Italy’s tax system is so out of whack that the wealthiest 7% benefit from lesser tax compared with its lowest earners

The European country has made few changes to its taxation policy over the years. That’s meant lower return on investments for lower-to-middle-income Italians than their high-income counterparts, a new study published in the World Inequality Database found. 

The paper, which uses European Central Bank data on wealth distribution, found that the returns on wealth for the bottom 90% are just 2.5% compared to double that for the wealthiest 10%. 

“This implies higher income concentration at the top of the income distribution and reveals that Italy’s tax system is more regressive than previously estimated, with tax rates disproportionately benefiting the top 7%,” the study said.  

Italy’s most affluent citizens have had considerable leeway in retaining and transferring their wealth. 

About 21% of Italy’s taxpayers earn between €29,000 and €75,000 a year, contributing more than 40% of income tax revenues, Reuters reported, citing Treasury data.

One key way Italy’s wealthiest take advantage of the tax system is through wealth transfer from generation to generation, as inheritance tax is staggeringly low compared to other major European economies. Inheritance tax collection amounts to €1 billion annually for the Italian government, compared to €9 billion in the U.K. and €18 billion in France. 

Italy is considered a high-tax country, with a tax-to-GDP ratio of nearly 43%—well above the OECD average of 34%. However, the issue is the distribution of taxes, which distorts how much some Italians make compared to others.

The study’s findings have stirred a debate in Italy, Europe’s second-most indebted economy, at a time when policies around wealth and inequality have become front and center across the region. Past research has highlighted the widening chasm between Italy’s rich and poor, particularly exposing Italians aged 18 to 35 who lose most of their income paying taxes. 

The paper, authored by five economists, suggests levying a wealth tax (different from income tax) on the top 7%, which appear to benefit from Italy’s current regime disproportionately. This would pave the way for a progressive policy that taxes people according to what they make, with the lowest earners paying the least tax and vice versa. 

Taxing the wealthy can be contentious, and while many countries have considered it in recent years, few have implemented policies to formalize it. 

In the U.K., for instance, talks of a wealth tax have resurfaced every few years, but they are always met with pushback. The new Labour government recently reduced allowances on capital gains tax to address inequality while raising revenue to fund government spending. France recently green-lit a plan involving taxing the rich to address its ballooning debt pile.  

Only a handful of European countries have a framework around wealth tax in place, including Spain and Switzerland. 

Another way to milk money from the rich? Taxing rich foreigners. 

Earlier this year, Prime Minister Giorgia Meloni doubled the flat tax on foreign income from high earners who recently moved to Italy from abroad. While the crackdown could turn expats away, scrutiny over the likes of the U.K.’s recently scrapped “non-dom” tax regime has helped Italy maintain its attractiveness.  

In a way, that means Italy’s government has more income streams to lighten its debt burden of 135% of GDP last year. At the same time, poverty has also been ticking up, leaving the lowest earners in a pickle. 

A more progressive tax regime could allow Italy to cut taxes on its low-income segment while hiking levies on its top earners.