Berlusconi tax cut promise could prove costly and ineffective

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By Francesca Landini and Giuseppe Fonte | February 6, 2013 6:21 AM EST

The pledge by former Italian Prime Minister Silvio Berlusconi to pay back a much-hated property tax could be a vote winner at this month's election but would be hard to fulfil and there are better ways to revive the economy, analysts said.

The tax on primary residences that Berlusconi had abolished in 2008 was reintroduced at the end of 2011 by Mario Monti's technocrat government as part of efforts to shore up public finances and restore investor confidence as Italy's borrowing cost soared.

The tax, known as IMU, brought in around 24 billion euros of which 4 billion came from primary residences.

"The new government would need to find at least 8 billion euros as soon as it gets into power to cut and reimburse the property tax on first homes," said Unicredit economist Loredana Federico.

Berlusconi promised on Sunday to scrap the tax at his first cabinet meeting and refund payments made last year.

The move would be funded partly by striking a deal with Switzerland to tax financial activities there by Italian citizens, and partly by cutting waste and downsizing Italy's bloated political apparatus, Berlusconi said.

Both strategies raise doubts. Italy and Switzerland have been negotiating on a tax agreement since May but the talks stalled in December with key sticking points still not agreed.

"Revenues from a deal with Switzerland are not predictable and a large part of them will be one-off," said Fedele De Novellis, economist at think-thank REF.

Plans to halve the number of lawmakers, cut waste, and eliminate public financing of political parties have often been proposed before, most recently by Monti, but have always resisted in parliament.

PRIORITIES

But even if Berlusconi did find adequate resources, they could be better used by cutting payroll taxes which would do more to make the recession-hit economy more competitive, economists said.

"Italy could live with high taxes on property if it reduced taxes on labour to boost the competitiveness of its companies," said Alberto Zanardi, professor of public finance at Bologna University.

This 'fiscal devaluation' would help Italian exporters suffering due to the appreciation of the euro, Zanardi said.

De Novellis suggested a two-pronged approach of lower payroll taxes and tax breaks for the lowest earners.

Most opinion polls indicate a centre-left coalition, headed by Democratic Party leader Pier Luigi Bersani, will win the February 24-25 vote.

The gap between the centre left and the centre right has, however, been narrowing steadily since Berlusconi returned to active politics.

"Pledges on taxes during the electoral campaign are based more on the popularity of the proposals than on their sense in terms of economic policy," said De Novellis.

Berlusconi won a 2008 election thanks to a promise to scrap a similar property tax, which he did fulfil, but analysts say Italians are now more sceptical.

A poll conducted on Monday by the SWG agency showed Berlusconi was the least credible on taxes among all the political leaders, convincing only 18 percent of those surveyed.

(Additional reporting by Elvira Pollina in Milan; Editing by Gavin Jones and Robin Pomeroy)

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