Are flat taxes and a guaranteed income the secret to economic renaissance in Italy?

Who would have thought that Italy, of all countries, might be at the forefront of a revolution that could change the way industrial nations deal with economic growth and poverty eradication?

On Friday, Italy’s two main populist parties, the Five Star Movement (M5S) and the League, struck a deal to form a coalition government. The partnership is an awkward marriage of two anti-establishment, euroskeptic parties that have never been in power at the national level, and come with untested leaders bent on shaking up two relationships: Rome’s with Brussels, and with the Italian people, who handed them 55 per cent of the vote in the inconclusive March 4 election.

The duo – Luigi Di Maio, 31, of M5S, and Matteo Salvini, 45, of the League – are brimming with unconventional ideas, some of which which seem unaffordable or unachievable.

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In addition to calling for the swift deportation of 500,000 migrants who arrived in Italy since the beginning of the war in Syria and the Libyan crisis in 2011, the two parties’ governing manifesto calls for an aggressive fiscal expansion program that has already rattled investors, who pushed down the prices of Italian government bonds.

The plan calls for a reversal of the pension changes that helped to stabilize Italy’s finances during the crisis, when the country came perilously close to Greek status, and the possible creation of “mini government notes” – in effect a parallel currency – that could be used to repay tax arrears. Neither idea may fly.

But two big ideas in the governing plan – a €780 ($1,182) a month guaranteed-minimum income for poor families and a flat tax – are intriguing and could help Italy emerge from a 30-year rut. Italy has a crushing debt-to-gross domestic product of more than 130 per cent, terrible productivity growth, relentless deindustrialization and a youth unemployment rate of 30 per cent. No economic policy since the 1980s has succeeded in halting the country’s slow-motion economic suicide, so the populist coalition wants to take a new approach.

Flat taxes and guaranteed incomes are not new ideas, but they have surfaced now and again in unlikely spots, and interest in them is picking up again. In the mid-1970s, the Manitoba town of Dauphin experimented with a minimum income (also known as a basic income). Today, a trial run is getting under way among a few thousand participants in Hamilton, Thunder Bay and couple of other spots in Ontario. Hungary has a flat income tax, set at 15 per cent, and Australia is moving toward one that will cover almost all workers by 2024.

Italy could get both a guaranteed income and a flat tax soon, assuming the coalition of M5S and the League endures and the two parties find a way to finance the schemes without a budget meltdown – both are big ifs. Neither the guaranteed income nor the flat tax can yet be considered a policy; at the moment, they are economic labels that need careful definition to make them effective and affordable.

Let’s start with the flat tax. M5S has proposed a flat tax rate of 15 per cent, and 20 per cent for families with a yearly income of more than €80,000 ($120,289), making it flat-ish. What we don’t know yet is whether there will be an exemption for low-income families, who, under the current system, can get away with paying hardly any taxes.

The flat tax’s biggest problem, however, is not its rate, its exemptions or its breadth but whether it’s a giveaway for the rich who, in Italy, are taxed at a 43-per-cent marginal rate. Most Italians probably are advocates of progressive taxes, that is, making the rich pay more than the rest of them. At the same time, Italians know the rich find devious ways to avoid paying their fair share.

The point being, if the flat tax sweeps a lot of rich, tax-avoiding or tax-evading Italians into the tax net, it might be an easy sell. But if it’s merely seen as another way for the rich to pay less tax, it would be a non-starter.

The guaranteed income is equally complicated, financially and morally. M5S would aim the income at the poorest Italians, most of whom live in the southern half of the country, where poverty is rife and the unemployment rate is higher than Tunisia’s.

As a way of ensuring that the poor could feed and house themselves, and educate their children, it’s a winner. But paying people to do nothing would do nothing to build a dynamic, competitive economy that generates jobs. A guaranteed income would make job destruction easier, pleasing corporations. The wealth divide could expand, not shrink.

A guaranteed income, in effect, would allow the Italian government and Italian business to write off the poor south. Delivering a financial opiate to the masses in the form of money for nothing may not be what the south wants.

The guaranteed income and the flat tax could launch Italy into a new economic era. But designed and executed badly, they could deepen Italy’s economic malaise, not cure it, especially if paying for these programs blows gaping holes into the Italian budget. The world will pay close attention to Italy’s bold economic experiment.