Italian government's flat tax plan may be unrealistic, central bank says

By Giuseppe Fonte

ROME (Reuters) - Italy's central bank said on Thursday government plans to set up a single income tax band and reduce the tax burden may prove unrealistic because of fiscal restraints and the amount the state has to spend on its extensive welfare system.

Nationalist Prime Minister Giorgia Meloni approved a bill in March to initially reduce the current income tax bands from four to three and then introduce a "flat tax" model before national elections due in 2027.

Trade unions and opposition parties argued the plan would mostly benefit the rich.

"The model envisaged by the bill - a single-rate system together with a reduction in the tax burden - may prove unrealistic for a country with an extensive welfare system, especially in light of public finance constraints," Bank of Italy tax expert Giacomo Ricotti told lawmakers.

The right-wing administration has promised to keep the budget deficit on a downwards trend as new budget rules being discussed at European Union level increase pressure on Rome to maintain a cautious approach to state finances.

Italian public social spending, which was equivalent to around 30% of gross domestic product in 2022, is the second highest after France's among members of the 38-nation Organisation for Economic Cooperation and Development (OECD).

In an address to parliament, Ricotti said the single rate model was diffused among countries deemed by the International Monetary Fund (IMF) as developing economies, mentioning among others Belarus, Bulgaria, Georgia and Hungary.

As a flat tax tends to increase income inequalities, Ricotti said some countries such as Estonia and Slovakia have accompanied its introduction with tax breaks aimed at helping the less wealthy.

The "redistributive effects (of a single-band model) will have to be carefully assessed", he added.

Bank of Italy has publicly criticised Meloni's government policy in the past.

In December it said a government plan to reduce regulatory curbs on the use of cash could have fuelled the black economy. Meloni dropped the plan after it was also opposed in Brussels.

(Reporting by Giuseppe Fonte; Editing by Andrew Heavens)