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Italy ranked among worst in Europe for tax burden on families

Working parents in Italy face some of the highest rates of taxation among developed countries, according to a new international report.

Italy ranked among worst in Europe for tax burden on families
Italy places a higher tax burden on families with children, according to a new report. Photo by JOSE JORDAN / AFP

Italian employees pay one of the highest rates of tax relative to income of all countries included in a new study by the OECD (Organisation for Economic Co-operation and Development), coming only behind Belgium, Germany, Austria and France.

The OECD report measured the ‘tax wedge’ or tax burden faced by both the employee and the employer in each country last year.

READ ALSO: How much does it cost to raise a child in Italy?

The figure includes income tax paid by workers, and social security contributions, which in Italy are paid by both the employee and employer.

According to the findings, Italy’s tax wedge is especially high for families with children, compared to a single worker with no dependents, ranking fourth-highest in this case among the 38 OECD member countries.

Only France, Finland and Turkey came higher.

In most of the countries studied, there are tax benefits for families with children. That’s because “most OECD countries provide benefits to families with children through cash transfers and preferential tax provisions,” reads the report.

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But Italy recorded lower than average reductions, with a decrease of just 8.6 percentage points for family benefits – less than the OECD average of 10 percentage points.

That meant Italy ranked as having the fourth-highest tax wedge for an average married worker with two children, amounting to 37.9 percent in 2021, while the OECD average is 24.6 percent.

The Italian government has recently pledged to do more to help families with the cost of living, including by introducing the Single Universal Allowance (L’assegno unico e universale).

However, this payment replaces various so-called ‘baby bonuses’, meaning the government is scrapping lump sums of hundreds of euros previously paid to help new parents cover the cost of starting a family.

Looking solely at the net tax that a worker pays on income, the same category of employee paid an average tax rate of 18.3 percent in 2021, compared with the 13.1 percent OECD average.

In other words, the take-home pay of an average married worker with two children in Italy, after tax and family benefits, is 81.7 percent of their gross wage, compared to 86.9 percent for the OECD average.

The discouraging figures come after a recent report estimated the total cost of raising a child in Italy up to the age of 18 at €321,617.

For a single employed person with no children, Italy had the fifth-highest tax wedge, slipping slightly from fourth place in 2020.

The tax wedge came to 46.5 percent in 2021 for single workers, while the OECD average tax wedge was 34.6 percent.

READ ALSO: How much parental leave do you get in Italy?

The OECD also reports that, in Italy, contributions and income tax account for 84 percent of the tax wedge, compared to 77 percent on average.

Employment taxation has bounced back for most countries in 2021 following the Covid-19 pandemic, the findings showed.

“Increases to the tax wedge in 2021 have more than offset the sharp declines recorded in 2020 and have seen the tax wedge rebound to higher levels than in 2019, before the pandemic,” the report stated.

Taxation rates for Italian workers remain relatively high despite employment taxation reforms in 2021 that included cutting income tax for lower earners.

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PROPERTY

PROPERTY: Is this the end of Italy’s building ‘superbonus’?

As state funds for Italy's popular building 'superbonus' have already been exhausted, Italian authorities are reportedly considering halting any further extensions to the discount scheme.

PROPERTY: Is this the end of Italy's building 'superbonus'?

The Italian government is considering yet more changes for Italy’s so-called building ‘superbonus 110‘, as the allocated budget for the building incentive has already been exceeded, while renovation projects continue to wait in a queue.

According to the latest data from ENEA (Italy’s national agency for new technologies, energy and sustainable economic development), the approximately €33.3 billion that was earmarked for the scheme until 2025 has already gone over by some €400 million.

That makes a total of €33.7 million in claims up until May 31st, 2022.

This means that not only have the Superbonus funds run out, they have also been claimed in excess, potentially meaning that the government could ask for the money back.

In the two years since it was introduced, the building discount scheme has given homeowners the chance to claim a tax deduction of up to 110 percent of the cost of renovation work.

READ ALSO: Nine things we’ve learned about claiming Italy’s building ‘superbonus’

Building jobs covered by the bonus are related to making energy-efficiency upgrades and reducing seismic risk, with the aim of kickstarting Italy’s post-pandemic economic recovery and its construction sector.

The credit transfer system is hampering accessing Italy’s ‘superbonus 110’. Photo by Guilherme Cunha on Unsplash

But the scheme has been beset with delays due to a raft of reasons, including its popularity creating soaring demand, supply chain issues, fraudulent claims, multiple changes to its rules and regulations and a blocking to the credit transfer system – that is, the way people access the government funds to pay for the building work.

These setbacks have caused some homeowners to abandon their plans altogether, or have left many in the middle of works concerned about whether they’ll able to finish their renovation projects in time.

Despite the changes and blockages, however, the bonus has in some way been heralded as a success, considering the vast amount of claims already made.

But what does that mean for those still stuck in the process with works waiting to start or not yet completed?

Property owners who have benefited in part from the subsidies for building renovation work could see their construction site stopped and their funding demanded back, as construction companies are unable to collect the credit.

READ ALSO: Italy’s building superbonus: What’s the problem with credit transfers?

Although no official government statement has yet been made, Italian media reports indicate that, after its latest extension, the authorities don’t intend to roll on the scheme any further beyond 2022 for owners of single family homes.

There have been multiple deadline extensions for this category of property in response to ongoing delays, but the government has ruled out any further lengthening to the current timeframe, reported Il Sole 24 Ore.

As things stand, single unit home owners have until September 30th to complete 30 percent of the overall works, with a final deadline of December 31st, 2022 for all renovations to be completed.

Without further financing and an unblocking of the credit system, those carrying out renovation jobs could find themselves with stalled construction sites, half-finished homes or having to give any claimed money back.

Claiming Italy’s superbonus has been mired by delays and bureaucracy. Photo by Laughing Cynic on Unsplash

The risk to both companies and individuals has prompted criticism from various sectors, as jobs, futures and a continuing stock of energy inefficient houses hang in the balance.

READ ALSO: How to stay out of trouble when renovating your Italian property

“If the government wants the death of the superbonus, it should come and say so… knowing that it is telling companies to go bankrupt,” stated the president of the Productive Businesses Commission, Martina Nardi.

Earlier this month, the CNA (Confederazione Nazionale dell’Artigianato e della Piccola e Media Impresa), which represents Italian small business owners, said some 33,000 businesses are at risk of bankruptcy due to blockages.

Calls to unblock the credit transfer system and overcome the stalemate continue as impending deadlines cause increasing alarm and frustration.

Opening up the credit transfer system would allow construction companies to convert their credit into liquidity, that is, actual money, and thereby complete works already started.

The National Confederation of Craftsmen and Small and Medium Enterprises has spoken of difficulties on the part of “thousands of companies in the construction sector that are unable to transfer tax credits linked to bonuses for the redevelopment of buildings due to the freezing of the market”.

In other words, projects continue to face blockages until building companies can be sure that they’ll receive the money they were granted.

READ ALSO: The hidden costs of buying a home in Italy

In an open letter to Italy’s prime minister Mario Draghi, one architect described the situation as an “almost unprecedented liquidity crisis” that is pushing the country to “the brink of the deepest economic and social crisis ever seen and managed”.

“It has been two years of tribulation, this we can say today, that have turned genius into monstrosity due to the constant changes, corrections and adjustments that keep everyone in suspense,” wrote Daniele Menichini.

The government has been criticised for doing the opposite of what they stated with the superbonus, instead causing further economic downturn. Photo by Damien MEYER / AFP

“The situation that is looming at this time is of uncertainty and insecurity, in which society will hit a wall because of the blocked credits and the blocking of all those projects that were about to start,” he added.

While the government has expressed no intention to refinance the scheme beyond 2022 for single family homes, a glimmer of hope remains via an opening up of credit in a further expected amendment to the superbonus.

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Easing the bottleneck would ensure that at least the projects that will meet the 2022 deadlines can be financed and completed.

To do this, the government is reportedly considering extending the ability to obtain credit to other parties besides banks, such as construction companies themselves. In doing so, it removes one extra bureaucratic hurdle and would unlock the current standstill due to many banks no longer buying credit.

The question of how the authorities will foot the bill for the already overrun budget still remains, with some reports suggesting an extra financial boost from the government will be needed until the end of 2022.

Other possibilities point towards allowing firms to carry over their credit surpluses until next year, to overcome the obligation to offset the credit this year.

Meanwhile, some categories of building have until 2025 to claim state funds with declining amounts available each year, but the future financing of which still isn’t clear.

The Local will continue to provide updates on this.

See more in our Italian property section.

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