Economy

ROME (Reuters) -Italy’s tax system is skewed in a way that lets society’s wealthiest 7% pay proportionately less tax than low and middle-income earners, a new study shows, fuelling inequality and hurting public finances in one of Europe’s most indebted nations.In advanced countries, the rich, helped by financial advisers and low levies on investments, find ways to maximise returns on capital and reduce their tax bills, and the top 1-2% often pay proportionally less than those below them.But in Italy the distortions kick in much earlier on the income and wealth scale, according to the study by five economists including former Treasury official Alessandro Santoro.The paper, which has triggered a debate in the euro zone’s third-largest economy, shows the system is regressive not just for the top 1-2% but for the top 7%, involving medium-high salaries as well as the super-rich.Progressive taxation means the more you have the more you pay as a proportion of your earnings and assets. The system becomes regressive when this principle is reversed.”There is evidence that regressivity in Italy is remarkable compared with similar economies and affects incomes above 76,000 euros ($80,000) with wealth of about 450,000 euros,” Santoro told Reuters.REDUCING INEQUALITY, DEBTThis situation has major consequences for Italy’s broader economy, many economists say. They say hiking taxation on medium-high and high earners would reduce inequality in a country where poverty has been rising for years and would enable Rome to cut the euro zone’s second-biggest debt pile.Alternatively, it could provide room to cut taxes for lower earners who spend proportionately more of their income than the rich, potentially helping consumption and growth in the currency bloc’s most chronically sluggish economy.A Treasury spokesperson said the government was against raising taxes and pointed to tax cuts for lower and middle earners in Rome’s 2025 budget.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.The country has low taxation on some property and financial assets that are typical sources of income for the wealthy, favourable rates for the self-employed, and negligible inheritance tax.Meanwhile, low paid workers in Italy lose more of their gross wages to tax and social security contributions than in any other EU country, European Commission data shows.”We have chosen an extremist mix of tax rates,” said Marco Leonardi, economics professor at Milan’s Statale University and a former aide to Prime Minister Giorgia Meloni’s predecessor Mario Draghi.Most financial investments are taxed from as low as 12.5% to 26%, rent on property can be taxed at a flat rate of 21%, and there is no taxation on people’s primary homes. The self-employed, a bedrock of support for Meloni’s right-wing government, can pay just 15% on annual income of up to 85,000 euros, whereas the highest tax band of 43% for payroll workers applies to income above 50,000 euros per year.Fifty years ago, Italy’s top income tax rate, applied on the very highest earners, stood at 72%.MIDDLE CLASS BURDENAs a result of these distortions, people earning between 29,000 and 75,000 euros per year, who account for 21% of taxpayers, contribute more than 40% of income tax revenues, Treasury data shows.Inheritance tax yields just 1 billion euros per year, compared with around 18 billion in France and 9 billion in Germany and Britain.”Inheritance tax is so low as to be insignificant,” said Leonardi, adding that Meloni could fund tax cuts for middle earners through even a marginal increase in this levy.The government, under pressure to ease the burden on the middle classes, is struggling to find 2.5 billion euros in its 2025 budget to cut taxes for those earning 50,000-60,000 euros.Meloni shows no intention of finding the cash by targeting Italy’s better-off, though she recently doubled a contested “flat tax” on income earned abroad which is intended to attract millionaires to the country.Mariana Mazzucato, an economics professor at University College London and policy adviser to governments, told Reuters flat taxes of all types were regressive and bad for revenue.”In a country like Italy, with growing inequality, they are just absurd,” she said.The government argues that flat taxes, or similar schemes such as the single 15% rate for the self-employed, simplify the system and help reduce tax evasion.Santoro urged a tax on wealth owned by the top 1%, or even just the top 0.1%, that could yield up to 12 billion euros per year.The first group amounts to some 500,000 people holding assets of more than 2 million euros, while the 0.1% of Italy’s richest equates to 50,000 people with assets of more than 15 million euros.($1 = 0.9475 euros)(Additional reporting and graphics by Stefano Bernabei, Editing by Hugh Lawson) More

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MOSCOW (Reuters) -The next U.S. administration may make an effort to ease tensions with Moscow but Western sanctions are unlikely to be lifted any time soon, Andrei Kostin, the CEO of Russia’s second-largest bank, VTB, told Reuters.Kostin, one of Russia’s most influential bankers and a former diplomat who served in Australia and Britain, said he believed U.S. President-elect Donald Trump would make a genuine effort to end the conflict in Ukraine, which will be close to entering its fourth year when he takes office for a second time in January.”Considering the statements Trump made during his election campaign, I believe that he will certainly try to make efforts to resolve the Ukrainian war. But will an agreement be reached?,” Kostin said from his office in one of the Moscow City business quarter’s towers, stressing that any peace settlement should be for the long-term.Trump has pledged to end the conflict in Ukraine quickly, in part because he does not want the United States to pay to defend the country.However, Kostin, who was placed under U.S. sanctions himself during Trump’s first term as President, said he did not believe sanctions against Moscow would be lifted quickly as there was a powerful anti-Russian “vector” in the U.S. establishment. “A good example is the Jackson-Vanik amendment. It was enacted against the USSR, and it was only repealed in 2012,” Kostin said, referring to a Cold-War era law linking trade relations with the Soviet Union to the rights of religious minorities to emigrate. A powerful insider who regularly meets with President Vladimir Putin, Kostin said that his own views on the conflict in Ukraine have changed since February 2022 and he now believed that Moscow “did not have much of a choice”. ANYWHERE BUT U.S. TREASURIES Kostin, whose bank once had a substantial presence in Ukraine, said he believed that Russia’s reserves that were frozen in the West after the start of the conflict would not be returned.Western countries blocked around $300 billion worth of sovereign Russian assets, with the G7 group and the European Union agreeing earlier this year to use the interest they generated to aid Ukraine’s defence. Russia has vowed legal action.”In the West, they say, let’s pay for the reconstruction of Ukraine from the reserves. And they will draw up such a bill that even the reserves will not be enough,” Kostin predicted.”Russia will never again keep its money in U.S. Treasuries. I’m sure of it. Anywhere, but not there.”Speaking ahead of the start of VTB’s annual investment forum this week where most participants will come from China, the Middle East and India, Kostin said the “dozens” of countries willing to work with Moscow showed that Western sanctions were not working, also pointing to the BRICS group summit which was held in Russia in October. More

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Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldAs European policymakers fret about the threat to EU competitiveness posed by Donald Trump, there is at least one US phenomenon that Europe would love to import: the country’s ability to fund itself with dynamic equity finance provided by individuals and institutional investors. Europe continues to rely on loans from its hobbled banking system for corporate finance.A European Central Bank analysis found that if EU households put as much into equities and bonds as American counterparts, it could redirect a stock of up to €8tn, and an ongoing flow of €350bn a year, away from cash deposits. The EU has been pursuing a Capital Markets Union to spur such a shift for a decade — to no tangible effect. So why should anyone take the initiative seriously now?In an interview last week, ECB president Christine Lagarde told the Financial Times that despite the challenges posed by a second Trump term, she had never before seen “such a level of understanding and excitement” among policymakers in the region to shake up the status quo and ensure more European money is productively invested.Her own recipe, underpinned by a CMU now rebranded as a Savings and Investment Union, involves a change of regulatory structures, particularly by turning securities regulator Esma into a powerful institution like the Securities and Exchange Commission that could cut through nation states’ self-interest and push an agenda of securities investment across the region.The nomination of Maria Luis Albuquerque as the EU’s next financial services commissioner has given bankers hope that there will be practical follow-through, too. The Portuguese politician and former Morgan Stanley non-executive has already pledged to consolidate the fractured EU market for securitisation. She is expected to try to build a “coalition of the willing”, encouraging the likes of France, Germany and other like-minded issuance locations to establish common principles for the treatment of insolvencies in securitised products, overriding national rules. Creating a more homogeneous market, and simultaneously allowing banks to recycle a larger share of risk, is seen as a crucial way to attract large-scale institutional investors, both local and international.For retail investors, Lagarde envisages a new investment structure, which could be EU-kitemarked, to guarantee common standards and low costs. She also recognises that equity investment may need to be tax-incentivised. France’s Livret A scheme is a partial blueprint — it diverts the savings of bank customers into tax-free contributions to state priorities, like funding the defence budget. But in common with the UK’s cash Isa regime, the Livret A tax break misses a trick: it traps retail money in zero-risk products with low guaranteed returns, rather than fostering the enthusiasm for equity investment that 401k schemes have long supported in the US. Lagarde and other European policymakers don’t accept that Europeans’ attitude to risk is fundamentally lower than their American cousins.Politicians, limited by straitened budgets, might well respond to proposals for new investor tax breaks with stony faces. But the economic argument is sound: if the money is mobilised to finance innovation, boost productivity and generally underpin growth, this surely is just how an economy could and should leverage private wealth.There are risks: for as long as European companies underperform their US rivals, why would your average European investor favour European tech over the Magnificent Seven, or Volkswagen over Tesla? A knee jerk restriction of tax breaks to domestic investment would either render the scheme unattractive or drive a poor capital allocation.And yet it is possible to imagine a benign scenario, unfashionable as it might seem amid today’s European gloom. The willing-coalition principle offers a chance to create opt-in mechanisms for keen member states. Advocates cite the SE European corporate structure, taken up by thousands of groups from Airbus to Allianz, as a useful precedent.What, then, if both a tax-incentivised retail investment structure and a securitisation initiative were conceived under such an umbrella and communicated as part of a broader growth agenda by a compelling line-up of stable political leaders? Those are some big ifs. But with the wind in the right direction, international asset managers might just be persuaded to rethink their conviction that Europe is a stagnant backwater that simply can’t compete with the US.patrick.jenkins@ft.com More

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