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Tax Break Clampdown Adds to Italian Brain Drain Fears Unintended Consequences of Italian Tax Incentive Changes

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By Giselda Vagnoni

ROME, Feb 22 (Reuters) โ€“ Italyโ€™s decision to slash tax incentives designed to lure talented expatriates back home has left 35-year-old marketing executive Serena Romeo in a bind.

Romeo left Italy ten years ago for brighter work prospects abroad โ€“ one of around half a million young Italians who have left the country since 2011 โ€“ and was negotiating a transfer to her hometown of Naples when she learnt she would no longer qualify for a tax break.

With little warning, Giorgia Meloniโ€™s government curtailed the scheme from January 1st, judging its benefits did not justify the cost of around 1.3 billion euros a year in lost tax revenue.

Romeo, who works as head of brand marketing at a German multinational, has put her plans to return on hold.

โ€œWithout the tax relief, I would earn significantly less,โ€ said Romeo from her home in Berlin, explaining that returning to Naples would expose her to poorer employment opportunities, particularly acute in southern Italy.

โ€œI donโ€™t want to lose my peace of mind.โ€

Romeoโ€™s concerns echo the sentiments of around 110,000 university graduates lost by the Bel Paese between 2011 and 2021, according to OECD data, equivalent to one-third of an annual graduate cohort.

According to GlobalEconomy.comโ€™s index of human flight and brain drain, Italy is second only to Japan among the G7 economies.

The Export of Intellectual Capital

Italyโ€™s export of intellectual capital lowers the countryโ€™s innovative potential, and in the long term its productivity, analysts say.

โ€œWe estimate that it costs Italy about 1 percentage point a year of output growth to have so much talent abroad,โ€ said Brunello Rosa, CEO of Rosa & Roubini Associates, a London-based consultancy.

In a report published in January, the OECD warned that long-standing weaknesses in Italyโ€™s tertiary education sector were preventing it from taking full advantage of productivity gains from new technology.

Over the years, Rome has tried to combat the exodus of talent by offering increasingly generous schemes for those who return to Italy.

Before 2024, returners were offered a 70% tax break for five years, which could be extended for another five years in certain circumstances. For those who relocated to the poorer southern regions, the tax break was 90%.

However, the scheme had mixed results. Economy Minister Giancarlo Giorgetti said in October that 24,500 people had benefited from the scheme between 2015 and 2021, but only 1,200 were teachers or researchers โ€“ areas where Italy has a particular skills shortage.

Critics say the system distorted the labor market and was abused by people claiming to have relocated to southern Italy who were, in fact, working remotely from elsewhere.

The governmentโ€™s slimmed-down scheme will target specific skills. Teachers and researchers who relocate will continue to receive the same generous tax breaks, but transfers within an organization are now excluded and a 50% reduction will apply to those on incomes of up to 600,000 euros.

Fears of Brain Drain

Many fear the changes will exacerbate the countryโ€™s brain drain.

โ€œThe repealed benefits were one of the main elements in deciding whether to return to Italy while the new ones are just something extra that are unlikely to move the needle,โ€ said Controesodo, a pressure group that helps expatriates return to Italy.

In Trentino-Alto Adige, a region at the border with Austria and Switzerland, only two out of ten German-speaking students who study abroad return to Italy.

Fixing the problem will require a multi-pronged approach, said local politician Julia Unterberger, one that addresses not just wage disparities but access to housing and childcare.

โ€œBut in the meantime, tax incentives have been the only measure that has had a positive effect,โ€ she added.

Consultant Brunello Rosa believes financial incentives to attract skilled workers to return home are the quickest way to reinvigorate Italyโ€™s economy.

โ€œA massive return of the so-called โ€˜brain drainโ€™ could in a very short time generate an increase in the growth potential of the economy,โ€ he said.

More than 40% of the repatriates have landed in Lombardy, the northern region around Milan, fuelling a revival of Italyโ€™s financial capital whose output has grown by 10.2% since 2019 compared with just 3% for the nation as a whole.

โ€œThe situation in Milan is so vibrant, partly because there are plenty of young professionals with international experience that are bringing about change,โ€ said Alessandra Mariani, a 29-year-old marketing manager in a big tech company who relocated from the UK in 2021, taking advantage of the abolished incentive scheme.

Without tax incentives, she would not have taken the plunge.

โ€œIn Italy, salaries are lower than in other advanced economies and young people are often given less decision-making responsibility. This means that relocating to Italy could be a gamble on oneโ€™s career trajectory. So you must be compensated for taking such a risk,โ€ she said.

(Reporting by Giselda Vagnoni; Editing by Christina Fincher)

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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