Taxation

Introduction

Tax revenue has been used for a long time as an indicator of the competitiveness of a territory and of a system where companies develop and produce, and their employees live and work.
The concept of fiscal competitiveness, though in the past relatively unknown, is widely appreciated and both companies and policymakers are fully aware of this. Companies often justify their location choices also on fiscal grounds. Policy makers may pursue active policies containing tax incentives (as in Ireland, for example). Bringing the parameters of the Italian tax system closer to European standards (before all European tax codes are substantially unified) would improve Italian fiscal competitiveness by increasing Italy's ability to attract new enterprises and investments and increase the profitability and long-term competitiveness of companies.
The objectives of this study are: to analyse the Italian taxation system in an international context; to observe the extent to which the different levels of tax revenue supports the investment in social spending in the various countries; and to further analyse the sectorial structure of the national public expenditure. We also examine the financial flows between the state and the regions and compare the tax burden on highly qualified personnel and companies in order to understand the strength and appeal of different economies.

8.1 - Public finance systems

Tax revenue and public spending

Italy ranks 8th amongst all of the countries of the OECD in terms of the share of tax revenue to GDP, with a value of 41.1%, after Sweden (50.4%), Denmark, Belgium, Finland, Norway, France, (43.4%), and Austria (42.6%). Considerably behind are Spain with 34.8% and Germany with 34.7%, in 17th and 18th place respectively amongst the 30 OECD countries. At the bottom of the list are Japan and the United States, with ratios of 26.4% and 25.5% respectively. (Figure 8.1.1)
Considering the most representative countries of the OECD in our analysis, over the last decade Italy's tax rate with respect to the GDP has slightly increased by 1%, similarly to Great Britain, whereas in France the increase amounted to only 0.5%. Amongst the other main European countries, Spain and Austria experienced a greater increase in the tax rate during the same time period, namely 2.7% and 1.5% respectively. The opposite trend occurred in Germany, where the tax rate fell by 2.5%. (Figure 8.1.2)
The make-up of the various fiscal revenues among the different economic sectors is rather diversified: in Eastern European countries a larger part of the total revenue comes from social contributions, while in Sweden, the United States and Denmark, the bulk of the revenue comes from taxation on income, salary and profits. In Italy, 31.4% of revenues derive from these, 30.3% derive from social contributions, and 26.4% from taxes on goods and services. (Figure 8.1.3)

Taxation of social transfer

As shown by an OECD study, one of the most common questions related to the ratio of tax to GDP is which motivations underlie the remarkable range of this ratio among countries. Undoubtedly, this is largely due to the differences in the size of public services (such as health and education) and the generosity of the social transfer (pensions and unemployment benefits, for example). Aside from the obviously differing fiscal systems and regulations, there are two possible explanations for these differences: the different ways in which they pursue social objectives through taxation, and the means of taxation. (Table 8.1.1)
If we focus on the second aspect, and especially on the rate of social transfer to GDP and the estimated tax rate applied to it, we can clearly see that the variation in the tax rates on social transfer in different countries is even higher than their difference in the percentage of gross social transfer to GDP. For instance, in 2003 the tax rate on social transfer ranged from 0.2% in Mexico to 7.5% in Denmark.
It is interesting to note that the highest level of tax paid for social transfer are for Denmark and Sweden, which, as previously indicated, are also in the top tier of countries with the highest overall tax rates. Countries at the bottom tier of social spending taxation also have the lowest overall tax rates (Mexico, Korea, Japan, United States). This suggests that reducing the differences in the countries' tax rate on social spending would, in fact, minimise the differences in overall tax rates to GDP.
We now turn to Italy to observe to which extent its tax revenues support social spending and to understand how the country is positioned in an international context.

Public spending by function

In order to compare public spending (Note 1), in addition to Japan and the United States, we chose a group of European countries, either similar to Italy in their social policy objectives (Nordic countries), or with taxation incentives for investments (Ireland). Sweden has the highest spending, both as a percentage of GDP, 56.8%, as well as per capita spending at 17,770 euro, well over the average of 40.6% and 11,724 euro (Note 2). Italy uses 47.3% of its GDP on public spending (11.296 euro per citizen). Ireland has the lowest percentage of public spending at 33.9% of GDP, but the highest per capita cost at 12,307 euro. Spain is below average in both categories. Japan and the United States spend 10,613 and 11,616 euro per capita, respectively, thus showing a less incisive state system. (Figure 8.1.4)

Spending on social security

For almost all countries the major portion of public spending is uses for social security (Note 3). This sector covers almost half of Germany's spending (47.2%) and is also a major source of spending in Sweden, Finland, Austria and France (40%), as well as in Italy (37.9%). This is less so for Japan (32.6%) and the United States (19.4%), which have a more decentralised system. (Figure 8.1.5), (Figure 8.1.6) and (Figure 8.1.7)
Sweden spends 24.4% of its GDP and 7,635 euro per capita on social security, the most of all the countries compared. Italy spends 4,276.8 euro per capita, almost twice that of the United States (2,254.8 euro), and is in the median with 17.9% of its GDP in social security spending. The United States ranks at the bottom with 7% of GDP.

Spending on public administration general services

Spending on the public administrations' general services (Note 4) is the second largest category for most of the countries studied. For Italy this is especially true, with 17.8% of total spending or 8.4% of GDP, though only third in per capita spending at 2,011.5 euro. Ireland has the lowest spending with 10.4% total, and 3.5% of GDP. Spain spends the least amount per capita at 951.6 euro. (Figure 8.1.8), (Figure 8.1.9) and (Figure 8.1.10)

Healthcare spending

In the category of healthcare (Note 5), with a 14% of total spending, Italy's indicators are relatively low compared to the other countries: 6.6 % of GDP for healthcare costs places it above only Germany, 6.1%, and Spain, 5.5%; while the 1,576.6 euro per capita spent in equipment and health services exceed only Spain's 1,077.7 euro. The burden of such an expense compared to the total is relevant for Ireland, where it represents 21.1%, but also for the U.S.A, with 20.5% or 7.4% of the GDP, highly significant figures when one considers that in the U.S.A. such public programmes carry out only residual functions, i.e. they protect only the poor and elderly. There is a great disparity in the health expenses per inhabitant, Ireland spending most, with 2,597.6 euro spent in 2004. (Figure 8.1.11), (Figure 8.1.12) and (Figure 8.1.13)
Overall, no substantial differences in public spending can be noted between countries with different health systems, such as public systems or systems that are predominantly based on mutual aid or national insurance (Note 6).

Spending on education

The United States has the highest rate of total spending on education (Note 7) at 17.3%. Italy's 10.4% is relatively low, followed only by Germany at 8.6%. Sweden spends the highest percentage of GDP (7.4%), and also spends the most per capita, 2,325 euro. Italy's contribution is almost half that at 4.9% of GDP, 1,170.8 euro per capita but for Spain it is even lower, at 855 euro. (Figure 8.1.14), (Figure 8.1.15) and (Figure 8.1.16)

Spending on business

Ireland spends the most at 14.8% of public spending on business (Note 8) and has the greatest per capita spending of 1,825.4 euro. Italy registers 8.3% of total spending, 3.9% of GDP, and is one of the countries which spend the least on a per capita basis, namely 931.6 euro. It is followed by the United Kingdom with 827.7 euro, 2.9% of GDP, and France with 790.8 euro and 3% of GDP. (Figure 8.1.17), (Figure 8.1.18) and (Figure 8.1.19).

Taxation and social spending

If considering all spending related to social affairs (Note 9), Sweden is again ranked at the top at 40% of GDP, with per capita spending of 12,478 euro. At the bottom of the list, yet again, are Japan and the United States. In general, a higher tax rate corresponds to an equally large social spending. However, this is not the case with Germany and the non-European countries, which allocate their modest tax revenue almost entirely to this kind of expenditure. (Figure 8.1.20)

Top  Public spending in Italy

Italian public spending (Note 10) between 2000 and 2005, despite the increase in nominal terms, remained almost constant compared to GDP, increasing from 51.2% to 51.5%. The share of current spending to total public expenditure in 2005 was 86.4% as compared to 86.3% in 2000. (Table 8.1.2)
The sectorial structure of public expenditure, including all its forms, such as management costs, transfers, interest expense and others, involved 67.2% of current spending (30% of GDP) in 2005, which is attributable to the personal services sectors. The first recipient are the labour and social security sectors, which absorbed 38.9% of current spending or 17.3 % of GDP, which is mainly due to the payments of contributory pensions; interventions in social areas, such as protection and assistance interventions financed by the fiscal system in general, can also be considered part of this sector. These alone correspond to 4.5 % of the total current spending or to 2.0% of GDP; followed by the sector of healthcare which takes on 14.4% or 6.4% of GDP. Lastly, education and training make up 9.4% of current spending or 4.2% of GDP. (Table 8.1.3)
Also, considering current spending in terms of economic destination, including all intervention areas of the Italian public sector, it turns out very clearly that most of it is due to the disbursement of pensions. In fact, it turns out that current account transfers into family and social institutions amounted to 40.8% of total current spending in 2005, 18.2% of GDP, mostly attributed to social security and income support, which consist mainly in the disbursement of contribution pensions, 36.2% of total current spending or 16.1% of GDP.

The functioning of the public administration

The whole sector of the public administration spends nearly 40.3% of total current spending or 17.9% of GDP, including its management and personnel costs (22.8% of total current spending in 2005, or 10.1% of GDP) and the purchase of goods and services used as input in the production process (17.5% of total current spending or 7.8% of GDP).
Aids to companies come essentially from capital account transfers to private companies (0.9% of GDP or 13.6% of total capital spending). The total expense, including also the before mentioned current account transfers, amounts to 2.6% of total public spending or 1.3% of GDP.
The state also assists companies by purchasing stock and providing subsidies, which takes up 26.5% of the capital spending or 1.8% of GDP. (Table 8.1.4)

Top  Public finance in the regions

Let us now examine the financial flows between the state and the regions, which is a key to understanding the different economies and their potentiality. The data used derive from three different sources. Information from the Dipartimento per le Politiche Fiscali del Ministero dell'Economia e delle Finanze [Department of Fiscal Policies of the Ministry of Economy and Finance, translator's note] provided us with region-by-region mounts of state tax revenue from all the main tax sources paid to the State. Additionally, the Ragioneria Generale dello Stato [General Accounts Office, translator's note] provided the amounts of capital payments from the State to each region. This made it possible to make a comparison between how much the State receives from the individual regions, each one assessed as a set of families and resident companies that pay taxes, and how much of that the State returns to each region as payment to the region and services to final users. Furthermore, from the Conti Pubblici Territoriali (CTP) database, provided by the Dipartimento per le Politiche di Sviluppo of the Ministero per lo Sviluppo Economico [Department for Development Policies of the Ministry for Economic Development, translator's note], information is obtained relating to the consolidated revenue and expenses of public administration and the enlarged public sector (EPS), which also includes municipal and decentralised companies and formerly state-run companies (Railways, Postal Services, Monopolies, etc.) and the ENEL [National electricity board].
From this analysis, it becomes obvious how the presence of two types of status in the Italian regions - normal status and special autonomous status - along with the different criteria of redistribution and standardisation of resources adopted by the legislature, produces a lack of homogeneity between what is produced and paid by each region and what is returned through contributions and services to businesses and families.
The two large financial flows (Note 11) between the state and regional territories are the payments made by the state and the taxes paid by the regions. To guarantee the temporal homogeneity between taxes and payments, we must analyse data from 2002, the last year for which there are ministerial statistics on the regionalisation of state tax revenue.
As regards state payments and consolidated public accounts, there is more recent data which will be considered further on in the analysis.
In 2002, each Italian citizen paid an average of 5,067 euro, while those resident in the Veneto paid 625 euro more, i.e. 5,692 euro. In six regions, headed by Valle d'Aosta and Lombardia, per capita taxes were superior to those in the Veneto, where a growing trend could be observed. In fact in 2000 Veneto citizens paid 5,492 euro and in two years witnessed their contribution to state tax revenue increase by 200 euro. Among the Italian regions, Calabria pays least, with 2,947 euro per capita (year 2002). (Figure 8.1.21)
The above described calculation acquires even more importance when compared with per capita payments made by the state per region.
In the same year, the State distributed an average of 2,721 euro to each Veneto citizen, 27% below the national average, that is 1,000 euro less than the average sum received by each Italian, and furthermore 5,772 euro less than that designated to each citizen of Valle d'Aosta, highest beneficiary in the ranking of all Italian regions, and 5,240 euro less to what is paid to every resident in Trentino-Alto Adige. To sum up, the residents of these areas received yearly about a third more than residents in the Veneto. (Figure 8.1.22)
Considering the financial balance, it turns out that people residing in the Veneto on average pay the State more than they receive, to an unquestionably higher degree than the other regions. Rather, the group of regions with a special status, which enjoys a greater autonomy in the handling of a considerable amount of taxes paid by its own citizens, obtains a positive financial balance. (Figure 8.1.23)
Each year, the Veneto citizen pays the State 2,971 euro more than the State invests in its regional territory. This figure amounts to 12% of the regional per capita GDP. The State reaps one month a year of wealth produced in the Veneto, which it invests elsewhere. A situation similar to this one is also experienced by the other regions comparable to the Veneto (Emilia-Romagna, Lombardia, Piemonte, Toscana), while at the opposite end there are only special statute regions, among which preside Trentino-Alto Adige and Valle d'Aosta, which classify first and second in the per capita regional GDP ranking. Trentino-Alto Adige has been attributed a per capita financial surplus of 1,927 euro, and Valle d'Aosta 1,726 euro more than the amount each resident pays to the State Treasury.
Information on payments updated through 2004 is also available. From this data, it can be deduced that the gap between regions accentuated from 2002 to 2004. In fact, Valle d'Aosta, which remains first in the classification of per capita payments by the state, with 9,599 euro in 2004, registered an increase by 13% compared to two years ago, while the Veneto, which is still last, receives only 2,553 euro for each resident, 6.2% less than in 2002. Since the 2004 figure on taxes paid by the citizens of each region is not available for an updating of the balance of finances, it is not possible to assess the most recent tendency of financial flows. (Figure 8.1.24)

Main types of taxes paid to the state

The Veneto region ranks above the national average per capita for IRPEF [personal income tax] and IRPEG [corporate income tax; notes of the translator] taxes, while Lombardia is in first place among all regions.
The Veneto contributes in a substantial way also with respect to VAT, amounting to 1,633 euro per capita in 2002, but this time it is the people of Valle d'Aosta who, probably due to a larger consumption of goods and services, pay more compared to residents of other regions. (Figure 8.1.25)

Territorial public accounts of the public administration

Territorial public accounts are the product of a consolidation process which sees each body as a distributor of final expense. Through the elimination of transfer flows between the various bodies of the public administration possible duplications should be avoided. The consolidated revenues (Note 12) of the public administration in the Veneto were quantified in 2005 as 12,608 euro per resident citizen, almost 500 euro over the Italian average. The share to the regional GDP is 45.3% and places the Veneto in last place in the regional classification, as well as below national average by 5 percentage points (50.3%). Lazio, location of most offices of the central administration, occupies the first position (55.3%). (Figure 8.1.26) and (Figure 8.1.27)
The expenditure (Note 13) of the public administration, adjusted for intermediate flows existing between its various agencies, in Veneto in 2005 totaled 10,826 euro per capita, 13.0% or 1,624 euro less compared to the average national expenditure. (Figure 8.1.28) and (Figure 8.1.29)
With 38.9% of GDP, the expenditure of the public administration in the Veneto is last in the regional classification, compared to a national average which exceeds 50%, indicating that the majority of the wealth in the Veneto is generated by the private sector. First in terms of public administration spending amongst all regions is Calabria, with an expenditure of 68.3% of GDP, followed immediately by Basilicata, with 66.8%.

Territorial public accounts in the enlarged public sector

The overall picture of financial flows of the EPS (Note 14) shows a slightly different situation. The per capita revenues of all of the regions increase, but the Veneto remains in tenth place in the classification with 15,412 euro per capita due to the EPS, compared to 12,608 euro revenue per inhabitant when considering the public administration in its strict sense (Figure 8.1.26). Analogously, as far as the share of EPS revenue to GDP is concerned, the Veneto takes on third place in the ranking of the regions, as compared to the last place it had with the public administration alone (Figure 8.1.29). The expenditure of the EPS is certainly greater as compared to that of the public administration in a strict sense, but while its share of expenditure to GDP does not move the Veneto from its last place in the regional classification, the share of per capita expenditure makes it move up one position, from the sixteenth to the fifteenth place. (Table 8.1.5) and (Figure 8.1.30)
Dividing the consolidated total expenditure of the entire EPS by the different levels of government, it results that, both in the Veneto as in all of Italy, from 2000 to 2005 the role carried out by the central administration in managing the expenditure - though still remaining preponderant - was partially reduced, favouring the bodies of the EPS.




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Notes

  1. In order to carry out a homogeneous comparison between countries, a classification system of the public administration functions (COFOG) has been used, which has been divided in 10 sections (divisions). The divisions stand for the primary ends pursued by the governments, and the sectors that are particularly useful in analysing both of EU objectives and public spending. COFOG stands for 'Classification Of Function Of Government'. It is an international classification defined by the main institutions that deal with national accounts; OECE, IMF, Eurostat. The 10 divisions (1st level functions) are then subdivided into groups (2nd level functions), and successively in Classes (3rd level functions). Groups regard the specific areas for intervention of public policies and the classes identify the single objectives where the areas of intervention are articulated. Each division has two particular groups, one regarding the expenses for Research and Development and the other for other expenses, which cannot be allocated to any group. Through the correct classification of the expenses of the government bodies, COFOG allows for the analysis of the activity of the public worker according to the viewpoint of production, identifying who produced what and for what purpose. Two indicators have been created to analyse the total public spending for each country: its percentage share to GDP and its per capita value; a third report has been calculated for every expense function, its percentage weight on the total expense. The reference year is 2004, since it represents the last data available on the subject matter.
  2. The average was calculated upon the following group of countries: Austria, Finland, France, Germany, Ireland, Italy, Spain, Sweden, Great Britain, Japan and the USA.
  3. It includes the following areas of intervention: illness and invalidity, old age, family, unemployment, other social exclusion and other social security measures.
  4. It includes the following areas of intervention: the costs for legislative and executive bodies, financial activities and fiscal and foreign affairs, international economic aid, general services, basic research, other public general services.
  5. It includes the following areas of intervention: products, health structures and equipment, hospitals and other services, services of public health, research and development for the health system and other health care services.
  6. Public assistance systems are characterised by a universal availability of state services, from financing through overall taxation and by the management and public control of the production factors: this is the system used in Italy, Finland, Ireland, Spain, Sweden, and Great Britain. National health insurance with obligatory coverage within a system of social security mainly financed by individual contributions through non-profit insurance funds and with the management of public and/or private production factors: this is the system used by Austria, France, Germany, Japan, and the USA.
  7. Includes the following areas of intervention: pre-school and primary education; secondary education, higher education, research and the development for education, other education.
  8. Includes the following areas of intervention: general economic, commercial and work-related affairs; agriculture, forestry, fishing and hunting, fuels and energy, mining, manufacture and construction, transport, communications, other sectors, research and development for economic purposes.
  9. Healthcare system; general recreational, cultural, and worship activities; public education and social security.
  10. The term 'public administration sector in its strict sense' can be explained by the successive analysis of the 'enlarged public sector'. Note that the data from the Ministero dello Sviluppo Economico differs from the OECD data because it includes financial accounts.
  11. - The state tax revenues are the sum of all the main taxes collected within the regional territory. Therefore the taxes paid by local and regional authorities themselves are.
    - State payments are capital payments carried out by the state according to the region where the payment is localised, except for the disbursement in favour of the Authorities (*) - in particular the social security ones - or by the Foundations (**) which are not part of the state budget. It must be noted that the expense of the social security authorities at a national level is covered by the state budget at 30% of the total. The remaining part is handled by the budgets of the various social security authorities themselves.
    (*) Authorities: INPS and other social security authorities, Ente Nazionale per le Strade (ANAS), Amministrazione Autonoma dei Monopoli di Stato, Consiglio Nazionale delle Ricerche (CNR), Ente per le Nuove Tecnologie, l'Energia e l'Ambiente (ENEA), etc.
    (**) Foundations: Fondo di Rotazione per l'Attuazione delle Politiche Comunitarie, Fondo Speciale Rotativo per l'Innovazione Tecnologica, Fondo Contributi alle Imprese, Fondo di Solidarietà Nazionale, Fondo Speciale per la Ricerca Applicata, etc.
    - The financial balance is calculated from the amount paid by the state to the regions minus the taxes paid to the state by the regions.
  12. It concerns consolidated regional revenues obtained from each region with the standard of a nation that tracks down the necessary revenues on its own territory in covering the costs of its policies, partially using goods from the public property (sale of goods and services, income from property), partially using taxes or social benefits. As to the regionalisation of tax revenues, the distribution of the revenue would result if the national taxes were transformed into regional taxes, as in revenues drawn from the taxable base originating from the economy of the region and defined according to the current fiscal norms.
  13. It is the value obtained through a consolidation process that involves considering each company as a distributor of final expense through the elimination of transfer flows between the various bodies of the public administration, avoiding possible duplications.
  14. The definition 'Enlarged Public Sector' includes two large components: the public administration, which is, in turn, composed of the central, regional and local administrations, and affiliated companies (municipal companies, ENAV, ENEL, ENI, Railway, Postal Services, etc.).


Figure 8.1.1
Percentage share of GDP of tax revenue in OECD countries. Year 2004
Figure 8.1.2
Percentage share of GDP of tax revenue in some main OECD countries; % var. 1995-2004
Figure 8.1.3
Tax revenue percentages in some main OECD countries. Year 2004
Table 8.1.1
Social transfers and their taxation. Percentage share of GDP - Year 2003
Figure 8.1.4
Percentage share of GDP of government spending per capita. Year 2004
Figure 8.1.5
Percentage share of total public spending on social security - Year 2004
Figure 8.1.6
Percentage share of GDP of social security spending - Year 2004
Figure 8.1.7
Per capita public spending on social security - Year 2004
Figure 8.1.8
Percentage share of public spending on public administration general services - Year 2004
Figure 8.1.9
Percentage share of GDP of public spending on public administration general services
Figure 8.1.10
Per capita public spending on public administration general services - Year 2004
Figure 8.1.11
Percentage share of public spending on healthcare - Year 2004
Figure 8.1.12
Percentage share of GDP of public spending on healthcare - Year 2004
Figure 8.1.13
Per capita public spending on healthcare - Year 2004
Figure 8.1.14
Per capita share of public spending for education - Year 2004
Figure 8.1.15
Percentage share of GDP of public spending on education - Year 2004
Figure 8.1.16
Per capita public spending on education - Year 2004
Figure 8.1.17
Percentage share of public spending on business - Year 2004
Figure 8.1.18
Percentage share of GDP of public spending on business - Year 2004
Figure 8.1.19
Per capita public spending on business - Year 2004
Figure 8.1.20
Tax revenue and social spending - Year 2004
Table 8.1.2
Total consolidated public administration expenditure - Italy, Years 2000 and 2005
Table 8.1.3
Consolidated current spending of the public administration on social sectors (value in millions of euro). Italy, Years 2000 and 2005
Table 8.1.4
Consolidated current spending of the public administration for the economic category (value in millions of euro). Italy, Years 2000 and 2005
Figure 8.1.21
Financial balance per capita per region (difference between payments by the state and per capita state tax revenue). Values in current euro - Year 2002
Figure 8.1.22
Per capita state tax revenue per region (values in euro) - Year 2002
Figure 8.1.23
Per capita payments by the state by region of destination (values in euro)- Year 2002
Figure 8.1.24
Per capita payments by the state by region of destination (values in euro)- Year 2004
Figure 8.1.25
Per capita level of the main state taxes. Regions - Year 2002
Figure 8.1.26
Consolidated public administration revenues per capita by region (values in euro). Year 2005
Figure 8.1.27
Percentage share of regional GDP of consolidated regional public administration revenues. Year 2005
Figure 8.1.28
Consolidated public administration regional spending per capita (values in euro) - Year 2005
Figure 8.1.29
Percentage share of regional GDP of consolidated public administration regional spending - Year 2005
Table 8.1.5
Main indicators of spending and consolidated revenues of the enlarged public sector per region and ranking of the regions. Year 2005
Figure 8.1.30
Percentage distribution of total consolidated expenditure per level of government. Veneto and Italy- Years 2000 and 2005

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