"What's Come to Perfection Perishes": Adjusting Capital Gains Taxation in Italy

Abstract

Italy is the first country to have experimented with both accruals and retrospective capital gains taxation along the lines suggested by Vickrey (1939) and Meade (1978). This paper describes the Italian experience, highlighting its peculiar features and the lessons that can be learned by other countries wishing to pursue these approaches. It illustrates the mechanics of the adjustments to the realization based capital gains tax and how far they diverge from the original proposals. The paper also draws attention to the administrative and political difficulties encountered in implementing the reform. These factors ultimately resulted in a repeal of retrospective taxation, and, in due course, may also entail the abolition of taxation on an accrual basis. The paper highlights the crucial role that financial intermediaries can play in lowering compliance costs under a proportional tax system and the effects on tax revenues.

Taxation and the Financial Crisis

“…Taxation does not explain 30 One such scheme, developed in Auerbach (1991), effectively charges tax on the excess of the actual sale value not over the acquisition price but over what that price would have been had the asset earned the risk-free rate, in effect taxing only the normal return while leaving the realization decision undistorted; Auerbach and Bradford (2004) describe a more general class of schemes achieving the same effect. Alworth et al (2003) describe experience in Italy with schemes intended to mimic the effects of taxation on accrual. 31 An incidental advantage of an ACE, for instance, is that tax incentives to overstate specific provisions would in principle be eliminated, since any increased deduction from doing so would be offset in PV by a reduction in Tier 1 capital and hence in the future imputed tax allowance on equity.…”

Tax and the Crisis*

“…31 One such scheme, developed in Auerbach (1991), effectively charges tax on the excess of the actual sale value over not the acquisition price but what that price would have been had the asset earned the riskfree rate, in effect taxing only the normal return while leaving the realisation decision undistorted; Auerbach and Bradford (2004) describe a more general class of schemes achieving the same effect. Alworth, Arachi and Hamaui (2003) describe experience in Italy with schemes intended to mimic the effects of taxation on accrual.…”

Retrospective Capital Gains Taxation in a Dynamic Stochastic World

“…For instance, the taxpayer might be forced to sell part of his/her assets, against his/her own wishes, in order to pay the taxes. 2 Italy is one of the few exceptions that implemented the accrual method for the management of nonqualified shareholdings in listed companies (see Bonzani et al, 2002;Alworth et al, 2003).…”