Two of the leading contenders to form a government after Italy’s general election on 4th March advocate a radical overhaul of the country’s tax code. Their plans would result in a substantial reduction in taxes that they claim would provide a big boost to GDP. A representative of Silvio Berlusconi’s Forza Italia has suggested that it would increase GDP growth from 1.5% last year to as much as 3%.
We are much more sceptical, for several reasons. First, the tax cuts would probably be accompanied by large spending cuts. Second, most of the gains would probably accrue to those on higher incomes, who would be likely to spend a smaller proportion of the windfall. And third, it is not clear that the high level of taxes is a major constraint on Italy’s economy. More important for supporting the economic recovery would be strengthening the banks and improving the business environment.
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