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Monti Taxes Italy Towards Recovery

Mario Monti, Italy’s technocrat leader, is facing a lot of flack for taxing Italy’s already over-taxed population to death.

The Bank of Italy has waded into the fray saying that if Italy is to grow, taxes have to come down.  Italy’s Accounting Court – the Corte dei Conti is also unhappy with all the tax increases.

While it may at first instance look at if Monti is going a little overboard on the tax front, reading between the lines, there appears to be a strategy and it may well turn out to be beneficial to Italy in the medium to long term.  I’ll explain why a little later on.

At the same time as Monti is generating increased tax income, Italy’s tax people are ensuring taxes in Italy are paid in full.  Not only this, but government spending is in the spotlight too.  The so-called spending review Monti has introduced should lower government expenditure by the not inconsiderable sum of €13 billion over the next two years.

Italians, as you may know, dislike paying taxes and will go to great lengths to ensure their tax declarations are as low as they possibly can be – in some cases, tax declarations are so low, they are laughable.

In attempts to keep declared incomes at their lowest possible levels, stores, restaurants and Italy’s legions of coffee bars, often do not issue receipts, nor do doctors, dentists, lawyers and many others.  Even employers pay employees in cash to keep their taxes and contributions as low as they can get away with.  Accountants will advise clients as to just how much they need to declare to keep under the radar.

Italy’s government has now officially cottoned on to the decades old issue of massive under-declaration of taxes and is finally doing something about it.  Just why nothing was done before is anyone’s guess, but managing Italy constructively was never a strong point of the governments which preceded Monti.  Italy’s political masters usual answer to tax evasion was to increase taxes.  This not so wise tactic punished the few Italians who actually do pay taxes while letting off the real perpetrators, often via ‘tax amnesties’.

Now, though, the situation is changing, albeit painfully in the eyes of tax-shy Italians.  Monti is playing catch-up and is attempting to recuperate some of the dues which evasive Italians have got out of paying over the years.  Then there are all these micro-taxes.  Generally, these are not new, but are additions to existing taxes.

IMU –  Not Such a Micro-Tax

The IMU property tax is one example, although the increases in tax liability it introduces are not microscopic.  Even if the IMU tax may appear to be a new tax, in reality, it is not.  The IMU simply replaces and extends its predecessor – the ICI  – which a bright spark known as Silvio Berlusconi had partially eliminated.  This move left Italy’s public coffers at a time of ever increasing public debt with even less money than before.  No real attempt was made to crack down on tax evasion either, and this exacerbated the problem.

Naysayers have been claiming that the IMU tax will depress Italy’s real estate market, but this is an exaggeration.  Yes, more tax will be payable, but the extra cost should be affordable for most families.  Unless families have more than two houses, it is doubtful they will start selling.  We shall see.  Media coverage of the IMU tax is placing quite a lot psychological pressure on Italians who will be looking at the real estate tax increases carefully.  There is a possibility that the IMU make have a ‘final straw which breaks the camel back’ effect for families with limited incomes.

Part of the IMU tax will be decided by and will go to local government to help fund local services.  The IMU is but one of many taxes.

Other Micro-Tax increases

The tax on refuse collection in Italy is to increase.  Fuel is being taxed more, and even travel is being subject to taxes – air and ferry travelers will pay a surcharge which will end up in government coffers.

Italy is already operating a kind of hotel-stay tax, and this tax has invoked the fury of hoteliers all over the Boot.  Vacations in Italy are to become ever so slightly more costly.

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On top of the other tax rises, energy and water is to be taxed more heavily too.  A taxing time for Italians, if ever there was one.

All this tax tinkering will add an average of around €2,500 a year (c. €200 a month) to family budgets throughout Italy.   €200 a month is quite a significant sum, especially in times of crisis and when businesses are going under and jobs are hard to come by.

The combined weight of all these micro-taxes may push some families in Italy into financial hardship.  So what is Monti up to?  Austerity on steroids?

The Strategy?

Forgetting the pain of having to fork out more money to pay all these new taxes for a moment, what is interesting is the strategy which may lie behind them.

Monti has not explained what the thinking behind these new taxes is, so what follows is pure speculation, although, curiously, it is not dissimilar to something I wrote about way back in 2008: A Taxing Problem.  Or when I hinted that a “pizza tax” might be the way to go.

Direct to Indirect

I suspect what Monti and his technocrat team are up to is shifting Italy’s tax burden away from direct taxes.  That is away from taxes which are easy to avoid and evade, towards indirect taxes which, it appears, relate to consumption.  Thus, the more someone consumes, the more tax they will contribute.  Even the IMU tax reflects this, in that the bigger the property, the more tax will be payable.  Unlike receipts which are not issued and the practice of keeping income hidden from the tax authorities, houses are rather difficult to disguise.  Big house, more tax.  Simple.  As a rule people with bigger houses have greater incomes, so it could also be argued that the IMU is a form of wealth tax.  Poorer people have smaller abodes, and so pay less.  This means the new IMU, which is to be based on square meters, not on the current and rather quaint ‘number of rooms’ or ‘vani’ system, should be fairer.

The other new taxes relate to services people use too.  Once again, the more money one has, the more one will use certain services, such as ferries to Italy’s islands, flights, and fuel consuming trips in cars, and even all the energy the wealthy use to keep the lights on around their swimming pools at night, or to heat the pools in the first place.  The rich who consume more, mainly because they can afford to, will pay more tax.  The poor, who do not have gas guzzling cars, heated swimming pools and huge mansions, will not pay as much.

While tourists will be hit by Italy’s fuel, travel and hotel taxes, the amounts concerned are so small they are unlikely to put anyone off coming to Italy on vacation.

What Next?

What all these new taxes should do is to create a more or less predictable income stream for the Italian state.  Just how much income will flow will only really be known when all the new taxes are up and running.  The IMU property tax should generate a more or less fixed income, whereas income generated by the other taxes will vary from year to year and will be dependent upon wealth and spending too.  And many of these newly increased taxes will not be at all easy to evade – this should help cut down Italy’s huge tax evasion problem.

One suspects that the forthcoming VAT increase is another way to create tax income for Italy which cannot easily be evaded.

Tax Cuts?  When?

Once it is clear that cash is flowing in the right direction, direct taxes in Italy may well be reduced.  When this will happen is not clear, but I predict stronger noises on the tax reduction front from Monti’s government after the summer.

Monti and his team may cut taxes during their term in office, or may offer the opportunity on a platter to whichever political party wins general elections in 2013 – if the elections take place and if everything works out as planned.  Once Italy’s rag tag political parties realize what Monti is up to, they’ll be chomping at the bit to offer Italians tax cuts, and, thanks to Monti’s magic, they may well be able to do so.

There still remains the worry that whoever takes over from Monti and Co will not be up to the job of running Italy.  Seeing as the faces in Italy’s politics are still very much the same, and that it was these ladies and gentlemen who landed Italy in the mud in the first place, the worry is justified.  That is another story though.

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