No one enjoys paying taxes, even though they are necessary for the functioning of the state. People are even more reluctant to do so when the tax system appears opaque and unfair. Thus, in order to gain consensus, politicians promise tax cuts that, in practice, they cannot deliver because they lack the ability to intervene on public spending. And yet, improvements are possible. In Italy, for example, the many small-scale tax evaders could be encouraged to report their income accurately by relying more on incentives than on audits. Moreover, wealth should be taxed more, through a reform of inheritance taxes and an update of the land registry.
Nearly nine out of ten Italians dislike our tax system, considering it inequitable, oppressive, and a driver of inequality. This figure, drawn from a Demopolis survey conducted for Oxfam on a sample of 4,000 households, is not particularly surprising: taxes will never appear appealing to those who have to pay them, and our country ranks fourth in the OECD for tax burden (the ratio between tax and social contribution revenues and national income). However, taxpayers may consider taxes in some way justifiable if they comply with shared principles, such as the one enshrined in Article 53 of the Constitution, according to which everyone is required to contribute “to public expenditure in proportion to their ability to pay,” and according to criteria of progressivity—that is, proportionally higher taxes for those with higher incomes. People instead feel overburdened when they believe they are paying more than those who are wealthier or who benefit from preferential treatment. The more complex a tax system, the more intricate its rules and the more numerous its exceptions, the easier it is for such sentiments to spread, stifling any sense of guilt among tax evaders and weakening social sanctions against them. As in the film The Overburdened Taxpayers by Stefano Vanzina, in which a shopkeeper (played by Totò) is advised by his accountant (Louis de Funès) on how to avoid fines imposed by a meticulous officer of the Guardia di Finanza (Aldo Fabrizi). The audience hopes that these repeated (and hilarious) attempts will ultimately succeed. And, not surprisingly, the film’s ending leaves that possibility open.
Endless Tax Reforms Deferred to Posterity
Aware of these widespread sentiments, politicians promise substantial tax cuts in every election campaign. Then, once in office, they backtrack on their promises and end up granting at most barely noticeable tax breaks to this or that particularly well-represented group, making the tax system even more intricate than before. Today, Italy has no fewer than 575 special tax expenditures—an unenviable record. These are generally small in scale and involve highly mobilized groups of beneficiaries. In this issue of eco, we document that these measures involve, on average, 200,000 people each and have an average cost of €207 million. This means that abolishing them would alienate a non-negligible number of voters while yielding only modest savings. Even a motivated and courageous politician would struggle to pursue this path.
To truly cut taxes, it would also be necessary to cut spending, and—as demonstrated by the countless spending reviews initiated in Italy since 1981 (initially called “expenditure reviews”)—doing so is politically more costly than abandoning promised tax cuts. Instead of cutting spending, governments spend more while pretending to reduce taxes: many tax breaks are in fact additional spending programs, which is why they are referred to as “tax expenditures.” The difficulty of cutting public spending is universal: even the most ambitious plans ultimately have to yield to reality. Consider Elon Musk’s Department of Government Efficiency (Doge), which was supposed to eliminate spending equal to one-third of the U.S. federal budget by July 4, 2026. It has vanished into thin air, while its would-be leader continues to receive substantial federal funding for his space projects.
To save face, policymakers then resort to appointing a commission of experts to design a tax reform, the implementation of which is conveniently delegated to a future government that will, inevitably, allow the enabling law to expire. The latest episode of this pattern occurred during the transition from the Draghi government to the Meloni government.
The Illusion of Tax Cuts
However, the Meloni government has managed to accomplish something that previous administrations had not. Thanks to a resurgence of inflation, it was able to collect extraordinary tax revenues through fiscal drag—that is, the fact that many employees have been subject in recent years to higher tax rates even though their real income (in terms of purchasing power) has not increased (see the numerical examples provided in this issue of eco). It then partially returned these revenues through three successive budget laws. The fact that the reimbursement was incomplete helps explain why the tax burden in Italy has increased in recent years, rising from 41.2 to 42.5 percent, generating more than €25 billion in additional revenue.
If the government had wanted to forgo this “inflation tax,” it should have indexed the personal income tax (IRPEF) brackets, the main progressive tax. It could have followed the example of Austria, Belgium, Germany, France, the Netherlands, Slovakia, and the United States, which implement automatic adjustments of personal income tax brackets to neutralize fiscal drag, or even that of countries that have made partial and discretionary adjustments (Estonia, Spain, Finland, Ireland, Lithuania, Luxembourg, Latvia, Malta, Portugal, and Slovenia). Instead, our government did none of this, only to intervene belatedly by presenting a partial refund of fiscal drag as a genuine tax cut, relying on the fact that many citizens were unaware of the phenomenon.
Room for Genuine Tax Reform
Must we therefore resign ourselves to being poorly taxed? Is a tax reform truly impossible? It may have been for a government like Draghi’s, supported by such a broad coalition that it represented all interest groups potentially affected by a rationalization of taxes. It is not, however, an impossible mission for a government with sufficiently clear ideas, capable of proceeding without appointing yet another commission of experts and able to create fiscal space from the outset of its term.
The experience of the Meloni government shows that it is indeed possible to intervene in the tax system when additional resources are available. In this case, those resources came from the hidden inflation tax. Future governments will hopefully not have this opportunity—and if they do, in the event of renewed inflation, we hope they will not exploit citizens’ limited economic knowledge to benefit from it.
There are fair and non-deceptive ways to raise additional resources for selective tax cuts that rationalize the system.
The first is combating tax evasion, which has been rising again despite the National Recovery and Resilience Plan (PNRR) calling for a sharp reduction. The Prime Minister repeatedly argues that the focus should be on large, not small, tax evaders. But in Italy, as elsewhere, most of the revenue lost to tax evasion comes from the partial or non-payment of taxes by a large number of small evaders. These individuals are so small that audits are hardly cost-effective. It is not worth sending Aldo Fabrizi to inspect Totò, because the amount recovered would be lower than the cost of the audit. It is therefore better to act not through controls but through incentives for accurate reporting, leveraging the increasing availability of data on taxpayer behavior and more sophisticated analytical techniques, building on the experience accumulated with sector studies.
The other avenue is to shift taxation toward wealth rather than focusing almost exclusively on labor income. Italians’ wealth has declined over the past thirty years, as economic growth has effectively stalled. At the same time, inequality between rich and poor has increased, and social mobility—the opportunities available to those born poor to improve their condition—has declined. To reduce these inequalities without giving up the goal of making everyone wealthier, it is necessary to reduce taxation on labor and increase it on capital. Today, capital is taxed less than labor and often in a non-progressive manner, while poorer individuals rely almost exclusively on labor income and wealthier individuals derive most of their income from capital. As a result, the latter often end up being taxed less overall, relative to their income.
The challenge in taxing capital is that it tends to move abroad as soon as taxation increases. In the current global environment, the prospects for an effective international agreement on capital taxation are close to zero. What can be done, however, is to tax large inheritances—which are less mobile—more heavily (we are talking about estates worth tens of millions), most of which have been accumulated over decades of low capital taxation, and to use the resulting revenue to reduce taxes on labor. As shown in this issue’s chart of the month, Italy currently raises only 0.05 percent of GDP from inheritance and gift taxes, among the lowest levels in Europe. A reasonable goal would be to reach at least 0.5 percent of GDP through these taxes. That €12 billion could be used to begin genuinely reducing taxes on labor. In addition, the land registry should be updated—not so much to raise revenue as to improve fairness. There is no reason why two individuals owning properties with the same cadastral value but different market values should pay the same taxes.
You may say this is too little, but little is better than nothing—and it is certainly better than alarming everyone with vague yet threatening proposals for wealth taxes.
P.S. The next issue of eco, on newsstands from February 21, will focus on banks.
