October 10, 2012

Italy Cuts Taxes on Lowest Earners

Surprise move comes as PM says Italy will stick to budget goals

Prime Minister Mario Monti of Italy. (Photo: AP) Prime Minister Mario Monti of Italy. (Photo: AP)

Italy’s prime minister, Mario Monti, surprised low-level earners in Italy with a tax cut in the midst of the country’s austerity program. The government also announced that it was cutting in half a planned increase in sales tax rates to a single percentage point. Despite these less strenuous measures, Monti said that the country would stick to the austerity plan it had agreed to with the European Union.

Reuters reported Wednesday that the decisions were reached after an eight-hour-long meeting of the Italian cabinet that ended in the wee hours of the morning. Previously, everything had gone the other way as the country sought to ward off a Greek-style crisis; taxes were boosted even as pensions were cut and other belt-tightening measures made the recession even worse.

Now, however, the cabinet reversed some of those measures. In the report, Monti was quoted saying, "Today we can see that budget discipline pays and makes sense" because "we can allow ourselves some moderate relief."

Italy’s lowest two income tax rates will each be cut, with those earning less than 15,000 euros ($19,309) annually paying 22% instead of 23% and those making between 15,001–28,000 euros paying 26% instead of 27%. The three highest rates will remain where they are.

The cabinet issued a statement that said Italy will balance its budget in structural terms in 2013, as its agreement with the EU decrees. It said that health care and other state spending will be cut a second time, and financial transactions and “fiscal interventions” for banks and insurance companies will both be taxed to help pay for the measures.

The government said that savings should total 3.5 billion euros a year when fully implemented, and that savings from the last batch of spending cuts will amount to 4.4 billion euros in 2012 and 10.3 billion in 2013.

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