By Paolo von Schirach
June 22, 2013
WASHINGTON- Just like the rest of Southern Europe Italy is limping along, trying to reconcile a gigantic public debt, (more than 120% of GDP), high taxes imposed on the citizens to finance it, budget cuts to reduce it, zero growth, stubbornly high unemployment and lack of enterprise. To make this even worse there is uncertain and fragile policy guidance. The country has no strong leaders armed with a compelling vision. Enrico Letta, the new Prime Minister, is yet another professional politician whose main job seems to be to hold an improbable Left-Right coalition together.
Widespread illegality
In all this the Italians try to survive. And this is a huge part of the problem. Rather than using their energy, ingenuity and wits to innovative and produce, many Italians spend an an inordinate amount of time and energy trying to deflect the blows of higher taxes and oppressive regulations. As a result, there is widespread illegality. A recent report of the Guardia di Finanza, the Italian tax police, illustrates the negative fiscal impact of a culture of mistrust that induces widespread illegality. My simple and short conclusion is that an excessive tax burden coupled with a really bad economy encourages millions of Italians to cheat.
1/3 of all retail transactions unrecorded
The Italians are geniuses at circumventing laws and in devising tax avoidance and plain tax evasion schemes. Let’s start from the bottom. According to the Guardia di Finanza report, at least 1/3 of Italian shopkeepers, restaurant and bar owners fail to issue receipts. So, about 1/3 of national retail transactions are not recorded and therefore not taxed. At a higher level of sophistication, there is a real industry aimed at creating fake corporations in other countries that issue false invoices that are then “paid” to them by Italian companies. This way bogus tax deductible expenses are created and untaxed money is transferred abroad.
And then you have the time honored practice of corruption in awarding almost any and all types of public procurement contracts. Bids are rigged, local authorities are overcharged, kickbacks are paid to all those who provided favors. Last but least, there is abuse of welfare programs. False disability and pension claims are the norm, this way causing an artificial growth of already bloated public spending.
This is not funny
When discussing these clever practices many commentators laugh. They say that all this is a credit to Italian resourcefulness and ingenuity. The smart Italians cheat the tax man and then go out and have a lovely dinner to celebrate. Well, the deeper truth is sad, not at all funny. Yes, the Italians are clever. But unfortunately, given the perverse system they created for themselves, their talent is wasted in devising illegal ways to survive, as opposed to engaging in productive, job creating activities.
Unfortunately, the scope of this web of illegality is so huge that it will be almost impossible to eradicate it. In an ideal world, Italy should adopt a flat tax system, seriously deregulate economic activities and labor markets, and drastically reduce the size of its mostly parasitic public administration.
Radical rethinking?
But this would require a cultural revolution premised by a total rethinking of the proper relationship between private enterprise and an adequate, modern and service oriented public administration. Unfortunately, there is no sign of such an awakening. This being the case, nothing will change.
And so, the Guardia di Finanza will keep going after small shopkeepers who do not issue receipts, this way trying to shelter some of their (often meagre) income from a perennially semi-bankrupt and hungry state. Yet another unproductive effort amounting to an additional waste of resources.