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Italy’s Taxing Election

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MILAN – A winter election is not to Italian tastes. But, on February 24-25, up to 50 million voters will go to the polls to elect a new parliament, delivering Italy’s 62nd government in the last 65 years. Since November 2011, Italy has been led not by a politician, but by an academic economist and a former European Union commissioner, Mario Monti. His emergency technocratic government, supported by the left and right, was a masterstroke of outgoing President Giorgio Napolitano.

Napolitano’s move was crucial, filling Italy’s need to replace the inefficient and scandal-ridden Silvio Berlusconi, in whom fellow leaders and global markets had lost all confidence, with an internationally respected figure. Under Monti’s leadership, reforms were finally initiated and markets were calmed.

To enhance the credibility of public finances, Monti’s government substantially increased taxes, particularly on real estate, while preserving the already record-high income-tax rate. The tax plan highlighted that Italy, like Japan, is a country of public debt and private wealth. As the economist Marco Fortis points out, Italian family wealth is still, if not for long, second to none in Europe.

Beyond growing international credibility, two major changes to the Italian political landscape have shaped the election campaign. The first is Monti’s surprise resignation in December, after losing the backing of Berlusconi’s party. While he will not run as a candidate (he is already a senator for life), he formed a centrist coalition – affiliated with neither the left nor the right – to contest the election, and has declared his willingness to resume his leadership role if the coalition is victorious.

The second change is that, after almost two decades of striving for a workable political system dominated by the center-left and center-right parties, Italy is experiencing a remarkable dispersion of forces. The ballot will include dozens of competing parties, most of which will not win parliamentary seats, owing to a 2005 electoral law requiring at least 4% of the national vote to enter the Chamber of Deputies (the lower house) and 8% on a regional basis to enter the Senate.

According to public-opinion polls, the center-left Democratic Party, led by Pier Luigi Bersani, along with some more left-leaning allies, has the support of roughly 33% of the electorate, down since late January, while backing for Berlusconi’s center-right coalition has risen to 28%. Meanwhile, Monti’s centrist grouping has only 16% support, while the populist Five Star Movement, founded by the comedian Beppe Grillo in 2009, has 17% backing – a figure that could go higher if those who previously stayed at home decide to cast a protest vote.

The real battle, therefore, is between the Bersani and Berlusconi coalitions. Most observers believe that Bersani will carry the day, thanks to the much-criticized electoral law, which will give him control of the lower chamber if he wins a majority – regardless of how many people vote or how slim the margin. The law favored Berlusconi in 2008; it is likely to benefit Bersani now.

But, in order to govern, Bersani would need both chambers, and he is unlikely to muster 50.1% in the Senate. At the same time, with Monti’s coalition failing to gain traction, reflecting the historically limited appeal of classic bourgeois parties in Italy, many observers are wondering what his role in the next government will be. For Bersani, creating a coalition with Monti may well be the key to gaining control of the upper house and, in turn, of the government.

Amid these plans and predictions, a growing banking scandal has reminded Italians that, in politics, luck can sometimes make the difference. When Monte dei Paschi di Siena – Italy’s third-largest bank – revealed that it faced losses of up to €720 million ($970 million) from complex derivatives deals carried out in 2006-2009, support for Bersani’s coalition slipped, owing to the PD’s long-standing ties to the bank. Given that Italians tend to vote against, rather than for, issues, mistrust of the PD has translated into increased support for Berlusconi’s coalition.

Another issue with the potential to undermine the PD’s standing is the party’s advocacy of a new wealth tax. Italians already shoulder heavy taxes: an individual taxpayer with annual income of €50,000 pays €15,000 in income tax; with two children, that total drops by only €1,000. By contrast, a French taxpayer with the same income pays only €9,000; with two children, the tax bill plummets to €3,000, and a €1.5 million fortune would mean an additional wealth tax of only €4,230.

In other words, with or without children, the French citizen’s annual tax payment would be smaller than that of the Italian taxpayer with no additional wealth. In this context, a new wealth tax could be a dangerous proposition for the PD.

One feature of Italy’s turbulent politics remains consistent: the control exercised by entrenched interests, and the dominance of a bloated and inefficient bureaucracy. With less than one-fifth of the population of the United States, Italy’s parliament has twice as many members as the US Congress, and they are among the world’s best-compensated and most privileged MPs.

Meanwhile, Italy’s top bureaucrats are the highest paid in history, according to OECD data, with several retired officials drawing larger pensions than former US presidents receive. The salaries of Italy’s military chiefs of staff and chief of police are almost triple those of their American counterparts.

But prospects for political reform do not inspire optimism. While Grillo’s supporters may ignite fireworks in protest of these gilded giveaways for a few months, a consistent assault leading to genuine reform seems doubtful.

/ Copyright 2013

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