Developments in the Member States

Part II

Italy I
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Overall trends in taxation a
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Structure and development of tax revenues
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In 2010, the total tax-to-GDP ratio (including social contributions) stood at 42.3 % in Italy, marking the first
decline, by ½ % of GDP, since 2005. Italy's overall tax burden ranked fifth highest in the EU, exceeding the EU-27
average by 6.7 points and the average for the euro area by 5.9 percentage points.

The share of indirect taxes on the total (33.5 %) lay well below the EU-27 average (38.6 %) in 2010, reflecting a
heavy reliance on direct taxes (34.9 % vs. 30.4 % for the EU-27); the social contributions share was closer to the
average. The direct taxes share declined in 2010 for the first time in five years, partly owing to a reversal of 'other
direct taxes' to normal levels, as revenue from two one-off levies, the Tax Shield and the levy on the adjustment to
IAS accounting principles, petered out. Revenues from VAT picked up by a strong 0.5 % of GDP to reach 6.2 %,
although this still represents the third lowest level in the EU. In contrast, the comparatively high revenue from
'other taxes on production' is due to the IRAP business tax (see section on corporate taxation).

Local government collects a fairly elevated share of revenue (14.5 %, fifth highest in the EU, although well below
its 2003 peak). The social security revenue share is above average and has been showing a marked upward trend.

The total tax-to-GDP ratio peaked in 1997 at 43.4 % as the country consolidated public finances ahead of euro
adoption. Subsequently it tended to decline, reaching a 40.1 % trough in 2005. The ratio then picked up again,
reaching 42.8 % of GDP in 2009. Finally, the total tax ratio declined by half a point in 2010 to 42.3%, essentially
due to the above-mentioned extraordinary receipts tapering off.

Taxation of consumption, labour and capital; environmental taxation

Despite the 1998 VAT rate increase from 19 % to 20 % and the abolition of a 16 % intermediate rate, the ITR on
consumption was in 2010 the third lowest in the EU. This is also due to a favourable VAT regime to housing (57).
However, substantial increases in excise duties and in VAT were introduced in the second half of 2011, which are
not yet reflected in the data.

In contrast, Italy's ITR on labour is at 42.6 % the highest in the EU, exceeding the average by almost 30 %. The
ITR on labour peaked in 1997 at 43.1 %, and then declined regularly until 2006, but the subsequent increases have
brought its level again close to historical peaks. Some recent reforms aimed at decreasing labour taxes have
primarily focussed on lower incomes, and may therefore not visibly affect the ratio, which depends on the average
tax burden across the entire income distribution. It is also worth noting that the IRAP tax partly falls on labour (58).

Capital taxes currently yield, as a percent of GDP, the second highest revenue in the EU. Revenue, boosted by the
lagged effects of high growth in 2006, peaked in 2007 at 11.8 % of GDP, declining to 10.2 % over the next three
years due to the global recession. All major types of capital income taxes contribute to the relatively high Italian
value. Furthermore, under the methodology used here, taxes and social contributions paid by the self-employed, a
large group in Italy, are booked as capital income taxes (59). Taxes on the stocks of capital or wealth, too, are
above-average. Significant reforms in capital taxation were introduced in 2011 (see following sub-section).

Italy had one of the highest levels of environmental taxation in the EU in the late 1990s, mainly on account of
energy taxes. Environmental tax revenues subsequently declined markedly, as a percentage of GDP, and in 2010
just equalled the EU average. The 2011 increases in excise duties herald however a revenue increase for the future.
57
( ) Strictly speaking, VAT paid on housing should not be counted in the ITR on consumption but as a tax on the capital stock. However, owing to statistical limitations, the
data presented in this report attribute VAT paid on housing, for all countries, to consumption taxes. This tends to reduce the ITR on consumption for countries with a
more favourable regime for housing (see methodology for details).
58
( ) Accordingly, our methodology allocates part of the tax revenue from IRAP to labour income. The remainder is attributed to the capital income of corporations or the self-
employed. The December 2011 package introduced partial deductibility of certain labour costs from IRAP, notably for new hirings of women and persons aged up to 35.
(59) The number of self-employed is the fourth highest in the Union, exceeding the EU-27 average by about half.

Taxation trends in the European Union 109