Tax evasion remains the central issue in the relationship between public finance and the economic system in Italy. Not only for an ethical question of fairness, as for the effects on the country efficiency.
The latest “Report on the unobserved economy, tax and contribution evasion” shows the estimates of Italy’s tax dodging, summarised by two indicators: the tax gap, defined as the gap between taxes and social contributions paid and the taxes and contributions that taxpayers would have to pay under a fully-fledged scheme; and the propensity for evasion that is the ratio between the amount of the tax gap and the theoretical revenues.
The tax gap fell markedly in 2018, reaching a figure of 102.8 billion euros, corresponding to a 19.3% evasion propensity.
However, the estimates contained in the Report do not cover all taxes and contributions, with the most important omission being the evasion of self-employed social contributions. Considering these items there are about 125 billion euros of taxable income subtracted from the tax authorities, with strong repercussions on the public deficit and the consequent public debt, placing Italy on top of the European and OECD countries for tax evasion.
Nonetheless, tax evasion seems to be heterogeneous among regions: in Northern Italy, where the most significant share of business and income is realized, more taxable income is evaded in absolute value, while Southern Italy has the record for number of evaders.
The propensity for evasion in the period 2014-2019 shows a different trend between the different taxes. The IRPEF from enterprise and self-employment is the tax with the highest propensity for evasion, with a marked growth in recent years. In 2019, the tax gap is expected to exceed 32.4 billion euros, corresponding to a propensity for evasion of 69.2%. IRES and IRAP showed a slight decrease in the propensity to evasion, which in 2019 was of 22.8% and 18.4% respectively.
The sum of the tax gap of IRES and IRAP for 2019 is slightly above 13.4 billion euros.
Other taxes (VAT, rental tax, and Rai TV license) showed a marked improvement. The tax gap for VAT has been reduced by 9.3 billion in 2017-2019 period, reaching for the first time a propensity for evasion of less than 20%. Nevertheless, VAT remains the second most evaded tax, with a tax gap close to 27 billion euros.
Shortly, Italian tax evasion is something that is more than rooted in the country, and it cannot be just addressed with the recurring proposal for “fiscal peace” that in period of political election emerges once again.
This, of course, is helped by the inefficiencies of governments in addressing the topic, a characteristic that has very distant origins and explains why a shortsighted political vision finds it difficult to effectively address the issue of tax dodging.
Nonetheless, government might be perceived as operating as a ‘grabbing hand’ or a ‘helping hand’. In the first case, an increase in government size leads to state predation and to an upward shift in tax evasion. Conversely, if the ‘helping hand’ role dominates, an increase in the size of government would strengthen its state capacity, reducing in turn tax evasion. Whether a ‘grabbing hand’ or a ‘helping hand’ dominates depends on the quality of government and of public goods provided.
In this respect, a tipping point could be, as for other issues, the NRRP, which among the reforms includes that of the tax administration (Reform 1.12 of the Plan) with the aim of combating evasion. The measures, recently approved by the Draghi government, include the extension of electronic invoicing to flat-rate taxpayers (but only up to 25,000 euros in revenues) and incentives for digital payments via debit and credit cards.
The Italian tax authorities are putting considerable effort into increasing and enforcing tax collection and at the same time creating a constructive dialogue with taxpayers. Indeed, the Italian tax authorities are putting considerable effort into implementing programs that engage the Revenue Authority and taxpayers in a constructive and transparent relationship, to prevent tougher audits and confrontation.
The Revenue Agency has a dual approach about taxpayers. On the one hand, the Revenue Agency maintains a very antagonistic and rigid attitude during tax audits, trying to identify the weaknesses in taxpayers’ behaviour to increase tax collection; on the other hand, it has a strong interest in dialogue and promoting voluntary tax compliance.
Regarding prevention and law enforcement activities, the «Guidelines for the achievement of fiscal policy objectives in 2022-2024 period» provided for a significant increase in communications, with the so called “compliance letters”. The Revenue Agency is also committed to increase the number of staff dedicated to this activity and to strengthen the technological infrastructures and selection algorithms, as well as the interoperability of databases, making the most of the information flows resulting from the automatic exchange of information, provided for by European Directives and international agreements, and those deriving from electronic invoicing integrated with those generated by the telematic transmission of fees relating to transactions to final consumers.
It is important to note that this approach is perfectly consistent with the forecasts contained in the NRRP referring to the «reduction of the tax gap», which provide for specific reforms according to two directives:
further strengthen compliance incentive mechanisms based on sending communications to taxpayers.
strengthen the control activity, increasing its effectiveness, including by better prior selection of the fiscal positions to be audited.
The management of tax risks inside companies and at the country level, by putting in place the tax control framework, may also prevent reputational risk, and is viewed positively by a company’s and a country’s stakeholders, financial investors, and the overall market
In this respect, there should be a greater attention on how companies and countries generally manage tax risks, and this could be addressed through a more comprehensive tax culture that is promoted throughout the level of the society. Everyone can be committed on an effective and equal tax regime, and benefit from the overall services provided by the country and local municipalities.
Sources: MEF, OCPI, Italian Revenue Agency, Bloombergtax.com
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