Is Italy facing a tax-burden?

In order to make ends meet and according to the economic survey for the year 2012, the Italian government has decided to reduce its economic growth forecasts for this year. Due to the series of events taking a toll on Italy economic structure, it has made various changes to its fiscal policies and rules.

The fiscal analogy displayed by the Italian government revolves around five taxes: i)the imposta sul reddito (income tax); ii) the imposta sulle società (corporate tax); iii) the imposta sul valore agginunto (VAT or sales tax); iv) the imposta sui servizi (tax on services); and v) the accise (excises).

While the Italian government is trying to overcome the recession, it has created an economic upheaval. This has caused turbulence in the overall GDP by 3.4%. The government is creating projects in order to create a subservient environment to fight the tax anomaly.

The Italian government is introducing various changes to their fiscal policy, specifically the increase in taxation norms that will be effective in the years to come- i.e. 82% in 2012, 70% in 2013 and more than 65% in 2014.
As the country is facing serious fiscal deficit and debt burdens, and is resorting to options to increase taxes applicable to all commodities. According to the market analysts’ Italy’s debt burden is immense and is going to stay there for a longer duration. Country’s debt first hit 120% of GDP in 1993, due to the spending spree of the 1980s when the budget deficits were regularly higher than 10% of GDP. After a series of dysfunctional political scenarios and failure to control the falling economy, the government saw an improvement in the fiscal retrenchment and that was the stability in the economy wherein, the fiscal deficit of 2% GDP in1990 improved to a 5% surplus by 2000.

Before the eruption of the financial crisis, Italy’s debt had fallen to 105% of GDP which is now grown up to 120% of GDP again. Even though Italy can sustain through this untenable financial situation, it has decided to seek assistance from stronger nations to come out of this crisis. The reason for Italy’s melancholy is its unending borrowing trend. Due to this progression Italy is on the verge of increasing the public interest rates to 4% which will in turn; increase the budget deficit by more than double. Another element contributing to this environment is the increasing margin on the various financial bonds resulting into a fall in their prices and as the market experiences volatility, the bonds become less attractive.

Even though Italy has raised tax burden on its citizens’, this change is temporary. The government is aiming at creating savings in view of the spending review, the additional revenue from the reduction in tax evasion, can thus be used to reduce taxes on productive activities on revenue- neutral basis, economic activity would benefit significantly through a reduction in the overall tax burden by more than 3% in the 3 years from 2014 to 2016.
 

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