Vogon Today

Selected News from the Galaxy

Economic Scenarios

How a bad government intends to overturn the excellent economic provision of the 110% Bonus

Because Draghi will get effects contrary to those announced.
by Davide Gionco
26.02.2020

The 110% bonus scams and corrections proposed by Mario Draghi
We are still deafened by the media choirs of the beatification of "San Mario Draghi", as well as by the continuous emergencies and fears that loom over the Italian people, for which almost no commentator takes the trouble to critically analyze the recent positions taken by the Prime Minister Draghi against the famous "110% tax bonus", which probably represented the only significant government measure for the growth of the Italian economy in the last 10 years.
Even more than the statistical indicators, proof of this is the rapid saturation of the construction sector, with companies failing to meet the agreed deadlines, despite the hiring of staff and price increases in the sector. Something no one remembered at least since the 1980s.

In recent weeks Draghi has reported numerous scams (equal to over 4 billion) by unscrupulous subjects, which led to the granting of tax bonuses in exchange for works that were never completed, after which the tax bonuses, sold to the banks, were converted in euros and invested (or ambushed) in the usual speculative finance.
To avoid the repetition of these scams, despite all the bureaucracy necessary for the granting of tax bonuses, Draghi proposes to limit the transferability of credits to "financial" subjects or banks. According to Draghi, this measure should avoid scams and, therefore, make tax bonuses sustainable for the state coffers and ensure that the energy renovation works are actually carried out.
But are we sure that Draghi's response will achieve these goals?

The mechanism of the assignment of credits
To understand how things stand, it is first of all necessary to understand the operating mechanisms of the tax bonuses (110% energy or other) that can be transferred to third parties.
The great novelty introduced by the Conte II government and then maintained by Draghi was not so much the granting of tax relief, which Italians had long been accustomed to, but the possibility of obtaining tax bonuses that can be transferred to third parties for payment. of work performance.
In the past, tax reliefs were covered by other tax revenues, by new cuts in public spending or, at best, by an increase in public debt (coverage by issuing new government bonds). For example, if $ 10 billion in tax relief was granted for building renovations, the government had to charge a € 10 billion increase in other tax revenues (or $ 10 billion in cuts in other expenses or an additional $ 10 billion in debt or a combination of these solutions).
Macroeconomics experts will rightly point out to me that the count is incorrect, as there is the famous "Keynesian multiplier".
In fact, by giving tax incentives, families or businesses will go to commission jobs that they would not have done without incentives. These additional orders lead to an increase in incomes, therefore in the taxable capacity of companies in the construction sector, and therefore an increase in their tax payments which, without incentives, would not have occurred. So when the state gave tax breaks of $ 10 billion for building renovations, it was actually spending less. 10 billion less in revenue from “relieved” taxpayers, but also 4 billion more (for example) collected by the companies benefiting from the additional orders. So, net, the state "paid" only 6 billion.

The original proposal of the 110% bonus, the one that inspired the promoters of the 5 Star Movement, was that of the CCF, tax compensation certificates, promoted by the Fiscal Money Group (economists Marco Cattaneo, Giovanni Zibordi, Biagio Bossone etc. ) and relaunched in March 2020 with the proposal of the National Salvation Plan ( www.pianodisalvezzanazionale.it ), transmitted to all parliamentarians and all ministers, with the kit of over 35 thousand citizens' signatures, which provided for the creation of a platform for the exchange of tax credits between private entities and the possibility of using them as tax relief only from 2 years after the date of granting of the bonuses.
With this mechanism, the condominium, for example, would have obtained from the State, once the work has been carried out, a "transfer" in tax bonuses directly to its "current account" of the exchange platform. From there, the condominium would pay the businesses the invoices for the work done using those tax bonuses. Businesses, in turn, could have used those tax credits to pay their suppliers, including their own employees. In the end, after 2 years, whoever found himself the owner of the tax bonuses could use them to pay their taxes in place of the euros.
The existence of the exchange platform would have facilitated the assignment of credits. And for each sale an invoice (or a paycheck) would be paid, which would have generated an increase in the taxable amount.
By apologizing to macroeconomics experts, I simplify the numbers to make the concept clear to the less experienced. If at the time of the classic tax reliefs, the issue of 10 billion euros of relief to the state actually cost 6 billion, with the novelty of the bonus mechanism that can be transferred to third parties through a public platform, with an extreme facilitation of making payments directly in tax credits offered to an economy characterized by a lack of credit and liquidity, within 2 years it would have transformed the issue of 10 billion in tax bonuses into an increase in taxable income of at least 25 billion, thus allowing for increased tax revenues by 12 billion. Which means for the State a loss of 10 billion offset by a higher collection of 12 billion or a net profit of 2 billion for the state coffers.
These figures are purely indicative, to help understand the mechanism.
Anyone wishing to deepen their knowledge of the mechanisms and the calculations made by the economists cited, is invited to do so on the original sources.

Once we understand the importance of the mechanism of the assignment of tax credits in the overall budget of the maneuver, we can now properly judge the work of the Conte II governments and, above all, of Mario Draghi.

The real costs and the real coverage
As we have understood above, the "cost" for the State of a financial maneuver in which tax bonuses are provided is not measured at the time of issuing tax credits, but at the moment in which those tax bonuses will be used to pay taxes (therefore paying less euros) and taking into account the effects of the economic growth induced by that maneuver, which lead to a simultaneous increase in tax revenues.
This means that the "issuing cost" of 10 billion in tax bonuses is not 10 billion, as too many newspapers and television broadcasts mistakenly claim, but it is zero. The state spends nothing when it grants a tax bonus to a business or to the owners of an apartment building. What matters is the overall accounting at the end of the macro-economic process that the issuance of those tax bonuses has triggered.

So the coverage of a fiscal maneuver that provides for the granting of tax credits does not depend on a "static" budget, as we are used to doing in the accounts of a family or a company, but it depends very, very much, on the economic growth that will be triggered in the years following that maneuver.
If we want to judge the effectiveness of the changes that Draghi intends to implement to the provisions envisaged for the 110% bonuses, we must pay very little attention to the figures (including those of the scams) and much more to the economic mechanisms, which are influenced by the rules. and by the bureaucracy that govern the maneuver.

Future taxation, the one that will make it possible to compensate for future lost tax revenues, depends on the future “turnover” of companies and the future income of workers. Turnover and income increase every time money, but also tax bonuses, are spent in exchange for the production of goods or services.
The mechanism envisaged in the original proposal, that of the public platform for the transfer between private individuals, was such as to facilitate as much as possible, with bureaucracy reduced to a minimum, the transfer of tax credits in exchange for work services, not only in the first step, for example for paying for the renovations, but in each subsequent step. For example, the firm, once the payment in tax credits has been collected, will use them to pay for the bricks, the brick producers will use them to pay for energy, the energy seller to pay their technicians and those technicians to pay a part. shopping at the supermarket, the supermarket to pay the farmers, etc.
Many passes = a lot of turnover = a lot of tax revenue = more coverage when discounting tax bonuses, after 2 years. Because it is necessary to allow time for the exchanges to take place.
It is essential to underline that in each step it is not necessary to convert the tax credit into euros. The bonuses, in fact, would allow you to pay for the goods and services purchased, without the need for euros.

The errors of the Conte II government
Already in the first version, modified with respect to the original one, the Conte II government had decided to modify the "original" mechanism by putting the banks in the way. From the beginning, there was the possibility of immediately converting tax bonuses into euros, transferring them to banks in exchange for euros. This process probably underlies the “110%” figure, 10% for bank commissions and 100% to pay for renovations.
Here I feel like denouncing a first serious mistake committed by the Conte II government.
If it is true that tax bonuses are worth the same as euros, it is not true that they are the same thing.
Tax bonuses have the value of a "tax rebate" only for those who pay taxes. They have value only in Italy and therefore would be used above all to pay for Italian suppliers. A foreign supplier, in fact, should subsequently worry about finding an Italian supplier to re-spend those bonuses.
Euros, on the other hand, have value both for foreign suppliers and for those who earn using the Euros for purely financial investments.
The possibility granted by Conte to immediately convert tax bonuses into euros meant that among the beneficiaries there were also in part foreign companies, reducing potential future tax revenues.
The conversion into euros by the banks has also meant that the "usual crafty ones" have found a way to invest them in financial products (shares, cryptocurrencies, foreign funds, etc.), rather than spend them to pay companies and workers.
And we know that "financial products" generate very little growth in national turnover and very little tax revenue.
The fact of putting the banks in the way has transformed, in a significant part, the tax bonuses into yet another mechanism of financial income for a few, rather than into an instrument for the growth of the country's economy, which would have guaranteed the economic coverage of the measure.
The active involvement of the banks by the Conte II government, obviously confirmed by Draghi, was a "detail" that made the financial coverage of the proposed measure less certain.

Draghi's mistakes
In recent weeks Mario Draghi has denounced the scams related to tax bonuses.
In reality, these scams only concerned the process of issuing the tax bonuses or the bonuses were issued for work that was never carried out.
We draw a merciful veil on the fact that, in addition to demanding a lot of useless paper and a lot of bureaucracy, the Government could have sent people with a minimum of technical skills to verify the actual progress of the work on site, avoiding this type of scams, but not they did. We know that in Italy paper prevails over substance.
As we have explained above, in reality the State does not spend anything at the time of issuing the tax bonus. Therefore, from the point of view of the state budget, it is absolutely irrelevant whether the work has been done or not.
To be clear: in the original proposal by Marc or Cattaneo it was envisaged to "give" tax bonuses to low-income workers. In exchange for nothing, with the sole objective of increasing their spending capacity and, therefore, the additional turnover that that expense would have generated for the entire Italian economy.
In the scams found, it is instead very relevant and very serious that the bonuses were transferred to the banks in exchange for euros (and even the banks did not check their origin), after which those euros came out of the real Italian economy and ended in the financial circuits. In this way they will not be transferred to other companies and other workers, so they will not generate any growth in the future taxable amount and the State will face a reduced (compared to potential) economic growth, therefore a lack of tax revenues, while it will have to accept that banks use tax bonuses to pay fewer taxes in the future. The game risks being at a loss, not because of the tax bonuses, but because of their transformation into euros by the banks.
Faced with these scams, what is Mario Draghi's proposal?
Draghi basically proposes to limit the transferability of tax credits only to banks, while it is not clear whether he will propose something concrete, such as inspections on construction sites, to verify that bonuses are issued against real works. That is: if until today, albeit with some difficulties. The condominium could settle the bill by paying the company directly with tax credits, which company could in turn use them for its payments, with the Draghi reform the tax credits will be transferable only to banks in exchange for euros, after which the banks will turn them into a financial product of their own convenience.

At this point I leave it to the readers to judge whether Mario Draghi is incompetent or in bad faith.
If the transfer of tax credits will be possible only for banks, by converting tax bonuses into euros, a greater part of the benefits will go to foreign suppliers (who do not pay taxes in Italy) or to subjects in the world of financial income. And it will be impossible to trigger the chain of the "Keynesian multiplier", the only one capable of ensuring the financial coverage of the provision.
The inevitable result will be a reduced current growth of the Italian economy and, in the future, lower tax revenues for the state, with consequent budget problems.

Other economic planning errors
I would like to conclude by highlighting 2 other serious mistakes already made during the first proposal of tax bonuses by the Conte II government and then, obviously, confirmed by Mario Draghi.

A first mistake was to want to concentrate fiscal stimuli mainly in the construction sector. After more than 10 years of profound crisis in the sector, of layoffs, retirements of experienced elderly workers without hiring young people, lack of professional training, lack of investments, how could one think that in just one year the sector was able to cope with new orders for tens of billions of euros?
The result, of course, was a rapid saturation of the sector, with exaggerated increases in prices, while other sectors in crisis, such as tourism or small commercial distribution, remained in deep crisis as and worse than in the previous 10 years.
It is no coincidence that the original proposal by Cattaneo & c. provided for the assignment of tax bonuses gradually and in many sectors of the economy, leading to widespread economic growth, without prejudice to the financial hedging mechanism described above (without the intermediation of banks).
It is very good to invest in the energy saving of private buildings (and public ones?), But the whole Italian economy needs to grow, not just construction. Growth evenly distributed across sectors would have been much better.

The second mistake was that of not giving the initiative a multi-year breath. We have been talking for years about the famous "structural reforms" demanded by economists "those in the know". But what is structural in a measure that it is not known if the following year will be renewed? How do you expect a construction company (or other sectors) to hire young people, investing in their training, to buy machinery, to develop skills, if the order horizon is at most 1-2 years?
Only an initiative with a certain prospect of at least 10 years can give companies the incentive to invest in permanent recruitment, in professional training, in hiring machinery to improve their production efficiency.
Even in view of a national plan for energy saving, which is certainly fundamental for a country that imports a very significant part of its needs from abroad, there is no point in a plan that does not have at least a ten-year perspective, considering the very bad energy status of the Italian building heritage.

Although it is clear that the 110% tax bonus measure is able to ensure financial coverage by itself, if not hindered by the inclusion of mechanisms that block the transferability of tax credits, those who govern us have decided to make it further ineffective, before relegating it to a single sector of the economy, then making it a "one-off" and totally non-structural measure, so as not to offer the country growth prospects.
With these arguments I feel I am giving a very bad judgment on the economic skills of those who govern us. And if it's not about incompetence, it's about bad faith, which would be even worse.
This despite the fact that the single chorus of televisions does not miss an opportunity to praise “San Mario Draghi”. May God free us of it as soon as possible.


Telegram
Thanks to our Telegram channel you can stay updated on the publication of new articles of Economic Scenarios.

⇒ Register now


Minds

The article How a bad government intends to overturn the excellent economic provision of the 110% Bonus comes from ScenariEconomici.it .


This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/come-un-pessimo-governo-intende-stravolgere-lottimo-provvedimento-economico-del-bonus-110/ on Sat, 26 Feb 2022 07:57:18 +0000.