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Italy tries raising the social stigma on tax evaders

ROME — On a recent morning, Maurizio Compagnoni, an employee of Italy’s internal revenue service, stood before a classroom of middle school students in a leafy neighborhood here, preaching the virtues of paying taxes.

"You may think, ‘I’m 13, why should I care about taxes?"’ he said with earnest enthusiasm as the students looked on, slightly bored. "But you can take a step in the right direction. You can change the behavior of the people around you, your parents and friends."

Compagnoni is one soldier in a battle — often uphill — to persuade Italy’s famously tax-evading citizens to pay up. Such efforts, along with a new blitz of public service announcements trying to raise the social stigma on tax evasion, have become crucial as Italy struggles to reduce its $2.5 trillion public debt and fend off speculative attacks.

The tax authorities say Italy loses an estimated $150 billion a year in undeclared revenues, while the national statistics authority places the underground economy at about 17.5 percent of gross domestic product — the third highest in Western Europe after Malta and Greece but before Spain. Other experts place the percentage much higher.

To tackle the issue, Prime Minister Mario Monti’s new $40 billion austerity package, which received final approval Thursday in the Senate, includes tougher measures that will allow tax officials to peer into Italians’ bank accounts to check declared income against bank deposits — not to mention yacht, car and home ownership — under a new cross-referencing initiative.

The measures also prohibit cash transactions above $1,300 — common in Italy, where low credit-card use keeps private debt low but evasion high — and lower the threshold for which tax evasion becomes a criminal offense. The government has also set an additional 1.5 percent tax on assets repatriated under an earlier tax amnesty, raising the levy for those requesting anonymity.

Italy is filled with colorful anomalies. According to tax officials, nearly half of boats larger than 35 feet are registered to people who declare income of less than $26,000 a year, and 604 airplane owners declared annual income between $26,000 and $65,000.

Radio 24 recently reported that there are about 2.5 million luxury cars in Italy, yet tax officials say that in 2009, less than 2 percent of Italy’s 41 million taxpayers declared annual income of more than $260,000 — indicating that many declare far less income than their lifestyles would suggest.

To rein this in, Italy is introducing the cross-referencing initiative, dubbed the "income-o-meter," to be put in place in the coming months.

"If you declare $26,000 a year, you can’t buy a piece of real estate valued at $1.3 million," said Attilio Befera, the director of the Agenzia delle Entrate, Italy’s internal revenue service. Discrepancies like that will now prompt an audit, Befera said.

It is a cultural battle as much as a logistical one. Noting that it is a Roman Catholic country, Befera said: "We have the concept of pardon, of penitence. From a fiscal point of view this is the sanction that I will pay when they find me." (The previous government introduced various tax amnesties, which critics said condoned evasion.)

"In the United States, the first forms of taxation were in the far West for the defense of the community, for a kind of sheriff, and anyone who didn’t pay was expelled from the community," Befera said. "Here, the first forms of taxation were imposed by princes, usually foreign, to pay for their own battles. So our citizens did everything not to pay because they saw nothing in return."

This heritage lingers. Many Italians approach tax evasion with true delight, taking pride in outsmarting the system, aided by books sold online and by Italy’s 113,000 tax accountants.

Many Italians say rule-breaking is a question of survival.

"When I first opened my restaurant, my accountant sat me down and told me that if I wanted to pay all my taxes, I might as well close up shop immediately," said Giuseppe, a restaurant owner in Rome who said he was a basically honest person who had been "forced to evade taxes" because of Italy’s costly fiscal system.

Business associations have urged the government to reduce the tax burden for companies and workers and raise it on assets. This month, the governor of the Bank of Italy, Ignazio Visco, said that Italy’s tax burden had risen to 45 percent overall and called for urgent reforms to help lower it.

"Tax evasion has a significant impact on growth," said Alberto Bisin, an economist at New York University. He said it kept companies from expanding by keeping productivity low — and less traceable. "I’m not saying that we should let people evade," but that reform is difficult as long taxes are so high, he said.

A country where some bear a heavy tax burden and others do not pay anything creates a "skewed system, distorting and horrible," he added.

Adding to the challenges, 5 million Italians are self-employed, including many doctors, contractors and small-business people, compared with 2.7 million in France and 3.9 million in Germany. Evasion among them is rampant.

In 2009, the last year for which data is available, just under 50 percent of Italian workers, or 20 million people, declared annual income of $20,000 or less a year, according to tax agency data. Many are salaried workers whose taxes are automatically deducted, but others are self-employed or most likely have additional income off the books.

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