Italy's tax system has long been a subject of concern, with recent studies shedding light on its skewed nature. This in-depth analysis explores how the wealthiest 7% pay proportionately less tax than low and middle-income earners, fueling inequality and straining public finances in one of Europe's most indebted nations.

Unraveling Italy's Tax Conundrum

How the Tax System Favors the Wealthy

In Italy, the tax system shows distinct biases. Advanced countries often see the rich maximizing returns on capital and reducing tax bills with financial advice and low investment levies. However, in Italy, these distortions start much earlier on the income and wealth scale. As stated by former Treasury official Alessandro Santoro, there is evidence that regressivity in Italy is remarkable compared to similar economies, affecting incomes above 76,000 euros. This means that while the rich find ways to minimize their tax burdens, the middle and lower-income groups bear a heavier tax load.For example, most financial investments are taxed at relatively low rates, ranging from 12.5% to 26%. Rent on property is taxed at a flat rate of 21%, and there is no taxation on people's primary homes. On the other hand, low paid workers in Italy lose a significant portion of their gross wages to tax and social security contributions, more than in any other EU country.

The Impact on the Middle Class

The consequences of this tax system are particularly felt by the middle class. People earning between 29,000 and 75,000 euros per year, who make up 21% of taxpayers, contribute more than 40% of income tax revenues. Inheritance tax, which yields just 1 billion euros per year compared to around 18 billion in France and 9 billion in Germany and Britain, is so low as to be insignificant. This leaves the middle class with limited resources to invest and grow their wealth.Even though the government is under pressure to ease the burden on the middle classes, finding the necessary funds in the 2025 budget has been a challenge. Meloni's right-wing government, with its support from the self-employed, has implemented a 15% tax rate for annual income up to 85,000 euros. However, the highest tax band of 43% for payroll workers applies to income above 50,000 euros per year, further widening the gap.

Proposals for Tax Reform

Economists like Marco Leonardi and Mariana Mazzucato advocate for tax reforms. Leonardi suggests that Meloni could fund tax cuts for middle earners by increasing inheritance tax. Mazzucato argues that flat taxes of all types are regressive and bad for revenue. Santoro, on the other hand, urges a tax on wealth owned by the top 1% or even just the top 0.1%, which could yield significant revenues. With the top 1% amounting to some 500,000 people holding assets of more than 2 million euros and the 0.1% being 50,000 people with assets of more than 15 million euros, such a tax could make a substantial difference.Italy is a relatively high-tax country, with levies of all types amounting to 41.5% of gross domestic product. But the burden is unevenly spread, with low taxation on some property and financial assets that are typical sources of income for the wealthy. By addressing these disparities, Italy could potentially reduce inequality, cut the euro zone's second-biggest debt pile, and stimulate consumption and growth in its sluggish economy.