Can Europe Make It?

Italy's cash tragedy - help stop the Italian government from making a terrible mistake

A new proposal by the Italian government will almost certainly favour tax evasion in a country where it is already rife. Here's how we can stop it.

Andrea Capussela
29 October 2015

Public domain/ Italian government has made a mistake. Not the worst a government can make, nor is this the worst government that Italy has had: still it is a manifest and damaging mistake, and the government seems obstinate. Not even the criticism of the head of the anti-corruption agency (‘very mistaken’) and the national anti-mafia prosecutor (‘a favour to crime’) moved it. So a civil society organization has launched a petition, to persuade the government to change its mind.

At stake is more than just one mistake. Since the turn of the century, in fact, politics in Italy has become increasingly personalized and hierarchical. This evolution is not unique to my country, of course, but it seems particularly pronounced there: and the logic of this model tends to stifle public debate, discourage political participation, and exacerbate both the permeability of the state to special interests and the parallel difficulty of diffused, non-organized interests to make themselves heard. (I touched this problem on this blog, here and here).

The government operates under the incentives that this logic generates. If powerful interest groups demand policies beneficial to them but harmful to the public interest, its incentives are likely to lead the government to oblige, because the citizens who bear the cost, in often imperceptible measure, typically lack the information, the spur, and the organization to react. For reasons that Mancur Olson explained in The Logic of Collective Action, fifty years ago, citizens generally remain silent. But their silence reinforces that logic, for political accountability weakens if it is rarely enforced.

An effective public reaction, conversely, would strengthen it. Were they to succeed in imposing a political price for disregarding the public interest, citizens would alter the government’s incentives and make the political system more open (sustainably so, for success breeds audacity). Hence the broader significance of this story.

The government’s mistake concerns paper money. Like other members of the European Union, Italy limits the use of cash: purchases or transfers above a certain threshold can only be done with cards or other traceable means of payment. The aim is to fight tax evasion, facilitated by anonymous payments, and the informal economy, which is largely cash-based. Italy was one of the first states to introduce such limits, for good reason: according two very recent studies – here and here – the peninsula still has the highest levels of tax evasion and economic informality among the EU-15, after Greece.

The limit was introduced gradually, as elsewhere in Europe, to allow consumers, firms, and banks to adapt. Over about a decade it declined from €12,500 to €5,000 to €2,500 to €1,000. The government now wants to raise it to €3,000.

This proposal reverses that trend and ignores the rationale of these limits. The comparison with France is particularly striking. The two studies mentioned above estimate that in Italy tax evasion is three times higher than in France (33.6% of payable VAT vs. 8.9%), and economic informality is twice as large (20.8% of GDP vs. 10.8%). And yet in the space of a few days Paris has lowered the limit from €3,000 to €1,000 whereas Rome has announced its intention to do exactly the opposite.

Government officials have argued that this will not facilitate tax evasion and economic informality. Unsupported by data or new research, this argument contradicts well-established results reached by the theoretical and empirical literature (see, most recently, these studies by Kenneth Rogoff, the Harvard macroeconomist, and by Europol, the EU’s law enforcement agency). The government, in effect, is asking us to take their word for it.

This would seem imprudent, also because there is no off-setting benefit. Government officials have claimed, somewhat tentatively, that raising the cash limit will stimulate spending. They are implying that this year a sizeable number of people refused to buy something costing more than €1,000 because, and only because, they could not pay it in cash (and will therefore buy it once they can pay it in cash). Even if one accepts its logic, however, this argument founders on the observation that the €1,000 limit is in place since 2011: consumers and firms have necessarily already adapted to it, and hardly anyone will spend more because, and only because, the limit is raised. The stimulus to consumption, if any, will be imperceptible.

Besides facilitating the transactions of the black and grey economies, moreover, raising the cash limit shall also send a bad signal to society, for it visibly contradicts the measures undertaken by the government to intensify the fight against tax evasion, tarnishing their credibility and effectiveness. Taxpayers are thus likely to expect that tax evasion will decline less than it would otherwise have done, ceteris paribus, and their propensity to evade taxes shall correspondingly rise. It seems impossible – certainly for me – to estimate the effect on tax compliance, which is anyway unlikely to be very large. But there is no doubt that it will be negative.

So this measure fits rather well with the strong definition of the word ‘mistake’: a manifestly irrational, unjustified, and damaging choice. Its proximate cause lies probably in the demands of some interest groups – retailers, for instance, or some service sectors where tax evasion is particularly high – and the parallel pressure of a member of the governing coalition (a small clientelistic spin-off of Berlusconi’s party), which has trumpeted this measure as its own success. Its root cause is the logic I described above.

This measure is linked to the 2016 budget, which goes before parliament now and is unlikely to be approved before mid December. So the government has plenty of time to change its mind. As things stand, however, it is unlikely to. Because the parliamentary opposition is mostly composed of two incompetent, populist parties, whose kicking and screaming is generally as loud as it is ineffective, and of Berlusconi’s party, who was convicted precisely of tax fraud. And because the mainstream media seems rather soft on this government, which they view as Italy’s ‘last chance'. Only civil society can persuade the government to remedy this mistake.

This is why I invite you to sign this petition. Launched by Riparte il Futuro (Restarting the Future), it has collected about 30,000 signatures in less than a week.

(Disclosure: I was involved in launching it. Instructions: the webpage is in Italian, but you just need to click the blue (Facebook), light blue (Twitter), or grey (email) button on the right-hand side, just below the red banner with the number of signatures collected).

If the petition succeeds, next year the black and grey economies will be lower than they would otherwise have been, and, more importantly, political accountability will have been strengthened. Success, moreover, would encourage civil society to become more active in the future, gradually making Italy’s democracy more open and more trusted by its citizens.

I do not appeal only to your civic solidarity. I also rely on your long-term interests, especially if you are European. Remember, in fact, that tax evasion weighs on Italy’s debt/GDP ratio, which is the single biggest latent threat to the survival of the euro, and therefore also of the EU. And consider, equally, that a more open democracy can better discuss, and more effectively implement, the far-reaching changes that Italy needs to undergo in order to become not just a better society, but also a better partner for its European peers.

In December I shall write again, to tell you how many signatures we collected, how the political system responded, and whether you can buy that splendid €1,499 bicycle in cash.

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