A major tax row blew up in Italy on Wednesday after the government said it would push ahead with an election pledge to hike the tax rate on financial investments.
The Silvio Berlusconi-led opposition accused centre-left Premier Romano Prodi of overtaxing Italians and increasing the tax burden on savings.
"It's taxes, taxes and more taxes... The only thing this government will be remembered for is the taxes it has invented," Berlusconi's Forza Italia party said.
The government said on Tuesday that it planned to lift the tax rate on capital gains and bond yields from 12.5% to 20%, in accordance with its election programme.
Economy Undersecretary Alfiero Grandi said the measure would be contained in the 2008 budget and stressed that the current tax rate on financial investments was far below the European Union average of 20-22%.
Grandi also said the government was considering exempting past Treasury bond emissions to protect the savings of families who held investments of this type.
Only 16% of government bonds are owned by small Italian investors while 55% are held by foreign investors, 20% by banks and businesses and 9% by investment funds.
But the opposition nonetheless accused the government of targeting family savings.
"It isn't enough for Prodi that fiscal pressure in Italy is much higher than the European average and that Italians pay at least 50 different types of taxes. Now he wants to hit the savings of Italian families and company investments," Forza Italia heavyweight Isabella Bertolini said.
The rightist National Alliance argued that the move would drive away foreign investors.
The protests were swelled by the devolutionist Northern League, a Berlusconi ally which has already called for a 'tax strike' to protest against taxation levels, and the UDC, a centrist, Catholic party which has distanced itself from Berlusconi's leadership but still remains in opposition.
But the issue also caused tensions in Prodi's fragile, nine-party coalition, which ranges from Communists to Catholic centrists.
While leftists in the government applauded the decision, saying it would "harmonise" financial investment tax rates, the small Radical and UDEUR parties slammed the idea.
The UDEUR, a centrist, Catholic party headed by Justice Minister Clemente Mastella, also protested that Prodi had acted without consulting his allies.
Coalition unity on the reform is essential if the measure is to win approval in the Senate, where Prodi holds only two seats more than Berlusconi.
Meanwhile, the Italy of Values (IDV) party led by Public Works Minister Antonio Di Pietro warned that raising the capital gains tax could further dent the government's popularity.
While agreeing with the reform in principle, IDV House Whip Massimo Donadi said that "it would be easier to digest if it were presented with other initiatives aimed at lowering income taxes, something which the government will have to do sooner or later if it wants to remain in touch with the people".
The government's ratings have fallen sharply since the 2007 budget, a 34.7-billion-euro package which contained extensive tax hikes and spending cuts.
The budget extended the highest income tax rate of 43% to all those earning 75,000 euros per year or more. At the same time, those earning between 55,000 and 75,000 euros annually saw their tax rate lifted from 39% to 41%.
Prodi defended the reforms and other tax-raising measures as essential for straightening the country's wobbly public accounts and meeting European Union budget targets.
TAX BURDEN TOO HIGH, CRITICS SAY, BUT EVASION RAMPANT. According to the tax office, Italians currently shoulder one of the highest tax burdens in Europe.
The agency said recently that Italy's official fiscal burden of 41-42% of GDP was far below the "real" figure, which was above 50%.
At the same time, tax dodging remains rampant in Italy.
More than 270 billion euros of taxes go unpaid each year - the equivalent of almost 20% of GDP, the tax office says.
Of the country's 40 million taxpayers, 95% claim to earn less than 40,000. A quarter declare an annual income of less than 6,000 euros.
The figures contrast with consumer spending indicators, which show disposable income at significantly higher levels.
The government has pledged to crack down on the tax cheats, saying that tax rates can only come down if everyone pays their taxes.
But the opposition argues that there would be less evasion if taxes were lower.
Northern League leader Umberto Bossi told reporters on Wednesday that he was sure his call for a tax revolt would win popular support.
"Every day, taxes go up. New formulas are being dreamed up every day to make those who have no money left pay more. Anger is mounting and the people will follow us on this (the tax strike)," Bossi said.
Bossi has suggested that Italians pay taxes only to their own regions instead of the state as a form of protest.
Centre-left ministers and MPs have blasted the League's proposal as subversive and anti-democratic but opposition allies agreed to discuss it at a powwow on Wednesday.
