On Thursday evening, the Council of Ministers approved the “Aid bis” decree: it is worth about 17 billion euros and contains many measures to support businesses and families, which find themselves facing large increases in the cost of living due to the inflation of these months. Among other things, the government has decided to strengthen and extend the cut in the tax wedge, in short of the cost of labor, which had already been foreseen for this year.
The tax wedge is an issue that has been talked about in Italy for decades, and on which many governments have intervened: it is also a topic that is heavily dealt with in election campaigns, and this small reduction decided in the “Aid bis” decree could accentuate the discussion.
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The intervention decided by the government is temporary and introduces a 1.2 percent reduction in the contributions paid by workers with an income of up to 35,000 euros, which is added to the 0.8 percent discount set by the 2022 budget law. for public and private employees. The total cut thus rises to 2 percent from July to December, with a cost to the state of 1.2 billion.
The UIL union made a simulation of the increases that employees will see in their paychecks until the end of the year. They took into account the old assumption of a 1% reduction, but a 1.2% cut should not produce very different results: € 15.47 more gross per month for a private sector employee with an average salary of € 20,111 gross per year. Many have judged these figures as marginal, such as UIL Secretary General Pierpaolo Bombardieri, who in an interview with Everyday occurrence he spoke of “alms” to workers and pensioners.
The cutting of the tax wedge has been reappearing for years in the political discussion when it comes to reducing taxes. The electoral campaign that has just begun is already full of party commitments in this sense.
What is the tax wedge
The tax wedge is the difference between what the employer pays and what the worker receives as a net salary. It is the sum of two main components: the personal income tax on the one hand (IRPEF) and social security contributions on the other. The employee is responsible for the tax and part of the contributions, the employer for the remaining part of the contributions.
In Italy the tax wedge is very high: according to the data released annually by the Organization for Economic Cooperation and Development (OECD), which consider the average wage of a single worker, Italy is the fifth country with the highest tax wedge. high, equal to 46.5 per cent of the total cost of labor, compared to an average of 34.6 per cent. This means that if the total cost of the work is equal to 100 euros, the employee receives only 53.5 euros as net salary. The remaining part, 46.5 euros, i.e. the tax wedge, is paid by the employee and employer: the company pays 24 euros and the worker 22.5.
The tax wedge can also be thought of in relation to the net salary: if the net salary is 100 euros, to these must be added another 42 to be paid by the worker and 45 by the company. The tax wedge is therefore 87 euros in Italy, almost as much as another full salary.
According to the calculations of Enzo De Fusco and Giorgio Pogliotti on the Sole 24 Ore, the real tax wedge in Italy is much higher than the OECD calculation, which is based on an average only. Analyzing the tax revenue bulletins, against 300 billion in gross wages paid on average each year in the private sector, the state collects about 100 billion in social security contributions and 80 billion in income tax (IRPEF), for a total of 180 billion euros to be paid by employers and workers. The real tax wedge in the private sector therefore stands at 60 per cent.
Everyone agrees to reduce it, but why not?
The tax wedge represents a huge burden both for companies, which have to face costs in addition to the simple salary of the employee, but also for the worker himself, who sees his net salary eroded due to taxes and withholdings.
Reducing these burdens would have many benefits. If the labor costs borne by companies are reduced, it will become cheaper for them to hire and stabilize and give a good boost to the labor market; if the burdens on employees are cut, their disposable income will increase and they are likely to spend more on consumption and investments.
Therefore, it is easy to understand how the reduction of the tax wedge in theory puts everyone in agreement: trade unions and companies have always asked for it and political parties have been promising it for years.
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In Italian history there have been many interventions to reduce taxation on labor, but all rather marginal and often only temporary, so much so that the effect on costs for the company and on payrolls was often negligible.
In 2014, the government led by Matteo Renzi introduced the € 80 IRPEF bonus, a tax credit that the employer paid directly in the pay slip to the worker with a gross annual income of up to € 24,600. The latter was an intervention particularly appreciated by the workers, who found themselves on their paychecks € 960 a year more. No subsequent government has ever revoked it, not least because the cost of doing so in terms of popularity would have been quite high. The Renzi bonus was then enhanced in the last two years, and today, for incomes above 15 thousand euros, it has been incorporated into the new forms of tax deduction for employees.
But measures of this type are very expensive: when it was introduced, the Renzi bonus cost between 7 and 10 billion euros a year. Furthermore, it must be considered that structural measures must be financed with equally structural funds. It means that it cannot be done by making more public debt every year, but either a reduction in other expenses or an increase in taxes must be envisaged to finance these new measures.
A reduction in the tax wedge that is actually visible to workers and companies – and therefore also works at the political level – must necessarily be very expensive and ambitious. Therefore, it is not easy to implement.
Another point to consider if you want to cut the tax wedge is how the state can make up for the resulting lost revenue. Labor income taxes finance general services, such as health care, road maintenance, law enforcement, and so on; the contributions finance pensions and the many protections enjoyed by all workers, such as health care, sick leave and parental leave, maternity, unemployment, insurance against accidents at work. The state must therefore find an alternative to continue providing these services, otherwise the risk is to see lower pensions or to have to give up the forms of protection to which workers are now accustomed.
Even from a political point of view it is not an easy intervention. Who implements it must decide whether to cut taxes to workers or companies: are the burdens borne by companies (such as IRAP and contributions) or income taxes (for example IRPEF) borne by workers reduced? The risk is to displease one or the other category.
Italian history is full of vague announcements on the tax wedge cut, and even in this electoral campaign they do not seem to be missing.
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An ambitious proposal came in the spring from Confindustria, with a total cost for the state of € 16 billion a year, two thirds of which for workers (10.7 billion) and one third of businesses (5.3 billion). ). The maximum benefit, for a salary of 35 thousand euros gross, would have been 795 euros net per year. The trade unions and all the political parties agreed and the president of Confindustria Carlo Bonomi replied in a provocative way: “All the party leaders are in agreement, so do it on Monday.”
The secretary of the Democratic Party Enrico Letta in June had proposed a very ambitious cut in the tax wedge, which would have brought workers an extra net monthly salary per year, to be financed with generic funds deriving from the fight against tax evasion.
Also for Action, + Europa and Italia Viva, all the resources recovered from the fight against tax evasion will have to be reused to reduce the tax burden.
The right-wing coalition instead proposes a reduction to three of the IRPEF rates, that is to 15, 23 and 33 percent, a so-called “flat tax” for the middle class and the overcoming of IRAP. Moreover, the flat tax has always been at the center of the Lega’s tax program.
Since there are still no precise programs, the proposals are very vague, they do not indicate which part of the wedge to cut or how to finance the measure. Given all the awkward decisions that must be taken when introducing a measure of this type, vagueness is also an electoral strategy.