In Italy, the spotlight on tax evasion, and therefore on the need to fight it, turns on whenever the government needs additional resources to finance expenses. To avoid upsetting voters, new potential taxes are never mentioned. Rather, incumbent governments focus on fighting tax evasion. Yet, the announcement is hardly followed by action, tax evaders do not worry and all comes to nothing. Instead, new commitments to more effective tax enforcements are often accompanied by tax amnesties, and these do encourage more tax evasion.
Over the years, Italian tax evaders have indeed benefitted from various tax amnesties. A notable example is the tax shield devised some years ago for financial assets (securities, bank accounts, insurance policies, and the like) and real estate illegally held abroad and never reported to the tax authorities. By paying a relatively small sum, and with the guarantee of anonymity, many – presumably even the straw men of major criminal organizations – were able to regularize their situation.
It is evident that implementing a tax amnesty creates the expectation of future amnesties. The result is that in Italy the ratio between overall estimated tax evasion and GDP is twice as high as the EU average (see Fig. 1).
Fig. 1
What does economic theory say about tax evasion?
According to the economic literature, compliance with tax laws depends on both extrinsic and intrinsic motivations. Extrinsic motivations relate to tax enforcement, which establishes the probability of detection and the level of punishment. Intrinsic motivations depend on the belief that the size of the fiscal burden is fair and is fairly distributed among taxpayers, and the belief that resources are used to the benefit of the public. Both beliefs are really weak in Italy.
Beside amnesties, which affect extrinsic motivations, Italians believe that tax evasion is encouraged by an unjust tax system. As a result, the perception that the tax burden is excessive and unfairly distributed generates a sense of tolerance regarding evasion and contributes to explaianing why the idea of a crackdown on tax evaders often remains on paper.
Policymakers are well aware that many businesses would shut down without tax evasion. Silvio Berlusconi declared that, in Italy, it is morally justified to evade taxes. Giorgia Meloni, referring to taxes, spoke of state extortion. The fact that two Prime Ministers do not speak out against tax evasion makes two things clear. First, the level and distribution of the tax burden in Italy are intolerable. Second, there is no way to reduce the tax burden unless one cuts public spending. This situation, however, worsens the contrast between those who pay taxes because they cannot evade them (typically employees and retirees) and the others. Such disparities further weaken intrinsic motivations to pay.
Indeed, taxable incomes from employment and pensions accounted for about 83% of the total. Furthermore, according to 2022 tax return data, the poorest 44% of taxpayers pay only 2.4% of the total Personal Income Tax (IRPEF), while the top 13% of taxpayers (those with annual incomes exceeding €35,000) generate 59% of the revenues (Fig. 2).
Fig. 2
In brief, the overall tax burden is very high and, more importantly, heavily concentrated on a small number of taxpayers subject to a personal income tax. If policymakers truly want to reduce tax evasion, they should begin by cutting unproductive public expenditures and balancing the fiscal burden by eliminating privileges, exemptions, and thresholds.
