The Flat Tax: how could it change our tax system?

by Alessandro Malerba

The so-called flat tax aims to eliminate the current four Irpef rates and the related income brackets, introducing a single rate for all taxpayers, but the proposal of the three parties of the centre-right coalition are different in terms and timing.

League

It is the proposal defined as the "most extreme", introducing a single rate equal to 15% for everyone, individuals and companies, to be reached according to a gradual process in three steps, namely:

1. A first extension of the flat rate regime for self-employed workers up to a turnover of 100,000 euros;
2. Secondly, the application of the flat tax on the income of businesses and families (employee work, taking into account the family quotient) up to 70,000 euros;
3. Finally, (over the five years) the extension to all incomes for work and business without any roof.

In order to protect the so-called principle of proportionality of the tax ex art. 53 of the Constitution, this proposal also provides for the introduction of two brackets: from 0 to 35 thousand euros and from 35 thousand to 50 thousand euros for which a fixed deduction equal to 3,000 euros is introduced: the deduction applies to both families and singles for taxpayers in the first bracket while for incomes equal to or greater than 35,000 euros it is only available to family members load.

In the flat tax system proposed by the League, the progressivity of the tax on the incomes concerned is implemented with the system of deductions, rather than with rates, while the system of total exemption for the lowest incomes would remain unchanged: there is currently talk of a "no tax area" for incomes up to 7,000 euros.

Forza Italia

According to Silvio Berlusconi's party, however, the flat tax should be set at 20%, with a tax exemption for incomes up to 12,000 euros and, also in this case, with systems of deductions and deductions for families and low incomes.

Brothers of Italy

The emphasis given to the flat tax by Giorgia Meloni's party is much less than that of its coalition partners, making it a minor proposal in the electoral programme. The approach is well framed by the prof. Maurizio Leo (head of the economics and finance department) who in a article published in La Repubblica writes in an even simpler way: “on everything that is declared in excess (work and business income) compared to the previous one, you will pay less taxes and, in particular, only 15%. The 15% taxation concerns only the year in which the increase in income is achieved, while it would not make sense to carry the benefit into subsequent years, if not in relation to any further increases". According to prof. Leo, therefore, it would be a sort of "national productivity bonus", or even "a stimulus, temporary although decisive, to get up from the sofa, to get busy, toimprove for oneself, for one's family and for the country".

The proposals of Lega, FI and FdI, as seen, are different from each other, but are based on a ccommon concept: by lowering the tax burden on income (business, self-employment and employee) under equal conditions, less tax evasion will be achieved, greater boost to the economy and tax revenue that will not be excessively penalised, but to implement this plan, to date, a requirement of around 13 billion euros is estimated, partly obtainable from a more efficient management of tax expenditure (68 billion in 2021). 

Flat tax: advantages and criticisms

Understanding what the flat tax is is much easier than analyzing what the advantages and disadvantages of the introduction of taxation at a fixed rate of 15% or 20% could be.

According to the proponents of the proposal, even considering the differences between the flat tax formulas described, the main advantages would be three:

• reduce the tax burden for both families and businesses;
• counter tax evasion;
• simplify the system by rationalizing the current deductions.

The major criticism made by the centre-left groups (Democratic Party first and foremost) is that the flat tax in Italy would mostly bring disadvantages: the cons of introducing a flat tax would belesser revenue for the State, but also the risk of advantaging the richest and, therefore, of introducing a law high risk of unconstitutionality.

The flat tax in Italy: a measure already implemented

What is often not underlined is that the flat tax already exists in our system: more correctly referred to as the "extended flat rate regime", it was introduced for the first time with the 2015 Budget Law (Law number 190/2014).

The current flat tax is operational only for taxpayers with a VAT number in flat-rate regime, or within a subsidized regime without IRPEF, additional, VAT, IRAP and not subject to sector studies or ISA. With the 2019 Budget Law, the turnover limit up to which it is possible to operate was raised for all taxpayers operating in the (subsidized) flat-rate regime, and is equal to 65,000.00 euros regardless of the type of activity carried out.

A profitability coefficient is applied to the turnover and then multiplied by the revenues/compensations collected in order to obtain the tax income. The current flat tax is therefore applied to this income, which can be:

• 5% for new activities;
• 15% for already operational activities.

The flat tax is not only the protagonist of the electoral campaign, but was one of the central proposals of the discussion on tax reform, with some news regarding VAT numbers.

Thedelegation law approved by the Chamber, which remained onstandby in the Senate due to the Government crisis, in fact provides for the introduction of a new facilitated tax regimefor VAT numbers.

The flat tax for lump sums up to 65,000 euros is accompanied by a new replacement regime for those who exceed the limits, aimed at gradually accompanying the company or professional towards the ordinary IRPEF. According to the contents of the enabling law, the flat tax “extra” would be applied for the two tax periods following the transition from the flat rate regime to the ordinary IRPEF regime. A provision that brings to mind theflat tax project incremental up to 100,000 euros, provided for by the 2019 Budget Law (strongly supported by the League), but abolished before even coming into force in 2020. As part of the tax reform, there was therefore further talk of a flat tax, and specifically of a slide for those who left the flat rate.

Flat tax: nothing really new

It is correct to say, therefore, that the proposal for the new flat tax would not overturn the current tax system, considering that the single rate is already widely used (for example, on financial income to which a fixed rate of 26% is applied, on rents earned by natural persons but also on business income, the IRES, equal to 24% or on performance bonuses at work at 20%).

Therefore, today, rather than the rate itself, the difference in terms of real taxation is made by the deductions and concessions to which taxpayers are subject in relation to their family or income status (Isee). The introduction of a system of lower rates aimed at taxing income from work (employee and self-employed) in a flat manner, at least within certain limits and taking into account family coefficients, would not cause particular upheavals in the overall revenue, perhaps eliminating some non-rational deductions beyond certain income brackets and favoring fiscal equity from a family unit perspective.

Recalling a recent article by Marco Miccinesi, published on IlSole24Ore, today, in fact, with the same overall employee income  within certain amount limits (e.g. 50,000 euros with a dependent child), a single-income family pays approximately double that of a two-income family; with the application of the flat tax “ the taxation of the single-income family would come closer  very much to that of the two-income family, finally eliminating the current discrimination between families. single-income and two-income ones; discrimination that appears  completely unjustifiedin light of the unity of the family unit whose incomes are used on the basis of the choices made together by the spouses and for the satisfaction of the exact same needs, both in single-income and two-income families."

The challenges of the Government after the September 25 elections

What is certain is that the ball will now pass to the new Government that will be formed following the political elections on 25 September 2022, which will have the task of restarting the discussion on the reform of the tax system. The advantages and disadvantages of the flat tax, and its possible extension not only to businesses but above all to families, will therefore also be discussed in the coming months.