The incremental flat tax is more sustainable than the traditional flat tax but would remain far more advantageous for those in the highest IRPEF brackets
For years, the incremental flat tax has been at the heart of Fratelli d’Italia‘s electoral proposals. Now that the Giorgia Meloni-led coalition is set to lead the country with a solid majority, this proposal could soon become a reality.
What is the difference between a “normal” flat tax and an incremental flat tax? In the former, all personal income currently taxed at four increasing rates from 23 percent to 43 percent would always be subject to the same rate. The traditional flat tax, then, is a flat, single rate. No center-right party, however, proposed it in its program in the last election round.
The incremental flat tax is a more complex concept that is useful to divide into two parts.
- It is “incremental” because the new 15 percent rate Fratelli d’Italia promises to introduce applies only to the increase in income that eventually occurs from one year to the next. If you declared 100 euros in the previous year and 120 euros in the next, only the additional 20 euros would be subject to the new rate.
- It is “flat” because in whatever income bracket one is in, the rate of the increase always remains the same. This, inevitably, makes the tax rebate more convenient for those who declare and earn more. Let’s see this with an example.
Henry declared 13,000 euros in 2022 and 15,000 euros in 2023. Under the current tax system, the 2,000 euro increment would be taxed at 23% since it falls in the first Irpef bracket: i.e., 460 euros. With the 15% total flat tax promised by Fratelli d’Italia, Enrico’s Irpef outlay would drop to 300 euros, with a net benefit of 160 euros on the current tax.
Giorgia, on the other hand, declared 55,000 euros in 2022 and 57,000 in 2023. The increase, again, is 2,000 euros and would be taxed, under current laws, at 43 percent (the last Irpef bracket). Giorgia, therefore, would pay 860 euros today. On the other hand, the IRS would settle for 300 euros with the incremental flat tax, just as in Henry’s case.
Pulling the sums of this comparison, the person in the first Irpef bracket would have saved 160 euros, the one in the last 560, although the income increase between 2022 and 2023 was 2,000 euros for both.
Is the incremental flat tax more sustainable than the traditional flat tax?
Fratelli d’Italia has always said that the incremental flat tax is more manageable to finance than an ordinary flat tax. In fact, with the incremental flat tax, the state would give up only part of the expected revenue in the event of growth by taxing individuals who earned more than the year before. But even then, state revenue goes up in absolute terms when growth occurs.
With the traditional flat tax, on the other hand, the relief would be extended to any scenario, whether of growth or decrease in income. Moreover, it would be permanent. In contrast, the benefit of the incremental flat tax applies only to years in which the individual experiences an increase in earnings.
Returning to Henry’s example, in 2023, the people who declared 15,000 euros are taking home a 160-euro tax break; if he declared 15,000 euros again in 2024, he would have to pay the ordinary tax rate at 23 and no longer the incremental income rate at 15 percent. The reason is simple: between 2023 and 2024, Henry would not have registered any incremental income.
In a Repubblica letter, the head of the Economy and Finance department of Fratelli d’Italia, Maurizio Leo, clarified that the reference year for calculating income increases subject to flat tax would not always be the previous one. “To avoid possible circumventions … our proposal starts from the assumption that the income to be incentivized should be determined not by comparison with the previous year, but concerning the maximum annual income declared in a multi-year reference period.”
An issue of constitutionality
The flat tax had been criticized as potentially incompatible with the principle of tax progressivity enshrined in the Constitution. That is, the principle that the more you earn, the more you pay, even in terms of increasing (progressive) rates. The incremental flat tax also risks introducing a distortion of this principle. Imagine comparing Enrico, who declared 15,000 euros in 2023 after declaring 13,000 euros in 2022, and Matteo, who earned 15,000 euros in both years. With the incremental flat tax, Enrico, who saw his circumstances improve in the last year, would pay less income tax than Matteo, who earned the same amount. This would violate the principle of “horizontal equity” since it would penalize or fiscally favor individuals in the same condition.
A problem of effectiveness
According to Leo, the thinking behind the incremental flat tax is to reward those who: work harder, hire more and contribute to increasing the country’s wealth.” A possible problem with the incremental flat tax is offering more favorable tax treatment to individuals who have seen an improvement in their earnings. In a recession scenario, for example, the political and economic problem could arise of a tax that helps those activities that have benefited from the crisis.
In many cases, positive or negative income trends are not due to workers’ will but to circumstances beyond their control.
