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Fiscal policy is the Right Weapon Against Inflation in Europe


by Giovanni Tria @ https://www.ilsole24ore.com/

Read original in Italian HERE.



The forthcoming negotiations for the revision of fiscal and budgetary rules in Europe will inevitably be influenced by the evolution of inflation that appears less and less temporary, both in the United States and in Europe, even if the adjective temporary lends itself to flexible interpretations. . If we go to the pre-pandemic debate, when the specter was deflation, the use of monetary leverage by the ECB to counteract the negative price dynamics and bring it back close to the 2% target clashed with budgetary policies that were not accommodative with respect to to monetary expansion action. In other words, the issue under discussion was the non-coordination in Europe between monetary policy and budgetary policy, the former being decided at a supranational level while the latter was, and still is, decided at the national level. with careful European surveillance focused on compliance with containment rules dictated by mutual distrust between member countries. The idea that national fiscal policies should also be coordinated according to the objectives of stabilization and economic growth of Europe as a whole was essentially ignored. The theme is still this.


The real stoned guest in the redefinition of the Stability and Growth Pact is the absence of sufficient discretion at the central level in the coordination between monetary policy and fiscal policy. All the institutional engineering schemes under discussion cannot evade this knot, which is purely political and which is re-proposed today in a context in which this coordination serves to keep inflation at bay, not deflation as in the past. without placing the burden of intervention only on monetary policy. The problem, however, arises even before the definition of the new rules.

We have already argued in these pages that the prudence with which the ECB is preparing to exit the bond purchase program with which it has allowed European governments to borrow at sustainable costs and guarantee liquidity to the production system during the pandemic is correct. . However, we also argued that the reason given, that of the temporary nature of the inflationary flare-up, was unconvincing and even risky. With European inflation at 5%, not much lower than the 7% recorded in the United States, the ECB could soon find itself short of arguments in the face of the Fed turning point that announced an upcoming interest rate hike, should this inflation gap should narrow or remain at current levels. This includes the issue of coordination between monetary and budgetary policy. French economist Jean Pisani-Ferry recently denied (European Inflation is not American Inflati on , Project Syndicate, 27/1/22) that inflation in the United States can be considered similar to that in Europe, and not only for the quantitative gap mentioned above.


Basically, inflation in the United States would be worse than in Europe because not only due to supply bottlenecks, but also to much stronger and more generous fiscal stimuli. Among other things, supply bottlenecks due to labor shortages would be stronger in the United States precisely because of excessive direct support to families in the absence of a more structured welfare system.. If this is true, but it is only net of inflationary pressures that are global and not only Western, the consequence is that inflation in Europe must be managed, even for the near future, with a mix of monetary and budgetary policies. , avoiding throttling the economy with an increase in interest rates which would act more on the side of an increase in costs than as a brake on demand. Consequently, in order to allow the ECB not to follow the Fed on the path of monetary tightening, well-targeted budgetary policies should be adopted in a phase in which the recovery is going through a complex period.


The economic recovery is strong in most European countries, but we are still rebounding after the collapse of 2020 (Germany, where the reduction in GDP was less strong during the crisis, today it grows less) and there is a fear of a premature slowdown due to the costs caused by the energy crisis even before the adoption of a possible anti-inflation monetary restriction. Even fiscal policy cannot therefore turn too quickly towards a reduction in fiscal stimuli in Europe, but at least it should look at the composition of the budget, both on the expenditure and on the revenue side, paying attention to the time profile of demand stimuli directed towards sectors. which already show difficulties in adjusting on the supply side. To be more explicit, in Italy there is no longer room for distractions such as those that have allowed us to carry out measures such as the 110% bonus, which generate inflationary stimuli in overheated sectors while at the same time subtracting public resources needed to calm energy costs and slow the start of inflationary spirals. Equally it would be useful to negotiate with Europe thetiming of various Pnrr programs where these collide with objective shortages of supply in the short term with the consequence of fueling the increase in prices. Controlling inflation also depends on controlling the composition of demand, which is preferable to central bank intervention which cannot be selective.

Velas

Parliament seems to have reached a general agreement on the enabling law for tax reform. The most shared point is that which concerns the need to reduce the direct tax burden, that is the personal income tax, on the lower middle income classes. But as regards the possible dimension of this reduction, a theme that seems forgotten in the debate is that of the possible shift of the levy from direct taxes (Irpef) to indirect taxes (VAT), that is, from the income from production factors, which in the case of 'Irpef are substantially income from work, as well as from pensions, the taxation of consumption. Minister Tremonti called this shift "from people to things". A forgetfulness that is very strange because, in a period of shared Europeanism, a traditional recommendation of the European Commission is being evaded. A recommendation based on the fact that this shift in the levy favors growth with the same overall tax burden. The reason is that the tax wedge, which enters the production costs, would be reduced, resulting in an increase in remuneration after taxes. But this shift in levy would also be useful for growth because it determines a "tax devaluation", since VAT does not affect exports, while it affects the consumption of imported goods and services equally with respect to those produced on the national territory. In this way international competitiveness is recovered. Furthermore, it is no coincidence that in the globalized economy, in order to tax the profits of multinationals locally, they are considering taking their sales in various countries as a reference. And also in the discussions on the taxation of wealth it is emphasized that personal wealth, in various ways legally or not legally concealed, are reflected in the standard of living of the beneficiaries. at the time of consumption.


The relevant fact is that following this path would allow today a reduction of the personal income tax on medium-low income double or even triple compared to what is being discussed and this would facilitate the definition of the "method" with which to reduce the tax to a perceptible extent. directed on the middle and lower-middle income classes. In fact, we have to decide "how" to make the correction and its dimensions. In other words, there is on the one hand the problem of how to finance the reduction of the personal income tax and on the other the problem of defining the structure of the levy, the degree of progressiveness and how to apply it. On this second point, the political debate has focused on two possible alternatives well described, as recalled by Paladini and Visco sul Sole of 30 June, in the excellent report presented in a hearing to Parliament by the director general of the Department of Finance of the Mef, Professor Fabrizia La Pecorella, and well studied in the same Department since 2019. The first alternative consists essentially in the reduction, from 5 to 3, of the number of rates applied for income brackets. The second hypothesis is to move to the so-called German model, that is to draw a continuous curve of marginal rates, which would substantially coincide with the actual average ones, to be applied for each individual level of income.


Having already taken a position on this column in favor of this second alternative (15 August 2020), I would like to recall its fundamental reasons. The main attractions of the German model lie in its transparency and flexibility. Transparency because every income earner would know, without making personal calculations, what percentage of his income he must pay to the State, which is very different from what is read in its marginal rate. The argument of those who speak of "algorithmic" or mathematical complication for the determination of the tax rate curve is misleading because the task of the calculation is the tax administration, and it is not complicated because it is enough to decide what it should be, while the taxpayer would only be communicated the actual percentage of his income he has to pay. As for flexibility, it must be considered from a double point of view. It allows you to decide in a targeted way the levels of income to be benefited today with a reduction in withdrawal, by accurately drawing the progressivity curve, but it also makes it easy to gradually flatten the tax rate curve in the future to the desired level of income. In other words, it would be easy to shift the progressive taxation dictated by the Constitution towards higher levels of income, as the balance of public finances allows it and according to the discretionary political choices that are the basis of democracy. In any case, once the method has been decided, the important thing is to gradually significantly reduce the tax burden on medium and medium-low incomes. It has been said for decades, at least since high inflation caused nominal incomes to rise, but not real incomes, with the consequence that the rates conceived for medium-high incomes ended up affecting even the medium-low ones. The debate on the the rate curve up to the desired level of income. In other words, it would be easy to shift the progressive taxation dictated by the Constitution towards higher levels of income, as the balance of public finances allows it and according to the discretionary political choices that are the basis of democracy. In any case, once the method has been decided, the important thing is to gradually significantly reduce the tax burden on medium and medium-low incomes. It has been said for decades, at least since high inflation caused nominal incomes to rise, but not real incomes, with the consequence that the rates conceived for medium-high incomes ended up affecting even the medium-low ones.


The debate on the the rate curve up to the desired level of income. In other words, it would be easy to shift the progressive taxation dictated by the Constitution towards higher levels of income, as the balance of public finances allows it and according to the discretionary political choices that are the basis of democracy. In any case, once the method has been decided, the important thing is to gradually significantly reduce the tax burden on medium and medium-low incomes. It has been said for decades, at least since high inflation caused nominal incomes to rise, but not real incomes, with the consequence that the rates conceived for medium-high incomes ended up affecting even the medium-low ones. The debate on the it would be easy to shift the progressive taxation dictated by the Constitution towards higher levels of income, as the balance of public finances allows it and according to the discretionary political choices that are the basis of democracy. In any case, once the method has been decided, the important thing is to gradually significantly reduce the tax burden on medium and medium-low incomes. It has been said for decades, at least since high inflation caused nominal incomes to rise, but not real incomes, with the consequence that the rates conceived for medium-high incomes ended up affecting even the medium-low ones. The debate on the it would be easy to shift the progressive taxation dictated by the Constitution towards higher levels of income, as the balance of public finances allows it and according to the discretionary political choices that are the basis of democracy. In any case, once the method has been decided, the important thing is to gradually significantly reduce the tax burden on medium and medium-low incomes.


It has been said for decades, at least since high inflation caused nominal incomes to rise, but not real incomes, with the consequence that the rates conceived for medium-high incomes ended up affecting even the medium-low ones. The debate on the once the method has been decided, the important thing is to gradually significantly reduce the tax burden on medium and medium-low incomes. It has been said for decades, at least since high inflation caused nominal incomes to rise, but not real incomes, with the consequence that the rates conceived for medium-high incomes ended up affecting even the medium-low ones. The debate on the once the method has been decided, the important thing is to gradually significantly reduce the tax burden on medium and medium-low incomes. It has been said for decades, at least since high inflation caused nominal incomes to rise, but not real incomes, with the consequence that the rates conceived for medium-high incomes ended up affecting even the medium-low ones. The debate on thefiscal drag , as the phenomenon was called, was intense but without significant effects. The hunger for tax revenues in the face of growing public spending, unfortunately not for investments, has until now always placed this need to correct the levy in the folder of good intentions.


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