While Italy’s politicians seem to do nothing but up taxes in Italy, the head of Italy’s Agenzie delle Entrate revenue service believes lowering taxes should lead to a reduction in Italy’s national sport, tax evasion.
On the lower taxes, lower evasion front, Italy’s chief tax collector is wrong though. Lower taxes will not will necessarily lead to lower levels of evasion, quite the opposite, in fact. Let me explain.
If, for example, your tax liability is currently 10,000 and you evade 5,000, Italy’s government coffers end up with 5,000 less to play with. Evasion stands at 50%.
If, however, your overall tax liability on account of a tax reduction falls to, say, 8,000 but you still hide 5,000, on paper Italy’s government loses less, and this gives the impression less is being evaded. In percentage terms though, evasion actually increases, as the 5,000 evaded on a liability of 8,000 equates to an evasion level of 62.5% of total tax liability, whereas the 5,000 before equated to only 50%. What will fall is the government’s lust for finance by way of taxes, but levels of evasion may actually increase in real terms.
What Italy needs to do is to continue with its clamp down on evasion, which is something Italy’s chief tax collector says will happen. In this way, the 5,000 evaded can be reduced.
While lower tax rates may induce some into declaring more, others may not bother doing so. In all probability, knowing Italy, they will not, as indeed Italy’s chief collector admitted when he said in a radio interview that Italy was a nation of tax evaders. Hence the need to keep battling evasion.
Battling evasion is not something Italy is good at, though it is getting a little better. The problem, in my opinion, results from Italy’s taxes being direct which makes them relatively easy to evade.
What Italy Needs: Indirect taxes
Italy is a nation of small businesses many of which work cash in hand and are so numerous that monitoring all of them is just about impossible. The answer and something which would reduce evasion to controllable levels would be to up indirect taxes perhaps by taxing raw materials right at source. Raw materials would include not only cement and other inorganic items, but would also include vegetables and fruit.
Crop yields are more or less known and growers can be asked to predict just how much they will produce. This they can do reasnably accurately seeing as they know how much land they own and cultivate. If production turns out to be lower than forecast then a tax rebate, either in terms of a credit or a cash refund, would be made.
With proper monitoring, such a tax would be hard to evade and everyone could be made to pay their dues. If everyone pays, then everyone pays less. They should have been clear to Berlusconi who battled hard to end Italy’s hard to evade IMU property tax. In part he succeeded, at Italy’s expense, alas.
The IMU Error
The IMU was the ideal tax for tax shy Italy because hiding buildings is not easy. It’s not, however, impossible to hide buildings and Italians have managed to hide an estimated one million homes from the taxman. Even taking into account the hidden homes, identifying structures is a lot easier than keeping track of whether or not tax declarations are honest or not. In fact, Italy is taking steps to find all its hidden homes and other structures. Once this has taken place, finding the owners should not be too hard and the tax income for Italy from its properties will be virtually guaranteed. This should allow Italy to lower other, direct, taxes.
The problem with the IMU tax was that it was simply piled on top of all the other taxes, instead of, and as should have been the case, using the more or less guaranteed IMU income to help reduce other taxes. While Italy is talking about another similar tax to replace the partially repealed IMU, it has only now started talking about reducing other direct taxes.
Once Italy’s chief tax collector starts talking about introducing hard to evade indirect taxes, everyone will know the nation is heading in the right direction. Simply reducing taxes will not be enough to curb Italy’s national sport though.
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