Prodi Seeks to Make Italians Pay Taxes, Not Pay for Forgiveness

By Sheyam Ghieth


Italy’s government is, once again, attempting to crack down on tax evasion. This time, there are signs it may actually be working. In the first 11 months of 2006, income-tax revenue increased more than 9 percent to 33.8 billion euros (44.4 billion). The gains came as Prime Minister Romano Prodi committed more resources to chasing cheaters as part of a pledge to end tax evasion in seven years. Prodi’s effort, which aims to generate 8 billion euros in revenue next year in a country where an estimated 100 billion euros of taxes go unpaid each year, may determine whether Italy is able to fend off fines for breaching the European Union deficit limit. It also contrasts with the policy of former Prime Minister Silvio Berlusconi, who raised revenue through tax amnesties — forgiving evasion for a fee. “Eight billion euros in such a short time may seem a little ambitious, but there is no doubt that Prodi’s government has taken a stance toward evasion that is very different from the previous one,” said Annamaria Grimaldi, an economist at Banca Intesa SpA in Milan. “Not passing amnesties and one-offs all the time is already a step in the right direction.” Italy’s income taxes are among the highest in the European Union. Even with a cut last year, the top rate is 43 percent. The problem, though, isn’t the amount. Many folks are simply unwilling to pay. Tax avoidance is a “natural human right,” Berlusconi said during his losing campaign against Prodi. Italy’s finance police said Dec. 20 they had uncovered 15.3 billion euros in undeclared taxable income from January to November. Revenue recovered from fighting tax evasion rose 63.4 percent to 2.5 billion euros in the first nine months, the most recent figures available. How much of that increase came from the crackdown by a government that’s only been in power since May is difficult to quantify. The economy did expand an annualized 1.7 percent in the third quarter, after stalling last year. Still, taxpayers may be thinking twice, said Francesco D’Amuri, a professor at the University of Essex and author of the paper “Workers’ Tax Evasion in Italy.” Tax Dodges Italians usually dodge taxes by under-reporting income, hiring workers off the books and paying for services without a receipt. Mechanics, plumbers and even retailers routinely ask clients whether they need a receipt or prefer a lower price. An undercover journalist for an Italian television program bought 216 euros of perfume and jewelry last month at a shop inside the Finance Ministry without a receipt. The program prompted Visco’s office to release a statement admitting the episode showed just how common tax evasion was in Italy. As many as 95 percent of taxpayers in Italy, the third- largest economy in the euro region, claim they earn less than 40,000 euros a year, while only 1.6 percent of the population admits to earning more than 70,000 euros annually. Debt Downgrades The priority given to fighting tax evasion as a way to raise revenue contributed to Standard & Poor’s and Fitch Ratings cutting their estimates of Italy’s creditworthiness on Oct. 19. The two agencies faulted Prodi for not cutting spending enough to bring the deficit to less than 3 percent of gross domestic product next year for the first time since 2002. The same rating companies had previously faulted Berlusconi for using tax amnesties to try to control the deficit. While Berlusconi’s two-time finance minister, Giulio Tremonti, also pledged to combat evasion, he implemented a serious of amnesties on everything from hiding money offshore to illegal construction. In 2003, the peak year of the condoni —as they are known in Italian — the government brought in more than 20 billion euros, the equivalent of 1.5 percent of GDP, from fees paid in return for a pardon or to avoid future audits. “It’s admirable that the government is suddenly trying to make people obey the law, but since when does that actually work?” said Paolo, a Roman taxi driver who refused to give his real name because he hasn’t paid taxes in “many years.” “Why should I kill myself to pay taxes, if I know the guy next to me isn’t going to pay either? The law can’t just target me.”