Tax Credit

Tax Wedge: The News of the Budget Law and the Calculation

The tax wedge is another hot topic of these days, following the approval of the budget law with all the measures it contains. On the other hand, it is a topic that is always present in the fiscal management of all companies, including small and medium enterprises. It is therefore not an absolute novelty, such as fiscal peace or flat tax. However, the conditions change, and this requires a new calculation. So let’s immediately see all the news.


Tax wedge: the changes in the budget law and the calculation of direct and indirect taxes


Before going into the news proposed by the yellow-green government and accepted and signed by President Mattarella, it is worthwhile to review the subject and how the tax wedge is calculated.

The tax wedge


This expression means in economic jargon the sum of direct and indirect taxes and social security contributions that affect the value of the work, thus determining the cost. This is a calculation applicable not only to freelancers, who independently decide the cost of their services, but also employees, who receive instead a fixed income from the employer.

In the case of the employee, therefore, the tax wedge is the difference between the cost of his work towards the company and his final salary. The determination of the tax wedge depends on many factors: the fact is that, in Italy, this is a very wide difference.

Although over the years various measures have been introduced during the succession of the various governments, the situation has not improved much compared to 2013, when the tax wedge had an incidence of more than 40%, due to taxation on labor.

Obviously, every type of work has a different tax, and this means that the tax wedge has a different amount.


How to calculate the tax wedge


How to calculate the tax wedge


To correctly calculate the tax wedge, reference must be made to the type of work that takes place. We can therefore divide the work into three macro-categories, depending on whether it is dependent work, self-employment or if we talk instead of an employer.

  • For an employee, the value of the tax wedge is equal to the sum of personal income taxes, additional municipal and regional taxes and social security contributions.
  • For the self-employed, on the other hand, the tax wedge is given by personal income tax + additional regional and municipal taxes + social security contributions + VAT.
  • The same calculation of self-employed workers also applies to employers.

This calculation therefore makes it possible to understand what the cost of labor actually is, a cost which obviously varies according to the variations in the taxes applied. To date, for example, we can count income taxes, equal to 17.5%, contributions paid by the employee, which amount to 7.2%, and those instead paid by the employer, much more expensive and equal to 24.3%.


 The measures taken


The measures taken


We have mentioned how, over the years, governments have undertaken to implement measures in order to reduce the tax wedge, with different results. This is therefore not a novelty on the part of the Conte government, as the laws have been regulating the matter for several years.

In 2014, the Renzi government, in fact, introduced the now famous 80 euro bonus, which was possible thanks to the cuts made with economic reforms and the increase in other taxes.

The goal was to achieve economic growth to be implemented in the medium and long term, respecting the 3% of GDP criteria for public debt. To date, however, the expected results have not been achieved: the tax wedge has not decreased in these 5 years.

According to the OECD, the value of the tax burden on labor recorded in Italy is now 49%, well above the average of around 35.9%. Furthermore, in 2018, taxes on labor increased by + 0.8% compared to the previous year.

Things do not improve if taxes on wages are taken into account, in Italy equal to 32.6% against the average of 25.5% in OECD countries.

From 2006 to 2015, however, the tax wedge maintained a constant growth trend.


And today?


The “new” government has not failed to include, in the budget law, also measures concerning the tax wedge. And it is precisely the flat tax, in this case, that plays a key role. The two rates (up to and above € 65,000, as we explained in the article illustrating the 2019 flat tax), aimed at VAT holders, should succeed in reducing taxes and consequently the tax wedge, together with the new ones Irpef installments coming in next year together with the maintenance of the Renzi bonus.

Moreover, even this had been one of the points on which the 5 Star Movement had put pressure during last year’s election campaign. The result that one hopes to achieve is, ultimately, a higher paycheck.

Read the text of the budget law

What is the tax wedge made up of?

What is the tax wedge made up of?

Trivially, from the sum of direct and indirect taxes. But let’s try to give a practical example: let’s take the case of an employee who collects a net salary of € 1000. The employer, that is the entrepreneur, will have to pay around € 1900. The gross salary is therefore almost double that of the net: the tax wedge is composed of taxes, social security contributions and Inail insurance.

The consequences

The consequences

In addition, according to Istat analysis, it seems that labor costs are much higher in the North than in the South, in particular in a tax wedge of 17% in the North West against 11% in the South and islands. There are also disparities even between men and women: even here the difference is as much as 6 percentage points.

It goes without saying that this situation causes a series of side effects. Employees are in fact burdened by a very high tax burden, and companies, on the other hand, are forced to pay, for the same net salary, 10% more for each worker. Certainly at home the situation does not improve: the parents, despite all the deductions, receive an income equal to 80% of the gross salary against 87% of our European neighbors.

So far, welfare has in fact concentrated on other aspects, one of which is pension assistance, without considering that a country that disadvantages those with the highest purchasing power inevitably entails the loss of purchasing power of the entire nation.

Calculating the tax wedge is necessary to assess the net and gross cost incidences and apply a correct management control.

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