On a recent morning, Maurizio Compagnone, an employee of Italy’s internal revenue service, stood before a classroom of middle school students in a leafy neighbourhood here, preaching the virtues of paying taxes.
“You may think, ‘I’m 13, why should I care about taxes?’ ” he said with earnest enthusiasm as the students looked on, slightly bored. “But you can take a step in the right direction. You can change the behaviour of the people around you, your parents and friends.”
Compagnone is one soldier in a battle — often uphill — to persuade Italy’s famously tax-evading citizens to pay up. Such efforts, along with a new blitz of public service announcements trying to raise the social stigma on tax evasion, have become crucial as Italy struggles to reduce its $2.5 trillion public debt and fend off speculative attacks.
The tax authorities say Italy loses an estimated $150 billion a year in undeclared revenues, while the national statistics authority places the underground economy to be about 17.5 per cent of gross domestic product — the third highest in Western Europe after Malta and Greece but before Spain. Other experts place the percentage much higher.
To tackle the issue, Prime Minister Mario Monti’s new $40 billion austerity package, which received final approval on Thursday in the Senate, includes tougher measures that will allow tax officials to peer into Italians’ bank accounts to check declared income against bank deposits — not to mention yacht, car and home ownership — under a new cross-referencing initiative.
The measures also prohibit cash transactions above $1,300 — common in Italy, where low credit-card use keeps private debt low but evasion high — and lower the threshold for which tax evasion becomes a criminal offence. The government has also set an additional 1.5 per cent tax on assets repatriated under an earlier tax amnesty, raising the levy for those requesting anonymity.
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Italy is filled with colourful anomalies. According to tax officials, nearly half of boats larger than 35 feet are registered to people who declare income of less than $26,000 a year, and 604 airplane owners declared annual income between $26,000 and $65,000.
Radio 24 recently reported that there are about 2.5 million luxury cars in Italy, yet tax officials say that in 2009, less than two percent of Italy’s 41 million taxpayers declared annual income of more than $260,000 — indicating that many declare far less income than their lifestyles would suggest.
To rein this in, Italy is introducing the cross-referencing initiative, dubbed the “income-o-metre”, to be put in place in the coming months. “If you declare $26,000 a year, you can’t buy a piece of real estate valued at $1.3 million,” said Attilio Befera, the director of the Agenzia delle Entrate, Italy’s internal revenue service. Discrepancies like that will now prompt an audit, Befera said.
It is a cultural battle as much as a logistical one. Noting that it is a Roman Catholic country, Befera said: “We have the concept of pardon, of penitence. From a fiscal point of view this is the sanction that I will pay when they find me.” (The previous government introduced various tax amnesties, which critics said condoned evasion.)
“In the United States, the first forms of taxation were in the far West for the defence of the community, for a kind of sheriff, and anyone who didn’t pay was expelled from the community,” Befera said. “Here, the first forms of taxation were imposed by princes, usually foreign, to pay for their own battles. So our citizens did everything not to pay because they saw nothing in return.”
This heritage lingers. Many Italians approach tax evasion with true delight, taking pride in outsmarting the system, aided by books sold online and by Italy’s 113,000 tax accountants.
Many Italians say rule-breaking is a question of survival. “When I first opened my restaurant, my accountant sat me down and told me that if I wanted to pay all my taxes, I might as well close up shop immediately,” said Giuseppe, a restaurant owner in Rome who said he was a basically honest person who had been “forced to evade taxes” because of Italy’s costly fiscal system.
Like many Italian restaurateurs, Giuseppe does not always present diners with a cash-register receipt at the end of the meal, so the sale is not legally registered and, therefore, not taxed. “If I didn’t do it, I just wouldn’t survive,” he said. “If we respected all the rules from A to Z, prices would be considerably higher for what you eat.”
For Giuseppe, running a business involves keeping complex records. Provisions he buys without receipts have to disappear without being tallied; he pays waiters under the table for overtime, evading payroll taxes, which are above 40 per cent. “I can’t afford to pay overtime and they can’t afford to live on their base salaries,” he said. “This way, we both benefit.”
Business associations have urged the government to reduce the tax burden for companies and workers and raise it on assets. This month, the governor of the Bank of Italy, Ignazio Visco, said that Italy’s tax burden had risen to 45 per cent over all and called for urgent reforms to help lower it.
“Tax evasion has a significant impact on growth,” said Alberto Bisin, an economist at New York University. He said it kept companies from expanding by keeping productivity low — and less traceable. “I’m not saying that we should let people evade,” but that reform is difficult as long taxes are so high, he said.
A country where some bear a heavy tax burden and others do not pay anything creates a “skewed system, distorting and horrible,” he added.
Adding to the challenges, five million Italians are self-employed, including many doctors, contractors and small-business people, compared with 2.7 million in France and 3.9 million in Germany. Evasion among them is rampant.
In 2009, the last year for which data is available, just under 50 per cent of Italian workers, or 20 million people, declared annual income of $20,000 or less a year, according to tax agency data. Many are salaried workers whose taxes are automatically deducted, but others are self-employed or most likely have additional income off the books.
Massimiliano D’Angeli, a criminal defence lawyer, said he believed that if more services like those provided by lawyers, plumbers and electricians were tax deductible rather than subject to the nation’s 23 per cent value-added tax, people would have an incentive to ask for receipts. Instead, many workers and professionals offer a “VAT discount” for payment under the table.
In spite of Monti’s approval ratings, there is widespread scepticism that the anti-evasion measures will work. Asked why Italy had had so much trouble cracking down on evasion, Bruno Tinti, a former prosecutor turned journalist specialising in the black economy, had a simple answer: “Tax evaders vote, that’s the problem.”
©2011 The New York Times News Service