Who will pay less income tax under Italy's planned reforms?

Italy’s government on Thursday submitted the text of a long-awaited tax reform bill which ministers say will be the first step in a sweeping overhaul of the system planned by 2027

As previously reported by The Local, the bill will introduce a raft of major tax changes aimed at gradually reducing Italy’s notoriously high tax burden and making investment in Italy more appealing. 

The plan includes a substantial change to Italy’s main income tax, Irpef (Imposta sui Redditi delle Persone Fisiche), with the number of  tax brackets dropping from four to three.

READ ALSO: Flat tax for all? Italy announces plan to overhaul tax system

This change is expected to mean a new tax rate for many workers in Italy starting from next year. But who’s going to benefit the most from the changes? 

Here’s what we know at this point. 

Irpef, which applies to all employees, many self-employed workers (regular partita Iva holders, but not those on the flat tax rate) and pensioners, currently counts four brackets, which are arranged as below:

The coming tax reform will reduce the number of tax brackets down to three, with the second and third bands being merged into a single one.

The tax rate for the lowest earners is expected to remain unchanged at 23 percent (for those earning 15,000 euros a year or less).

The tax rate should also stay the same for the highest earners taking home 50,000 euros a year or more, at 43 percent.

But middle earners who are currently in the second or third bracket may end up paying more or less tax - and it’s still unclear exactly what will happen. 

READ ALSO: The tax changes in Italy to know about in 2023

While Thursday’s announcement confirmed the number of tax bands will drop to three, the newly published bill didn’t specify what tax rate the new band would carry nor confirm how rates in other bands would be readjusted. 

However, Meloni’s cabinet is reportedly considering two options. 

First scenario

Under the first, and currently more likely, option, the new middle bracket will mean all taxpayers earning between 28,000 and 50,000 euros a year will pay a 33-percent rate.

Rates for the first and last brackets would remain the same.

This would mean all those who are currently in the second (income between 15,000 and 28,000) and third bands (28,000 to 50,000) would see their tax rate drop by two percent next year and subsequently benefit from sizable cuts to their Irpef payments. 

Second scenario

Meloni’s government is also considering a second scenario, with a 27-percent rate for a larger middle band - an option that would be much more costly to the state, and so seems less likely.

This would mean people currently in the second bracket (15,000 to 28,000) will see their tax rate increase by two percent, while those in the third bracket (28,000 to 50,000) would benefit from a whopping eight-percent cut. 

Rates for the first and last brackets would again remain the same.

Which path will the government go down?

While it was hoped that the bill’s text would clarify what rate the new band would carry, there are currently no details as to which option the government intends to go with.

That said, the first option seems to be the more likely one at this point in time, not least because implementing it would reportedly cost state coffers around 6 billion euros, whereas the second option would present the treasury with a 10 billion-euro bill.

Further information over which route the government will ultimately go down should emerge in the coming weeks as the bill goes through parliament. 

And even the possibility that Meloni’s executive might end up adopting an Irpef system other than the two described above cannot be ruled out at this time.