Tax Cuts for Rich Put Everyone Else in Trouble

While Republicans and Democrats in the United States debate whether to extend former President Bush’s tax cuts for the country’s rich, some early signs of what unwise and unfunded tax cuts can do are coming from Italy.

The country’s Court of Accounts has released its report on the finances of Italian municipalities and provinces for the period 2008-09.

The big picture is scary: Municipalities have a total debt of 62 billion euro (about $81 billion), while provinces are 11.5 billion euro (about $15 million) in debt.

“The situation in general is not encouraging,” the report states, “resulting in an increased number of [indebted] local entities, some of which find themselves in alarming situations.”

In recent years municipalities, especially the smaller ones, have had to figure out strategies on how to replenish their finances. In 2008, one of Prime Minister Silvio Berlusconi’s first government acts was abolishing I.C.I., a property tax that went directly to municipalities. The previous Prodi government had already cut I.C.I. for poorer families and homeowners.

“It’s not a big deal,” Berlusconi was reported saying in 2006, in the midst of a campaign he eventually lost to Romano Prodi. “We’re talking something between 2.3 and 2.5 billion euro, an amount we can easily recover from current tax evasion.”

That was quite an understatement.

In 2009 alone, the Italian government gave between 3.5 and 3.8 billion euro to municipalities just to cover budget gaps due to the missing I.C.I. tax. Certain cities, like Genova, went as far as writing up two separate budgets, not knowing exactly how much money they would receive from the government. Just to stay on the Genova example, in February the city’s mayor, Marta Vincenzi, said the city would finally receive from the government 20 million euro of missing I.C.I. contributions. That’s a lot of money that could go to schools, police, firefighters and other city needs.

Not being an economist, I’m having a hard time understanding the reasoning behind those backing the tax cuts. I’m glad to see I’m on the same line with Alan Greenspan and Paul Krugman on this one.

So here’s my question, both to the Italian government and Republican legislators in the United States:

Where do you find the courage to promote such irresponsible budgetary decisions that would benefit a small percentage of the rich, but hurt the vast majority of the rest of the population and the country in general?

Here is Berlusconi promising to abolish the I.C.I. tax during the 2006 campaign:

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