Friday, October 06, 2006


It seems Italy's going to plunge into another serious economic downturn by increasing income tax rates. The country is captured by a fairly unstable macroeconomic situation. Public debt (measured as a percentage of GDP) is the highest in the Union. Italian leftist policymakers chose to cut country's 4,2% budget deficit by increasing tax rates instead of cutting spending habits. Although the budget reduces payroll taxes by EUR6bn in 2007 and EUR9bn in 2008, income taxes are raised immediately by EUR33.4bn, mostly through an increase in the top rate of tax from 41% to 43%, and lowering the floor for the top rate from EUR100,000 to EUR75,000. Lower bands are adjusted to favour the less well-off. This amounts to a savage attack on the middle classes, and is presumably exactly the opposite of what needs to be done if Italians' notorious under-declaration of tax is to be brought under control. Prodi announced measures to punish professionals who don't declare all their income; but successive governments have totally failed in this endeavour and there's no reason to think that the new one will be any more successful. It is completely impossible to create economic growth by increasing taxes and uncutting government spending. Italian general economic picture is everything else but favorable. IMD ranked Italy's Competitveness even below its neighbour Slovenia. Foreign investors face enormous restrictions on operations and ownership as well. Economic freedom of Italy is miserable. Together with France, the country's economic freedom has been kicked-off far below the level of the most competitive economies. Fiscal deficit is huge. Labor market amount indispensable rigidies that produce difficult practices of hiring and firing workers. It takes more than 500 hundred days to enforce contracts while venture capital funds are rarely availible. New tax increases proposed by Prodi's government will make this problematic situation even worse off.

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