Tax cheating: an inherited family-business

Italy has no big corporations. Companies are run by family and friends. Just like Diamond Dogs bar (picture) in Milan. Photo: Evelina Bergström

MILAN Italy’s shadow economy grows. Attempts to change the situation have failed, but experts are positive towards current reforms.

By Evelina Bergström

What meets the eye in the economical capital of Italy is fashion and expensive lifestyles. Signs of a financial crisis are hidden, so is 27 percent of the economy. Money that should be paid in terms of taxes disappear in tax evasion.

Italy, which has Europe’s second biggest national debt after Greece, is on economic stagnation and financial crisis. Tax evasion is according to leading economists and Bocconi Professor Carlo Garbarino a major reason.

“Tax avoidance must come to an end or it is game over for us,” he says.

Past politicians made empty promises to fight tax evasion. Former Prime Minister Silvio Berlusconi even encouraged breaking the law when he said that tax evasion is morally acceptable.

However taxation expert Garbarino and big parts of the Italian population believe that the current government and prime minister Mario Monti has what it takes to change the cheating mentality.

“There is a domino effect of the horror examples Greece and Portugal. We really have to start making consistent and regular controls to not end up like them. Most people agree on that,” says Garbarino.

One of Europes highest tax rates

Italy’s tax wedge (government income on labour taxation) is higher than EU average, 11% over normal. And tax rates have steadily increased without any tax-cuts over the last decades.

Although some experts disagree, the relationship between high taxes and tax evasion is not clear-cut. Investigative journalist David Cay Johnston recently blogged at Reuters on how the low tax rates in the US comes with arising tax evasion.

Garbarino also believe that blaming the cheating on high taxes, is like fiddling while Rome burns. The reason for tax evasion is to be found in the economical structure of Italy.

“Italy has no big corporations. Businesses are run by families and friends. People that hardly report on each other”, says Garbarino.

Tax evasion is cultural

Director of the Regional Revenue Agency, Carlo Palumbo agrees that Italy’s economical structure is the reason.

“Italy is world-famous for its family-culture. Even the corporate world is kept within the family,” he says

The Revenue Agency operates to increase tax compliance. Lombardia region, with its office in Milan, stands for 25% of the collection of evaded tax revenues.

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Denmark is worse then Italy

In contrary to small business, the compliance is big where business is big. But there are exceptions.

“Countries with the same structure as Italy also have high tax evasion. If you look at only the self-employment sector, many countries are worse than us,“ says Palumbo.

Denmark is an example. While separating the field of self-employed people from the total economy of Denmark, you get an economic structure similar to Italy. Within that field, Denmark has a 37 percent rate of tax evasion. However the total shadow economy of Denmark is only 17.7 percent and a lot lower than in Italy.














Ferrari’s are out of fashion

The only way to get bigger tax compliance is to change the structure, according to Palumbo.

“But it can not happen over a night, and we work on a long-term basis,” he says.

Campaigns, advertising and commercial are the tools used to change the mentality. Since last year the Revenue Agency is taking a much stricter line to reach the enterpriser on a local scale.

Larger exchange of information with the Municipalities makes it possible for the Agency to compare people’s lifestyles with their declares of incomes and book-keepings. Briefly the information includes registered housing, cars, motorcycles, boats etc. Mr Palumbo does not want to go give further details about the information from the Municipalities.

A suspicious target is found through detailed analysing. Accountings and declarations within the same enterprise and geographical area are compared and monitored over a long time. The companies whose incomes stick out from the rest, will be checked in their premises.

Performing the controls are inspectors from the Revenue Agency, INPS (labour market inspection) and civil agents of the Local Police. In some cases, the checks are pure razzias, and where more serious crimes have been committed, the financial police Guardia di Finanza will do the control.

During a control the inspectors check employers registrations and if receipts are handed out. Guests and customers that just left the premises are asked to show their proof of purchase, and if a company is encountered with not handing a receipt more than 4 times in 5 years, they have to close.

Controls aimed at rich individuals take place mores spontaneously. Owners of luxurious cars are were stopped at the streets and asked for driver’s license and registration. The Revenue Agency then checks if the cars’ owners declare enough incomes to pay for their cars.














Tactics or actual revenues?

The raids are comprising and pricey. Garbarino along with others doubts the benefits in terms of revenues for the government.

“There is a lot to win if people pick up the paper and see that others got caught for tax evasion.”

Revenue Director Palumbo is however certain that the raids cash in revenues. According to recent figures €12.7 billion was collected last year, which is an increase of €1.9 billion from the year before.

“For every euro spent, four euro is collected,” he says.




The Revenue Agency’s anti tax evasion commercial

The Finance Police raids a store in Milan’s China Town




About Bergström Evelina