If you have an extra euro in your paycheck, you could lose 1,100 euros

The mix between copayment decentralization and Irpef reform will bring “more benefits to middle-low income earners and workers,” but some “critical issues arise from coverage and income thresholds.” This was stated today during a hearing in the House and Senate Budget Committees by the head of the Parliamentary Budget Office (UPB), Lilia Cavallari, who considered the maneuver under consideration by the Parliament. Cavallari pointed out that “approving the distribution of participation guarantees a significant support for low- and middle-income earners from work” but that “the band-based method results in the withholding of any benefits beyond the gross salary threshold of 35,000 euros, resulting in a loss of approximately 1,100 euros.” exceeding this threshold by only one euro”.

This is an issue that is often overlooked in discussions, including in the media, about the budget law. In fact, it is difficult to dispute the point made by the PBO: if it is true that reducing contributions brings undoubted benefits to the paycheck (the government has mentioned about 100 euros per month), the cut will not have any impact on the above. 35 thousand euro income. An outright outage could lead to other problems as well as being extremely punishing for the workers involved. If the measure is extended further, the PBO chairman added that “it will be a strong disincentive to work and it will be more complicated to reach contract renewal agreements.” Therefore, it would be appropriate to “unravel these mechanisms”.

How does the tax wedge deduction work?

In particular, the contribution reduction, which is entirely for workers, is equal to 7 percent for incomes up to 25 thousand euros and 6 percent for incomes up to 35 thousand euros. An important point to note is that the contribution cut is already in force and therefore it is useless to expect significant increases in salaries from next January. The government has approved a measure that already exists but is not yet “structural”, that is, temporary rather than definitive in nature.

The impact on wages – which there undoubtedly is – has been made less obvious by the fact that cuts in contributions have been introduced in phased interventions over the last two years. With the 2022 budget law, the Draghi government first introduced a 0.8 percent contribution exemption for annual incomes up to 35 thousand euros, and was later increased by 1.2 percent with the decree. Meloni’s government then intervened with two decrees, eventually bringing the discount to 6% and 7% depending on income group.

The renovation is temporary, other resources will be needed to make it structural.

The opinion of the parliamentary budget office regarding the measure is in any case positive. “The approval of the contribution guarantees a significant support to low- and middle-income earners, especially the income of workers, and increases the redistributive capacity of the general contribution and the tax levy,” Cavallari said. In addition to the zero impact above 35 thousand euros, the PBO identifies another critical problem in the non-structural nature of the measure, which is “temporarily deficit-financed” (i.e. by increasing debt) with an allocation of 10.7 billion. “As Cavallari underlined, a possible additional expansion would require the definition of structural coverage measures.”

Tax advantages from 2024 thanks to the Irpef reform

In addition to reducing the tax wedge, the government also intervened by remodulating Irpef rates. The first two tranches, up to 15 thousand and up to 15-28 thousand, will be combined and a 23 percent rate, the lowest rate envisaged to date, will be applied to both. The aid will come into force from 2024 and will provide annual tax benefits of up to 260 euros; This time, this advantage will be visible on pay slips (and retirement slips). The Parliamentary Budget Office has made some estimates. “Cavallari said the benefit is 75 euros a year for income from employment between 8,000 and 15,000; from 15,000 to 28,000, the benefit increases gradually, with income up to a maximum of 260 euros; above 50,000 euros the benefit can be eliminated” by cuts in non-health costs and expenses because of”.

Cavallari then concluded that, according to Upb analysis, “the intervention on Irpef is largely neutral in terms of redistribution. By including dedodification, the effect becomes progressive. He concludes that the effect of the two interventions is more consistent in terms of redistribution.” Employees have an average benefit in the employees category, with an average of 3.4% of the taxable amount, followed by employees with a more inclusive rate of 1.9%. The incidence and absolute benefit of the benefit for retirees is lower than for workers and employees. “The exemption always rewards the young, especially those over 35, depending on income.”

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Source: Today IT