July 10 (Bloomberg) -- Italian Finance Undersecretary Pier Paolo Baretta said the government is considering shifting the tax burden to the wealthy in order to satisfy demands for broad-based fiscal easing and meet its 2013 deficit target.
“The truth is we’ve got a real bottleneck of issues to deal with” this year, Baretta said yesterday in an interview in his office in Rome. In order to raise funds, Italy is seeking spending cuts and may limit the tax deductions higher-income households take on medical visits and other expenses, he said.
Prime Minister Enrico Letta is bracing for a tax-policy showdown that threatens to destabilize his two-month-old parliamentary coalition. Lawmakers in Letta’s alliance have demanded tax cuts and spending measures that, taken together, total more than 7 billion euros ($9 billion). That’s more than Italy can afford as its recession deepens, Baretta said.
“The financial wherewithal for 2013 is less than the sum of all these issues,” Baretta said.
Extra resources won’t come from new taxes or increased rates, after the government introduced a levy on electronic cigarettes last month, Baretta said. Instead, Letta is focusing on spending cuts and curbs to personal tax deductions and incentives for companies, Baretta said. Deductions amount to about 250 billion euros a year, he said.
Deductions on medical expenses like the purchase of eyeglasses or trips to the veterinarian could be maintained for lower income families, while being canceled or scaled back for wealthier Italians, Baretta said. The government could evaluate curbs to other incentives, such as those for mortgages, he said.
“We have to take a series of measures tied to income, or qualitative factors,” Baretta said. “There is room, obviously to distinguish between a pensioner with minimal income who has to get new glasses that cost him a month’s pension, if not more, and those people with a medium to medium-high income.”
Letta, 46, is squeezed between his allies’ calls for stimulus and his commitment to European Union allies to bring the budget deficit below 3 percent of gross domestic product. Baretta, a member of Letta’s Democratic Party who serves under Finance Minister Fabrizio Saccomanni, is helping identify options for savings and additional revenue. The final decisions will be made by Letta’s Cabinet in September or October.
Silvio Berlusconi, the three-time premier and a partner in Letta’s coalition, has pushed for the abolition of property taxes on primary residences, which would cost the state about 4 billion euros annually. Other members of the coalition have called for the cancellation of an increase to the value-added tax planned for Oct. 1. Postponing the VAT increase by three months would cost the government about 1 billion euros.
Requests to modify a waste-management tax would cost about 1 billion euros and boosting unemployment funds would take as much as 1.5 billion euros, Baretta said. Lawmakers are also seeking reductions to the payroll tax and more funds for local governments.