Reconstruction Loan – Tax Reductions Experiments

«The Economist», 25 febbraio 1933, p. 409

Turin, February 12

The formation of the Institute for Industrial Reconstruction (I.R.I.) was quickly followed by the announcement of a loan of one milliard lire, in 472 per cent. 500-lire bonds offered at 455 lire, redeemable in 20 years, exempt from all taxes, present and future, and enjoying the status of trustee securities. The issue is made by the Public Works Credit Consortium, which is a State institution and is guaranteed, as are all other issues of the Consortium, by the State. In addition, the bonds are specially guaranteed by the sale from the I.R.I. to the Consortium of part of the 20-year 85 million annuity granted by the State to the I.R.I. The yield works out at 5.66 per cent., to which must be added the annual value of 5 million lire premiums which will be granted, mostly in amounts of one million lire, for the first five years of the currency of the bonds, to the first numbers of the bonds yearly drawn for reimbursement. As it was the first experiment in a 4 1/2 per cent, issue since 1915 the results were awaited with interest. The subscription, which was guaranteed by a banking consortium, headed by the Bank of Italy, was opened on February 6th and closed on the evening of February 7 , when subscriptions reached the sum of 1,239,795,000 lire. The excess will be reimbursed, small subscriptions being preferred in the allotment.

This is presumably the first of a series of public issues. The needs of banks and industrial concerns are not limited to the 900 million lire net yield of the loan. Liabilities of the Liquidations Institute transferred to I.R.I. amount to 1,890 million lire; and rediscounts by the Bank of Italy which need to be “unfrozen” probably form a large proportion of the 5,560 million lire discounts and advances figure of the Bank. Moreover, the State budget deficit for 1932-33 will probably not be less than the 4,500 millions of last year, and must be financed somehow. As, however, savers are shy of all other investments, public issues will be easily subscribed. The only limit to public issues is therefore the amount of annual savings; and, in their turn, savings are mainly limited by taxation, the burden of which on the reduced national income is growing heavier. After many successive increases, a beginning is being made toward improving the yield of taxes by reduction of their rates. As an experimental step in that direction, the price of a special type of State monopoly cigarettes will be reduced in thirteen cities on Sunday, February 26, and for that day only, from 20 to 15 centimes each. In the event of big enough sales, the experiment may be repeated.

Another reduction has been made in the rate of the income tax, from 9 to 8 per cent., on salaries, pensions and other incomes of employees, exclusive of public employees, which were already taxed at the 8 per cent. rate. The Exchequer hope to receive a greatly enhanced revenue, as all employers will now be obliged to send to the revenue office the complete list of their individual employees, with the precise amount of all sums paid to them in the preceding year. Heretofore, employers contracted out by paying the tax on a lump sum instead of on the individual exact amount of salaries; and the tax on employees was considered as an overhead cost of employers. Thenceforward employees will be obliged to refund the tax paid on their account by employers; but they will have the right to an increase in the salary corresponding to part of the amount. In time the new system will work well, but the change in the assessment system will mean a definite increase in the burden of taxation on employers and employees alike. The transition should perhaps have been eased by a bigger reduction of the rate.