Le riforme italiane nella tassazione di impresa negli anni ’90 in una prospettiva europea Silvia Giannini
Università di BolognaSeminario di Economia Pubblica
Istituto di Economia e Finanza – Master in Economia Pubblica
Università Cattolica del Sacro Cuore – 22 febbraio 2001
Le riforme italiane nella tassazione di impresa negli anni ’90 in una prospettiva europea Silvia Giannini
Università di Bologna
Seminario di Economia Pubblica
Istituto di Economia e Finanza – Master in Economia Pubblica
Università Cattolica del Sacro Cuore – 22 febbraio 2001
S.Giannini, The Reform of the Italian Corporate Income Tax: Evaluation and perspectives, Conferencia internacional sobre a reforma de tributação do rendimento das sociedades, Coimbra 19-20 Ottobre 2000
M.Bordignon, S. Giannini, P.Panteghini, "Reforming Business Taxation: Lessons from Italy?", in corso di pubblicazione su International Tax and Public Finance
S. Giannini, M.C. Guerra, "Dove eravamo e dove siamo: il sistema tributario dal 1990 al 2000, in La finanza pubblica italiana, (L. Bernardi, ed.), Il Mulino, Bologna, 2000.
S. Giannini, "Mercato interno e fiscalità: aspetti economici", Congresso internazionale sul "Coordinamento fiscale nell'Unione Europea" Osservatorio"Giordano dell'Amore", Stresa, 19-20 Maggio 2000, in corso di pubblicazione negli atti del convegno
Objectives of the paper
to review the characteristics and economic effects of the Italian 1997-98 corporate tax reform;
to compare it with other international experiences and reform proposals;
to show that it faces problems and conflicting needs that are common to small open economies;
to illustrate that it can be seen as an original attempt to trade off these needs and can provide some lessons to other countries too.
Policy makers in small open economies have to trade off different conflicting needs:
To reduce corporate (capital) taxation in order to face the increasing international tax competition
To increase the neutrality of the tax system with respect to investment and financing choices
To maintain tax revenue without shifting (too much) the tax burden from mobile (capital) to immobile (labour) factors
To preserve the equity of the tax system, i.e. a “fair” relation between personal labour and capital income tax rates and the corporate tax rate.
Major common features of other countries’ reforms (1980s and 1990s)
overall reduction in the statutory corporate tax rate
often accompanied by an enlargement of the tax base
hence, the marginal effective tax rates (EMTR), which measure the effect of taxation on the cost of capital and take into account also the determinants of the tax base, changed less than statutory rates (sometime even increased)
no country moved in the direction of a fully neutral tax system, under which the EMTR would be zero, but which would require a higher statutory rate to maintain a given revenue
moreover, rapid diffusion of preferential tax regimes (such as Belgian co-ordination centres, Dublin financial service centres, Dutch holding companies)
These reforms were a rationale response, from the single country perspective, to the increasing international integration and the lack of tax co-ordination
(example of international tax competition)
The reduction in the statutory rates and the development of special regimes have the major objective of attracting profits and the more mobile economic activities
But whereas special preferential regimes are clearly considered Harmful Tax Competition (EC Code of conduct), a general reduction of the corporate tax rate is not, even though economic externalities are similar.
The declining trend is showing no sign of stopping!
Why statutory corporate tax rates are so important for a small open economy?
1. A divergence in statutory rates creates incentive to locate the tax base towards jurisdictions with lower tax rates (profit shifting):
transfer pricing
thin capitalisation
other tax planning devices
2. Economic activities will tend to locate where the overall profits generated by the investment are less taxed. The most useful indicator to measure this incentive is the effective average tax rate (EATR), which highly depends on the statutory rate, above all for some types of very mobile activities (like financial services, that do not have significant depreciation allowances) and for very profitable multinationals.
What is an effective average tax rate (EATR)?
Why does it differ from an effective marginal tax rate (EMTR)?
Which is their relation with the statutory rate?
Both effective marginal tax rates (EMTR) and effective average tax rates (EATR) consider the interaction between various aspects of the tax systems: the statutory corporate tax rates, other taxes on profits and capital, depreciation allowances, other deductibilities from the tax base, etc....
Both are ex-ante concepts…
…..but
...... EMTR
Measures the percentage tax wedge on the before and after tax return on a marginal investment (an investment which only covers its costs, including “normal” profits) Whereas EATR
Measures a similar tax wedge on an inframarginal investment (an investment producing rents, i.e. extra-profits)
EMTR
Is important to determine the scale of investment (how much to invest)
And
May not vary or may even decrease with an increase in the statutory rate (depending on the deductions from the tax base)
Traditional analysis (King and Fullerton, 1984; Oecd, 1991; Ruding Report, 1992)
EATR
is important to determine the location of investment (where to invest)
and
usually tends to increase towards the statutory rate with the increase in the profitability (because deductions become less important)
Recent analysis (Devereux, Griffith, 1998,1999, EC Commission, forthcoming)
The reduction in the overall (national and local) statutory rate: Italy did not participate to the tax competition race!
Effects of the high statutory rate before the reform
discouraged foreign direct investment in the country (unless financed through debt)
highly favoured debt finance and penalised equity finance
stimulated tax evasion and avoidance
discriminated with respect to the organisational form
The 1997-8 tax reform in Italy - Corporate sector
Pre reform
Local income tax (ILOR): 16.2% on profits
Wealth tax: 0.75% on net worth
Corporate profit tax (IRPEG): 37% Post reform
Regional tax (IRAP): 4.25% on value added of the net income type (revenue from sales less costs for intermediate goods and depreciation)
Dual income tax (DIT):
a) 19% on “ordinary income” (normal profits)
b) 37% on residual profits (extra-profits)
The 1997-8 tax reform in Italy - Non corporate sector
Pre reform
Local income tax (ILOR): 16.2% on profits (exemptions and rebates)
Wealth tax: 0.75% on net worth
Personal income tax rates: from 10% to 51% Post reform
Regional tax (IRAP): 4.25% on value added of the net income type
Dual income tax (DIT):
a) 19% on “ordinary income” (normal profits)
b) personal income tax rates (from 19% to 46%) on residual profits
Features of the regional tax on productive activities (IRAP) it is neutral with respect to different financing sources (profits, interest and labour costs are all included in the tax base) and “fairly neutral” with respect to different productive factors (labour and capital)
it has a very broad base: to collect a given revenue it requires lower statutory rates (thus reducing the excess burden of taxation)
it applies to all types of productive activities: it is neutral with respect to different forms of organising business
it allowed a significant reduction of the corporate statutory rate (from 53.2 to 41.25%): differently from other countries this was obtained by extending taxation at the business level to other types of income (different from profits), rather than by widening the definition of profits to be used as the tax base (as most other countries did, by reducing for example, depreciation)
Original solution
(similar experiences: New Hampshire (USA), Michigan (USA); some similarities also with the Comprehensive Business Income Tax (CBIT) suggested by the US Treasury Department in 1992, but IRAP extends the tax base to labour costs too)
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