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A Taxing Problem

It’s just about 1:30 in the morning here in Milan.  I should be heading for bed, but my head is awash with thoughts, and I want to try and create order from the chaos reigning in my mind.  I’m thinking about Italy‘s incredibly high levels of tax evasion.

Yes, I know taxation is probably not the most thrilling issue to be writing about, but then that’s what comes of having a mind which thinks about too many things in a desperate search for explanations.

If you feel like finding out just what my crazed mind has been turning over, then read on, otherwise skip to something lighter like my recent post on Floriovo, which is much more drinkable.

Tax Evasion is Rife in Italy

In Italy tax evasion is rife, and a recent article in a newspaper I browsed through whilst getting my morning caffeine shot the other day revealed that in 2007 tax evasion in Italy amounted to some 100 billion Euros, or around 20% of Italy’s GDP.

That is an impressive sum, and bears testament to the myriad of ways in which Italians reduce their tax liabilities.   However, it’s not all that clear how the figure of 100 billion was arrived at, in that how can you know how much people aren’t paying?  Oh well, I guess the people who worked out the figure must know what they are doing.

What can be Done?

The question is, just what can be done about this?  This is something I’ve been mulling over for quite some time, but although I’ve sort of come up with an answer, my ability to create the requisite mathematical models is, I’m afraid, sadly lacking.

The Origins of Taxation

Before I suggest how Italy’s evasive little problem may be overcome, have a think about the origins of tax for a moment.  Basically, as I have always understood it, kings were the first to come up with the idea of levying taxes, mainly because back in the old days, kings had something of a penchant for invading other countries and building empires.  The only trouble was that to build an empire, you needed soldiers, and soldiers need to live.  While some were prepared to fight for whatever god they believed in, and their country, others were rather more cynical, and wanted some form of reward, be it gold or goods.

So, to keep their armies functional, and so the kings, and queens, could go do their invasion things, they had to pay up.  Only they did not have enough assets to pay off their fighters.  At some point, some bright spark, queen, king or counsellor, must have come up with the idea of persuading citizens to cough up contributions to their kings, and evaders back in the days in which taxes were conceived, simply lost their heads.  Taxation was born.

Direct taxes

These taxes were ‘direct’, in that the king’s cronies wandered up to doors and said, ‘Give me gold for your king.’  You cannot get much more direct than that, and refusal was not acceptable, if you valued your life.  Democracy had not really been born back then either.

However, even after democracy supposedly came on the scene, raising income for republics was still based on the levying of direct taxes, and the same is true today.  Only now we use fancy terms like ‘income tax’, and those who are caught not paying their dues rarely lose their heads.  At least I have not heard of any Italians being decapitated for not coughing up.

The Living Museum Strikes Again

Italians though, are still working on the old rules, in that the best way to keep your tax payments low is to declare as little as possible, and in Italy there are a myriad of little, and big, schemes and ploys designed to keep income declared as low as possible.  This means you have people earning 12000 Euros a year on paper, but driving around in €100,000 BMWs.  And everyone is at it, to the extent that the tax collection authorities here just do not seem to be able to collect realistic amounts.

Italian governments, not famous for their innovation it has to be said, have simply increased tax levels, thus penalizing those who do actually pay tax, and, as a consequence have probably convinced others to reduce their declarations as a result.

An example:  Mario works in a bank, he has to pay tax because it is taken directly from his salary – he has no escape.  Meanwhile his father, Roberto, has a building business.  Roberto sees that his son’s income is low, or that Mario is being hit very heavily by tax, so Mario’s dad finds a few ways to reduce the on-paper income of his building company.  Thus Mario pays 10,000 Euros in tax, whereas his father avoids 20,000 Euros, but helps out his son.  The tax man loses out by 10,000 Euros.  And everyone in Italy is at it.  You cannot blame them, tax levels are cripplingly high here – just ask any Italian.

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Stop reading, start speaking

Stop translating in your head and start speaking Italian for real with the only audio course that prompt you to speak.

Only the 10,000 Euros multiplied by everyone becomes 100 billion Euros, and Italy finds its state coffers in a little bother.  So far though, nobody in Italy has really come up with a way to make evasion more difficult, or rather there are various little ways, in the form of a few indirect taxes, but such systems probably cost more than the amounts of money they raise.  Someone somewhere may have done the sums, but this is not necessarily the case in a country which has governments wandering in and out of power every five minutes or so.

It not just flighty governments and tax levels which are high, but also the Italian tax system which is horrifically complex. Mistakes are often made and fines have to be paid.  Fines which are based on amounts outstanding.  If the amounts declared are low, then fines will be palatable. My very own accountant has made errors -it’s perfectly normal here owing to the complexity of the tax laws.

Are you still there kind reader?  If you’ve made it this far, well done!  I hope your socks are still on.  Take a deep breath, and continue to the solution theory.

The, Indirect, Answer, Possibly

What is the answer to this sticky little vicious circle?  An excellent question, and I believe that the best way to tackle tax evasion in Italy is to lower direct tax levels and raise indirect tax levels.  Even though Italians are not telling the tax man about the true levels of their incomes, they are still spending money – on new BMWs – and quite a number of other high ticket items, as you would expect in land with such a love of designer clothes and Rolex watches.

If a sales tax were to be applied to certain categories of products in Italy, with the possible exception of foodstuffs and utilities, then evasion would potentially become much more difficult.  Imagine your Italian who declares 12,000 Euros, but drives around in an 100,000 Euro car.  If a higher proportion the price of the car was tax payable to the government by the company selling the car, then the fact that Mario, or whoever was under declaring his income would matter rather less.  Mario will still want to spend his cash, so when he does, tax him on his acquisitions.

OK, so cars are but one small category, but their are many others, and if higher sales taxes are applied to so called luxury goods, then those who like to purchase such items will still end up paying their dues.  Yes, prices would go up, but if the calculations are carried out carefully, and the resulting tax income monitored, then direct taxes could be lowered, to the point where they become so low as to make it simply not worthwhile evading, possibly.

Applying a sales tax would be much easier for Italy’s tax authorities to control too, in that instead of trying to round up creative individuals, the Italian tax man can go after companies, and it should be a little more difficult, though not impossible, to fiddle production output levels, or quantities of cars imported, for example.

The number of companies in Italy is far fewer than the number of individual tax payers too, obviously.  We also live in the age of computers and the world wide web, which means that the tax authorities could virtually monitor production levels if they wanted to.  And this too would make the system more difficult to work.  Indeed, this is starting to happen in Italy, and just about everyone with a business is obliged to use computerised banking facilities, which sooner or later will be directly linked to the tax man’s IT systems.

The Ramblings of a Blogger?

Before you dismiss the above as the ramblings of an incoherent blogger, you should perhaps know that one Vernon Lomax Smith, who also happens to be a Nobel Prize winner, also believes that indirect taxation is best, and is much fairer than direct taxation, which remember was a rather undemocratic tax devised when dictators, in the forms of absolute monarchies ruled the roost.

Then, there is the interesting FairTax proposal which is being discussed in the USA, which is based on a sales tax. There seem to be good arguments in favour of the FairTax system, and their is a possibility that Obama, who has painted a picture of himself as being a forward thinking leader, may well endorse such as system, or at least put it to the test.

In summary, with an indirect sales tax based system, the more money someone spends on a product or service, the more they pay in tax.  This appears to be much fairer than taxing people on their income, as the kings of old did.

Prove me Wrong, or Right

As I mentioned earlier my ability to manipulate numbers is not that high, but I’m sure there are many out there how could come up with the appropriate calculations to either refute or confirm whether a system of indirect taxation based on sales taxes would be more efficient.

Over to those with much brighter grey matter than this here blogger from Italy.  If you have managed to get this far, then many thanks for reading, and please leave a comment, should you so wish.

It’s now past 3 in the morning.  Good morning, I’m off to bed.

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