## 1. Capital Tax Measures in the 2011 Fiscal Packages

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---

### Scope and definitions
- Capital taxation includes taxes on:
  - capital income (business profit, dividends and interest received by individuals, capital gains, and rent);
  - capital transfer (inheritance and transaction taxes);
  - capital stock (property and net wealth taxes).
- Analysis omits some aspects (for example, the regional production tax, which is not specifically a tax on capital).

### Context and recent policy actions
- Reforming capital taxation is of considerable practical importance and current interest in Italy.
- The 2011 consolidation packages relied largely on increased taxation of some transactions and items of capital income and of wealth.
  - About one-fifth of the summer packages and half of the December package relied on capital taxation.
  - Notable measure: reintroduction of the primary residence tax in the December manovra of the Monti government.
- The capital tax structure was not significantly modified in 2012, although a financial transaction tax (FTT) was adopted at the end of the year, taking effect from March 2013.
- The property taxation framework was modified by the 2014 Stability Law which:
  - repealed the tax on primary residences and the waste disposal tax, and
  - replaced them with local service taxes effective from 2014.
  - (The property tax on secondary homes and non-residential properties was not affected.)
- The authorities prepared a framework law setting out strategic directions for a targeted tax reform (“Delega fiscale” or DF), intending to adopt the DF at the beginning of 2014.

### Specific measures in the 2011 fiscal packages (as reported)
- July-September Packages (in billions of Euros):
  - Stamp duty on securities accounts 1.3
  - Higher IRAP on banks 1.0
- December Package (in billions of Euros):
  - First house property tax and base re-evaluation 10.7
  - Luxury good tax 0.4

### Analytical findings and policy recommendations (overview)
- Sustaining and expanding recent reforms could significantly strengthen the design of the tax system.
- Policy directions suggested:
  - Further progress towards a dual income tax system to enhance the coherence and effectiveness of the income tax structure.
  - Unifying the tax treatment of retained earnings across different types of business to ease distortions of business decisions.
  - Updating cadastral values to improve fairness in property taxation; this could finance a reduction in property tax rates and a cut in property transaction taxes.
  - Consideration of an explicit wealth tax and/or strengthening inheritance taxes to create fiscal space to lower taxes on capital and labor income.
- Note on classification: some measures are ambiguous as capital taxes (example: fixed charge on bank accounts introduced in December 2011).

### International comparison (key statistics)
- Capital taxes in Italy yielded 10 percent of GDP, the fourth highest revenue in the EU-27 in 2011 (Eurostat).
- Italy ranks: taxes on household income (5th), capital stock (6th), and corporate income (9th) in the EU.
- Implicit tax rate on capital is 33.6 percent.
- Share of capital taxes in total taxes is 23.5 percent.
- Italy relies heavily on transaction taxes: taxes on financial and capital transactions ≈ half of total taxes on wealth in 2011, versus one fourth for the OECD average.
- Real estate tax revenues rose from 0.7 percent of GDP in 2011 to 1.5 percent in 2012 (post-reform); OECD average is 1.1 percent; Japan 2.2 percent of GDP; France 2.5 percent; US 3.1 percent; UK 3.3 percent.

### Enhancing the neutrality of the capital income tax system
- Dual Income Tax (DIT) concept: tax capital income at a low single rate and labor income under a progressive schedule; corporate profit tax rate ideally equals single rate on capital income; full imputation avoids double taxation.
- Italy exhibits DIT-like features:
  - rental income taxed at 21 percent;
  - interest income other than government debt at 20 percent;
  - dividends (non-qualified) at 20 percent;
  - capital gains on most financial instruments at 20 percent.
- Unification of withholding rates on interest income was a key measure of the August 2011 fiscal package.
- Allowance for Corporate Equity (ACE, introduced December 2011) provides a notional deduction for additional equity, reducing bias toward debt finance.
  - Notional interest rate for ACE: 3 percent for 2011-13; 4% in 2014; 4.5% in 2015; 4.75% in 2016 (2014 Stability Law).
- Remaining deviations from textbook DIT:
  - Half of dividends for qualified shareholdings taxed under progressive IRPEF rates.
  - Potential taxation of capital gains on real estate at the IRPEF rate (no taxation if property held ≥5 years or used as primary residence).
  - No differential treatment of labor vs. capital income for unincorporated businesses.
  - Distributed corporate earnings (above normal return) effectively taxed close to top IRPEF marginal rate 43 percent rather than 20 percent interest rate.
  - IRES rate is 27.5 percent.
- Structural neutrality issues between organizational forms:
  - Retained corporate profit subject to IRES; partnerships/sole proprietorships subject to IRPEF (progressive 23–43 percent) — may induce tax-motivated incorporation.
  - Corporations can defer personal tax on distributed earnings by retaining profit; non-corporates cannot.
  - Distributions by non-corporate entities taxed under IRPEF; corporate distributions subject to corporate and dividend taxes leading to effective rates of 42 percent (non-qualified shareholdings) and 43 percent (qualified shareholding at top IRPEF rate).
- Policy proposal: Imposta sul Reddito Imprenditoriale (IRI)
  - Tax retained earnings of businesses irrespective of legal form at IRES rate, with outflows deductible but fully taxable at personal IRPEF.
  - Aim: neutrality between corporate and non-corporate business forms.
  - Caution: Making IRI optional risks revenue loss, administrative complexity, and higher compliance costs; a single regime (except for smallest enterprises) is preferable; transitional optionality may be considered.

### Implementing a fairer and more effective property tax
- Rationale: recurrent immovable property taxes are less mobile, relatively benign for growth, can function as a “benefit tax,” and are a stable revenue source.
- IMU reform (start of 2012) replaced ICI, reintroduced primary residences into the tax base, scaled up cadastral values with multiplicative factors:
  - Revaluation coefficient for houses was 1.6; for other property types reevaluation ranged from 1.2 to 1.6 percent.
  - Taxable values increased by about 50 percent overall.
- Remaining valuation issues:
  - Cadastral base still outdated: market rental values from 1988–89.
  - National average ratio of market to taxable value: 2.2 for primary residences; 2.4 for other dwellings.
  - Property prices have changed heterogeneously since 1988–89 (up to five-fold in some regions, half that in others).
- Valuation reform options:
  - Market-driven “comparable sales approach” for frequently traded properties.
  - For unique properties: “cost-based approach” for owner-occupied; “income approach” for income-producing properties.
- Revenue and rate implications:
  - Taxable base for housing is still less than half average market value nationally; comprehensive revaluation could allow comparable revenue with less than half the current tax rate.
  - Use some revenue gains to reduce distortionary transaction taxes.
- Administrative considerations:
  - Maintaining cadastre: over 83 million parcels; individualized appraisals for over one million specialized cadastral properties.
  - Possible sharing of tasks with municipalities and local agencies; consider dedicating a small portion of property tax revenue to maintenance of assessment/collection system.
  - Self-declaration by taxpayers for property characteristics is an option; requires audit capacity, verification procedures, appeals procedures, and penalties.
- Exemptions:
  - Approximately 60 percent of land in Italy currently exempted from property tax (agricultural land exemptions, municipal authorities’ discretionary exemptions, public facilities).
  - Recommendation: review exemptions (particularly agricultural land) to broaden base, reduce rates, or enhance local revenues.

### Reducing distortionary taxes on transactions
- Transaction taxes estimated at 1.0 percent of GDP in 2011, twice the OECD average of 0.5 percent.
- Composition of transaction tax revenue (2012, ISTAT):
  - Registration taxes: 30%
  - Duty in lieu of registration taxes and stamp duties: 20%
  - Stamp duties: 32%
  - Mortgage tax and land registry duties: 12%
  - Surcharges on cadastral acts: 6%
- Transaction taxes heavily affect immovable property; housing market transaction costs in Italy ≈ 25 percent above OECD average.
- Taxes on real estate purchases:
  - Buyers pay registration tax (imposta di registro): rates 3–15 percent depending on property type; for business assets charged as flat amount.
  - Land registry tax (imposta catastale): 1 percent.
  - Mortgage tax (imposta ipotecaria): 2–3 percent.
  - VAT on new housing: 4–22 percent depending on property; if sale subject to VAT, registration and land registry taxes reduced to small flat amounts (except business assets).
- Economic costs of transaction taxes:
  - Distort behavior, impede mutually beneficial transactions, reduce market liquidity, may increase price volatility, inflate housing prices, enable tax evasion via collusion (under-reported prices), create lock-in effects reducing residential and job mobility and potentially increasing structural unemployment.
- Mobility: Italy’s residential mobility significantly below OECD average.
- Policy moves and recommendations:
  - Legislative Decree 23/2011 plans a single rate for most transaction taxes on immovable property from 2014: 2 percent for primary residences and 9 percent for other properties (current rates range between 3 and 18 percent).
  - Continue streamlining transaction taxes; rate reductions of this order seem reasonable though possibly low for non-primary residences.
  - Further IMU reform and cadastre review provide opportunity to offset IMU base increases with cuts in registration taxes.
  - Under assumption that half of transaction taxes bear on real property, to reduce total transaction revenues to OECD average, tax rates on real property transfers should be divided by four.
- Financial Transaction Tax (FTT):
  - Italy introduced an FTT effective March 2013 targeting transfers of equity instruments, equity derivative trades, and high-frequency trading.
  - FTT rates vary by transaction type and whether executed on a regulated market.
  - Risks: reduced trading volume and liquidity, lower asset prices, unclear effect on leverage given lower derivative tax rates, displacement of trading activity outside Italy, potential distortion if taxing transactions between businesses.
  - IMF (2010) preference expressed for a Financial Activities Tax (FAT) on sum of profits and remuneration of financial institutions.
  - Recommendation: carefully monitor effects of the Italian FTT on stock markets to evaluate merits and drawbacks.

### Strengthening the taxation of inheritance and gifts
- Italy taxes lifetime gifts and inheritances; allowances specified as lifetime amounts from a specific donor; running totals must be kept if multiple gifts or combined gift and inheritance from same donor.
- Transfers net of financial liabilities; different rates and allowances apply by kinship.
- Revenue: In 2012, inheritance and gift tax yielded €520 million, equivalent to 0.03 percent of GDP or 0.1 percent of total tax revenue.
- Reasons for low yield: generous allowances and low rates; asset valuation uses cadastral not market value for real property gifts/bequests.
- Comparative examples:
  - France: child allowance €100,000; marginal rates 5–60 percent.
  - Germany: marginal rates 7–50 percent; child allowance €400,000.
  - U.K.: estate threshold £325,000; tax rate 40 percent.
  - Spain: marginal rates 7–34 percent; child allowance up to €47,859.
- Structural design:
  - Italy’s system is close to “donee-based” accession tax: each donee taxed to extent transfers from a donor exceed lifetime limit — equalizes gifts vs. inheritances.
  - Weaknesses: transfers from different donors treated separately (allowances do not aggregate across donors), allowance thresholds not automatically updated (require ministerial decree).
  - Recommendation: consider applying allowances to sum of prior gifts/inheritances from different donors; consider automatic inflation adjustments to thresholds.
- Equity and efficiency considerations:
  - Closest-relative allowance up to €2 million tax-free can make tax ineffective (only ~1 percent of households have net wealth above €2 million per Bank of Italy 2010).
  - Suggestion: progressive banding with lowest rate equal to lowest PIT rate 23 percent and top marginal rate close to highest PIT rate 43 percent.
- Exemptions and reliefs to review:
  - Exemption for transfers of enterprises/controlling stakes to descendants/spouse if beneficiary continues business for 5 years — may entrench inefficient management; alternative: eliminate exemption but allow tax payment in installments (5–10 years).
  - Reduction of transaction taxes for family homes if donee uses as main residence — may incentivize over-investment in homes; alternative: eliminate relief but allow deferral of tax payment until subsequent sale.
  - Rationale unclear for exempting government bonds from inheritance tax but not from gift tax.
- Capital gains on inheritances:
  - Often not taxed; in Italy, capital gains on sale of primary residence exempt; capital gains on securities other than government bonds taxed only on share accrued by heir for inheritances, but on full amount for gifts.
  - Various exceptions and reliefs exist for buildings, agricultural land, and primary residences.

### Towards a more comprehensive taxation of wealth?
- Italy does not levy a comprehensive net wealth tax (NWT); many European countries repealed NWTs over past 20 years; within Europe, France, Iceland, Norway, Spain, Switzerland still have recurrent NWTs.
- Typical top marginal rates of NWTs generally <2 percent; revenues <1 percent of GDP (exception Luxembourg 1.5–2 percent of GDP).
- Italy taxes various selected financial and real assets; December 2011 fiscal package included primary residences in property tax and new taxes on luxury goods and assets held abroad.
- Selected revenues from taxes on wealth stock in 2012 (Italian authorities):
  - Real estate held domestically: €23.80 billion, 1.51 percent of GDP
  - Real estate held abroad: €0.01 billion, 0.00 percent of GDP
  - Financial assets held domestically (including bank accounts): 0.00 billion, 0.00 percent of GDP
  - Financial assets held abroad: 0.01 billion, 0.00 percent of GDP
  - Financial assets (tax shield): 0.88 billion, 0.06 percent of GDP
  - Luxury goods: 0.13 billion, 0.01 percent of GDP
- Total taxes on selected forms of wealth ≈ 1.6 percent of GDP in 2012, slightly above OECD average 1.4 percent of GDP in 2011.
- Considerations:
  - Moving to a comprehensive NWT could be an option but risks layering high effective marginal rates when combined with existing capital income taxation; careful design needed regarding netting liabilities, allowances, progressive rates, and assignment between central and local government.

### Box 1 — Taxes on Asset Holding in Italy (highlights)
- Tax structure on domestic and foreign asset holdings:
  - Real estate: Taxed at 0.4 percent for the primary residence and 0.76 percent for other properties until 2013 (a new real property tax system is introduced in 2014).
  - Bank accounts: Annual flat fee of €34 for individuals, and €100 for businesses.
  - Financial assets (excluding bank accounts): Taxed at 0.2 percent; the financial sector does not pay this tax.
  - Assets held abroad: Financial assets held abroad are taxed at 0.2 percent annually, excluding bank accounts held in EU countries or EEA member states that allow information exchange, which are subject to the €34.2 lump sum fee.
  - Special tax for assets covered by the ‘tax shield’ program: Amounts repatriated under the 2001 and 2009 foreign asset disclosure schemes and still not disclosed to the tax administration are taxed at 1.35 percent in 2013, and 0.4 percent from 2014.
- Wealth levels and concentration:
  - Net household wealth amounted to €8.6 trillion at end-2011, about 4.5 times the public debt.
  - Italy has one of the highest wealth-to-income ratios in advanced economies: about 770 percent of household disposable income in 2011.
  - The richest 10 percent households hold about half of total net wealth.
- Revenue from existing wealth taxes (excluding property tax): 0.1 percent of GDP in 2012.
- Asset composition (top decile share of net wealth):
  - Top decile: Real estate 78; Business Equity 10; Valuables 1; Deposits 4; Government Securities 1; Other Securities 5; Trade Credit 1.
- Efficiency and distributional implications:
  - Differential taxation justified by mobility differences but creates cross-asset distortions.
  - Flat fee on bank accounts may encourage divestment of low-yield assets and retention in bank accounts.
  - Wealth taxes on gross assets bias against leveraging; recommendation: deduct financial liabilities from gross wealth.
- NWT trade-offs and incidence:
  - A NWT could replace existing taxes, applying a single tax rate to assets net of liabilities with a high allowance.
  - Administrative cost objections are weaker in Italy given existing asset taxes.
  - Numerical illustrations:
    - For an investor earning a 5 percent real return on assets, a 1 percent NWT effectively doubles the current 20 percent capital income tax to 40 percent.
    - In the presence of 2 percent inflation, the tax on the real return would rise to 67 percent in the short term and 48 percent in the medium term.
- Policy priorities (summary):
  - Continue progress toward neutral capital income taxation (ACE and unifying retained earnings treatment).
  - Bring cadastral values closer to market values; align revaluation with tax rate cuts and use some gains to reduce transaction taxes.
  - Reduce taxes on asset transactions significantly as a first step.
  - Inheritance tax: adopt a progressive rate schedule to increase redistributive impact.
  - Medium-term option: consider substituting a single NWT for existing taxes, weighing administrative, efficiency, and equity trade-offs.

*Source: _wp1406 - 1. Capital Tax Measures in the 2011 Fiscal Packages and Box 1 (excerpt).*

### 1. Capital Tax Measures in the 2011 Fiscal Packages .............................................................. 4

### 1. Capital Tax Measures in the 2011 Fiscal Packages .............................................................. 4

### Scope and definitions
- Capital taxation is defined in this paper to encompass taxes on:
  - capital income (business profit, dividends and interest received by individuals, capital gains, and rent);
  - capital transfer (inheritance and transaction taxes);
  - capital stock (property and net wealth taxes).
- The analysis omits some aspects (for example, the regional production tax, which is not specifically a tax on capital).

### Context and recent policy actions
- Reforming capital taxation is of considerable practical importance and current interest in Italy.
- The 2011 consolidation packages relied largely on increased taxation of some transactions and items of capital income and of wealth.
  - About one-fifth of the summer packages and half of the December package relied on capital taxation (Table 1).
  - Notable measure: reintroduction of the primary residence tax in the December manovra of the Monti government.
- The capital tax structure was not significantly modified in 2012, although a financial transaction tax (FTT) was adopted at the end of the year, taking effect from March 2013.
- The property taxation framework was modified by the 2014 Stability Law which:
  - repealed the tax on primary residences and the waste disposal tax, and
  - replaced them with local service taxes effective from 2014.
  - (The property tax on secondary homes and non-residential properties was not affected.)
- The authorities prepared a framework law setting out strategic directions for a targeted tax reform (“Delega fiscale” or DF), intending to adopt the DF at the beginning of 2014.

### Specific measures in the 2011 fiscal packages (as reported)
- July-September Packages (in billions of Euros):
  - Stamp duty on securities accounts 1.3
  - Higher IRAP on banks 1.0
- December Package (in billions of Euros):
  - First house property tax and base re-evaluation 10.7
  - Luxury good tax 0.4
- (Additional heading present in source: Capital income taxation 3)

### Analytical findings and policy recommendations
- Sustaining and expanding recent reforms could significantly strengthen the design of the tax system.
- Policy directions suggested in the source:
  - Further progress towards a dual income tax system to enhance the coherence and effectiveness of the income tax structure.
  - Unifying the tax treatment of retained earnings across different types of business to ease distortions of business decisions.
  - Updating cadastral values to improve fairness in property taxation; this could finance a reduction in property tax rates and a cut in property transaction taxes.
  - Consideration of an explicit wealth tax and/or strengthening inheritance taxes to create fiscal space to lower taxes on capital and labor income.

### Notes and caveats from the source
- In terms of economic impact, classification of various taxes is not always clear-cut (example: the fixed charge on bank accounts introduced in December 2011 is not clearly a tax on a specific transaction nor, since it is unrelated to the balance of the account, is it a tax on wealth).

*Source: _wp1406 - 1. Capital Tax Measures in the 2011 Fiscal Packages (excerpt).*

### 1.4  Stamp duty (including on financial

### 1.4  Stamp duty (including on financial instruments)

### II. International comparison
- Capital taxes in Italy yielded 10 percent of GDP, the fourth highest revenue in the EU-27 in 2011 (Eurostat).
- Italy ranks: taxes on household income (5th), capital stock (6th), and corporate income (9th) in the EU.
- Implicit tax rate on capital is 33.6 percent.
- Share of capital taxes in total taxes is 23.5 percent.
- Italy relies heavily on transaction taxes: taxes on financial and capital transactions ≈ half of total taxes on wealth in 2011, versus one fourth for the OECD average.
- Real estate tax revenues rose from 0.7 percent of GDP in 2011 to 1.5 percent in 2012 (post-reform); OECD average is 1.1 percent; Japan 2.2 percent of GDP; France 2.5 percent; US 3.1 percent; UK 3.3 percent.

### III. Enhancing the neutrality of the capital income tax system
- Dual Income Tax (DIT) concept: tax capital income at a low single rate and labor income under a progressive schedule; corporate profit tax rate ideally equals single rate on capital income; full imputation avoids double taxation.
- Italy exhibits DIT-like features:
  - rental income taxed at 21 percent;
  - interest income other than government debt at 20 percent;
  - dividends (non-qualified) at 20 percent;
  - capital gains on most financial instruments at 20 percent.
- Unification of withholding rates on interest income was a key measure of the August 2011 fiscal package.
- Allowance for Corporate Equity (ACE, introduced December 2011) provides a notional deduction for additional equity, reducing bias toward debt finance.
  - Notional interest rate for ACE: 3 percent for 2011-13; 4% in 2014; 4.5% in 2015; 4.75% in 2016 (2014 Stability Law).
- Remaining deviations from textbook DIT:
  - Half of dividends for qualified shareholdings taxed under progressive IRPEF rates.
  - Potential taxation of capital gains on real estate at the IRPEF rate (no taxation if property held ≥5 years or used as primary residence).
  - No differential treatment of labor vs. capital income for unincorporated businesses.
  - Distributed corporate earnings (above normal return) effectively taxed close to top IRPEF marginal rate 43 percent rather than 20 percent interest rate.
  - IRES rate is 27.5 percent.
- Structural neutrality issues between organizational forms:
  - Retained corporate profit subject to IRES; partnerships/sole proprietorships subject to IRPEF (progressive 23–43 percent) — may induce tax-motivated incorporation.
  - Corporations can defer personal tax on distributed earnings by retaining profit; non-corporates cannot.
  - Distributions by non-corporate entities taxed under IRPEF; corporate distributions subject to corporate and dividend taxes leading to effective rates of 42 percent (non-qualified shareholdings) and 43 percent (qualified shareholding at top IRPEF rate).
- Policy proposal: Imposta sul Reddito Imprenditoriale (IRI) to tax retained earnings of businesses irrespective of legal form at IRES rate, with outflows deductible but fully taxable at personal IRPEF—aiming for neutrality between corporate and non-corporate business forms.
- Caution: Making IRI optional risks revenue loss, administrative complexity, and higher compliance costs; a single regime (except for smallest enterprises) is preferable; transitional optionality may be considered.

### IV. Implementing a fairer and more effective property tax
- Economic rationale: recurrent immovable property taxes are less mobile, relatively benign for growth, can function as a “benefit tax,” and are a stable revenue source.
- IMU reform (start of 2012) replaced ICI, reintroduced primary residences into the tax base, scaled up cadastral values with multiplicative factors:
  - Revaluation coefficient for houses was 1.6; for other property types reevaluation ranged from 1.2 to 1.6 percent.
  - Taxable values increased by about 50 percent overall.
- Remaining valuation issues:
  - Cadastral base still outdated: market rental values from 1988–89.
  - National average ratio of market to taxable value: 2.2 for primary residences; 2.4 for other dwellings.
  - Property prices have changed heterogeneously since 1988–89 (up to five-fold in some regions, half that in others), making common adjustment factors insufficient and creating inequities.
- Valuation reform options:
  - Market-driven “comparable sales approach” for frequently traded properties.
  - For unique properties: “cost-based approach” for owner-occupied; “income approach” for income-producing properties.
- Revenue and rate implications:
  - Taxable base for housing is still less than half average market value nationally; comprehensive revaluation could allow comparable revenue with less than half the current tax rate.
  - Use some revenue gains to reduce distortionary transaction taxes.
- Administrative considerations:
  - Maintaining cadastre: over 83 million parcels; individualized appraisals for over one million specialized cadastral properties.
  - Possible sharing of tasks with municipalities and local agencies; consider dedicating a small portion of property tax revenue to maintenance of assessment/collection system.
  - Self-declaration by taxpayers for property characteristics is an option to gather data; requires audit capacity, verification procedures, appeals procedures, and penalties.
- Exemptions:
  - Approximately 60 percent of land in Italy currently exempted from property tax (agricultural land exemptions, municipal authorities’ discretionary exemptions, public facilities).
  - Recommendation: review exemptions (particularly agricultural land) to broaden base, reduce rates, or enhance local revenues.

### V. Reducing distortionary taxes on transactions
- Transaction taxes estimated at 1.0 percent of GDP in 2011, twice the OECD average of 0.5 percent.
- Composition of transaction tax revenue (2012, ISTAT):
  - Registration taxes: 30%
  - Duty in lieu of registration taxes and stamp duties: 20%
  - Stamp duties: 32%
  - Mortgage tax and land registry duties: 12%
  - Surcharges on cadastral acts: 6%
- Transaction taxes heavily affect immovable property; housing market transaction costs in Italy ≈ 25 percent above OECD average.
- Taxes on real estate purchases:
  - Buyers pay registration tax (imposta di registro): rates 3–15 percent depending on property type; for business assets charged as flat amount.
  - Land registry tax (imposta catastale): 1 percent.
  - Mortgage tax (imposta ipotecaria): 2–3 percent.
  - VAT on new housing: 4–22 percent depending on property; if sale subject to VAT, registration and land registry taxes reduced to small flat amounts (except business assets).
- Economic costs of transaction taxes:
  - Administrative ease due to infrequent ownership changes, but taxes distort behavior, impede mutually beneficial transactions, reduce market liquidity, may increase price volatility, inflate housing prices, enable tax evasion via collusion (under-reported prices), create lock-in effects reducing residential and job mobility and potentially increasing structural unemployment.
- Mobility: Italy’s residential mobility significantly below OECD average (Caldera Sanchez and Andrews 2011).
- Policy moves and recommendations:
  - Fiscal federalism reform: Legislative Decree 23/2011 plans a single rate for most transaction taxes on immovable property from 2014: 2 percent for primary residences and 9 percent for other properties (current rates range between 3 and 18 percent).
  - Continue streamlining transaction taxes; rate reductions of this order seem reasonable though possibly low for non-primary residences.
  - Further IMU reform and cadastre review provide opportunity to offset IMU base increases with cuts in registration taxes.
  - Under assumption that half of transaction taxes bear on real property, to reduce total transaction revenues to OECD average, tax rates on real property transfers should be divided by four.
- Financial Transaction Tax (FTT):
  - Italy introduced an FTT effective March 2013 targeting transfers of equity instruments, equity derivative trades, and high-frequency trading.
  - FTT rates vary by transaction type and whether executed on a regulated market.
  - Risks: reduced trading volume and liquidity, lower asset prices, unclear effect on leverage given lower derivative tax rates, displacement of trading activity outside Italy, potential distortion if taxing transactions between businesses.
  - IMF (2010) preference expressed for a Financial Activities Tax (FAT) on sum of profits and remuneration of financial institutions (broadly equivalent to a VAT for the financial sector).
  - Recommendation: carefully monitor effects of the Italian FTT on stock markets to evaluate merits and drawbacks.

### VI. Strengthening the taxation of inheritance and gifts
- Italy taxes lifetime gifts and inheritances; allowances specified as lifetime amounts from a specific donor; running totals must be kept if multiple gifts or combined gift and inheritance from same donor.
- Transfers net of financial liabilities; different rates and allowances apply by kinship.
- Revenue: In 2012, inheritance and gift tax yielded €520 million, equivalent to 0.03 percent of GDP or 0.1 percent of total tax revenue.
- Reasons for low yield: generous allowances and low rates; asset valuation uses cadastral not market value for real property gifts/bequests.
- Comparative examples:
  - France: child allowance €100,000; marginal rates 5–60 percent.
  - Germany: marginal rates 7–50 percent; child allowance €400,000.
  - U.K.: estate threshold £325,000; tax rate 40 percent.
  - Spain: marginal rates 7–34 percent; child allowance up to €47,859.
- Structural design:
  - Italy’s system is close to “donee-based” accession tax: each donee taxed to extent transfers from a donor exceed lifetime limit — equalizes gifts vs. inheritances.
  - Weaknesses: transfers from different donors treated separately (allowances do not aggregate across donors), allowance thresholds not automatically updated (require ministerial decree).
  - Recommendation: consider applying allowances to sum of prior gifts/inheritances from different donors; consider automatic inflation adjustments to thresholds.
- Equity and efficiency considerations:
  - Closest-relative allowance up to €2 million tax-free can make tax ineffective (only ~1 percent of households have net wealth above €2 million per Bank of Italy 2010).
  - Current flat rates are low relative to PIT; suggestion: progressive banding with lowest rate equal to lowest PIT rate 23 percent and top marginal rate close to highest PIT rate 43 percent.
- Exemptions and reliefs to review:
  - Exemption for transfers of enterprises/controlling stakes to descendants/spouse if beneficiary continues business for 5 years — may entrench inefficient management; alternative: eliminate exemption but allow tax payment in installments (5–10 years).
  - Reduction of transaction taxes for family homes if donee uses as main residence — may incentivize over-investment in homes; alternative: eliminate relief but allow deferral of tax payment until subsequent sale (acknowledging lock-in effects).
  - Rationale unclear for exempting government bonds from inheritance tax but not from gift tax.
- Capital gains on inheritances:
  - Often not taxed; arguments for taxing them include different roles of capital gains tax versus transfer tax, avoidance of encouraging holding appreciated assets, and preventing conversion of income to capital gains.
  - In Italy, capital gains on sale of primary residence exempt; capital gains on securities other than government bonds taxed only on share accrued by heir for inheritances, but on full amount for gifts.
  - Various exceptions and reliefs exist for buildings, agricultural land, and primary residences.

### VII. Towards a more comprehensive taxation of wealth?
- Italy does not levy a comprehensive net wealth tax (NWT); many European countries repealed NWTs over past 20 years; within Europe, France, Iceland, Norway, Spain, Switzerland still have recurrent NWTs.
- Typical top marginal rates of NWTs generally <2 percent; revenues <1 percent of GDP (exception Luxembourg 1.5–2 percent of GDP).
- Italy taxes various selected financial and real assets; December 2011 fiscal package included primary residences in property tax and new taxes on luxury goods and assets held abroad.
- Selected revenues from taxes on wealth stock in 2012 (Italian authorities):
  - Real estate held domestically: €23.80 billion, 1.51 percent of GDP
  - Real estate held abroad: €0.01 billion, 0.00 percent of GDP
  - Financial assets held domestically (including bank accounts): 0.00 billion, 0.00 percent of GDP (negligible in 2012 as banks used tax credits from previous years)
  - Financial assets held abroad: 0.01 billion, 0.00 percent of GDP
  - Financial assets (tax shield): 0.88 billion, 0.06 percent of GDP
  - Luxury goods: 0.13 billion, 0.01 percent of GDP
- Total taxes on selected forms of wealth ≈ 1.6 percent of GDP in 2012, slightly above OECD average 1.4 percent of GDP in 2011.

*Source: Italian authorities’ projections and chapter text as supplied.*

### Box 1. Taxes on Asset Holding in Italy

### Box 1. Taxes on Asset Holding in Italy

### Tax structure on domestic and foreign asset holdings
- Real estate:
  - Taxed at 0.4 percent for the primary residence and 0.76 percent for other properties until 2013 (a new real property tax system is introduced in 2014).
- Bank accounts:
  - Annual flat fee of €34 for individuals, and €100 for businesses.
- Financial assets (excluding bank accounts):
  - Taxed at 0.2 percent; the financial sector does not pay this tax.
- Luxury goods:
  - Some luxury goods are subject to specific taxes.
- Assets held abroad (individuals only):
  - Real properties held abroad are subject to the basic IMU rates.
  - Financial assets held abroad are taxed at 0.2 percent annually, excluding bank accounts held in EU countries or EEA member states that allow information exchange, which are subject to the €34.2 lump sum fee.
- Special tax for assets covered by the ‘tax shield’ program:
  - Amounts repatriated under the 2001 and 2009 foreign asset disclosure schemes and still not disclosed to the tax administration are taxed at 1.35 percent in 2013, and 0.4 percent from 2014.

### Wealth levels, concentration, and current revenue impact
- Net household wealth and macro context:
  - Net household wealth amounted to €8.6 trillion at end-2011, about 4.5 times the public debt.
  - Italy has one of the highest wealth-to-income ratios in advanced economies: about 770 percent of household disposable income in 2011.
- Concentration and inequality:
  - The richest 10 percent households hold about half of total net wealth.
  - Income inequality in Italy is above the OECD average.
- Revenue from existing wealth taxes (excluding property tax):
  - These taxes raise 0.1 percent of GDP in 2012.
- Asset composition highlights (share of net wealth by type for selected deciles):
  - Top decile (10): Real estate 78; Business Equity 10; Valuables 1; Deposits 4; Government Securities 1; Other Securities 5; Trade Credit 1.
  - Decile 4 example: Real estate 79; Business Equity 3; Valuables 4; Deposits 11; Government Securities 1; Other Securities 2; Trade Credit 0.
  - (Reading: Real estate accounts for 78 percent of net wealth of the top 10 percent richest households.)
- Observations on asset reporting:
  - Survey data may understate assets held abroad; increased risk aversion may have reduced holdings of financial assets since 2000.

### Efficiency, distributional implications, and distortions
- Differential taxation and mobility:
  - Real property is much less mobile internationally than financial capital, justifying higher taxation on efficiency grounds.
  - Differential treatment raises concerns: steep increases in property taxation may adversely affect the real estate market and exemptions/preferential treatments enable avoidance.
- Specific distortions noted:
  - Flat fee on bank accounts may encourage households to divest low-yield assets and keep savings in bank accounts.
  - Wealth taxes levied on gross assets create a bias against leveraging, potentially amplifying a high propensity to save; recommendation is that financial liabilities should be deducted from gross wealth.
- Administrative and behavioral considerations for reform:
  - Piecemeal adjustments to wealth taxation can exploit differences in asset mobility but create cross-asset distortions and equity concerns.
  - Existing asset taxes mean a shift to a net wealth tax (NWT) would not necessarily require dramatic changes in revenue administration, except for collecting information on financial liabilities.
  - Defining the taxable unit is important to minimize incentives to split wealth among family members; options include allowing joint declarations with specific rates and allowances.

### Net Wealth Tax (NWT) trade-offs and quantitative incidence on returns
- Design options and assignment:
  - A NWT could replace existing taxes, applying a single tax rate to all assets net of liabilities with a high allowance (possibly progressive); it should be assigned to the central government, while IMU would remain as a local benefit tax.
  - A NWT could complement capital income tax when the latter is constrained by design (e.g., commitment to a low flat rate under the DIT system).
- Administrative costs and compliance:
  - Argument that NWT has higher administration and compliance costs is weaker in Italy because taxes on financial and real assets already exist.
- Impact on capital accumulation and effective marginal tax rates:
  - Capital taxation is already very high in Italy by European standards.
  - Layering a NWT on top of existing capital income tax could produce high effective marginal rates, especially at lower real rates of return and higher inflation.
- Numerical illustration of effective taxation on real returns:
  - Example: For an investor earning a 5 percent real return on assets, a 1 percent NWT effectively doubles the current 20 percent capital income tax to 40 percent.
  - Example: In the presence of 2 percent inflation, the tax on the real return would rise to 67 percent in the short term (if inflation is not anticipated, and the pre-tax real rate of return declines) and 48 percent in the medium term (once nominal pre-tax rates of return have adjusted).
- Behavioral consequences:
  - Facing lower returns, investors may shift from savings to consumption (negatively affecting domestic investment and growth), or seek opportunities abroad and expatriate.

### Policy recommendations and reform priorities (from conclusions)
- Continue progress toward neutral capital income taxation:
  - The ACE is a significant step to eliminate the tax on the normal return to equity at the business level and neutralize the preferential treatment of debt.
  - Further reform: introduce a new business tax unifying treatment of retained earnings across organizational forms to reduce distortions.
- Property taxation reform:
  - Bring cadastral values closer to market values: cadastral assessments are more than 20 years out of date; relative property prices have diverged widely, with increases in some regions of 500 percent and about half that in others.
  - Alignment of cadastral prices with market prices will improve fairness; tax rate cuts could partially offset revaluation effects, and some revenue gains should be used to reduce transaction taxes tied to immovable property.
- Wealth taxation reform path:
  - Reduce significantly taxes on asset transactions as a first step—they are quite large in Italy but have little justification beyond administrative simplicity and distort behavior.
  - Inheritance tax: adopt a progressive rate schedule to increase redistributive impact; current low rates and high allowances limit effectiveness.
  - Medium-term option: move toward a more comprehensive taxation of wealth by substituting a single NWT for existing taxes, weighing efficiency advantages of differentiated rates across assets against equity and netting-out-liabilities complexities.

*Source: Box 1. Taxes on Asset Holding in Italy, _wp1406 - Box 1. Taxes on Asset Holding in Italy_*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2014/_wp1406.pdf_