Why is tax evasion so bad in Italy?

At first glance, it might seem odd that Italy’s debt woes are threatening to torpedo all of Europe. The country’s current finances, after all, are fairly sound: in 2011, Italy will take in more in taxes than it spends, building up a primary surplus of about 0.8 percent of GDP. The problem, alas, is that Italy is paying for the profligate ways of governments long since booted out of office. When you include interest payments for the debt that Italy accumulated over the years — reaching some 4.8 percent of GDP per year, the second-highest in Europe after Greece — then the country is in real trouble.

(LASZLO BALOGH/REUTERS) That means Italy needs either to grow its way out of debt (hard to do right now) or run up even bigger surpluses, either by cutting spending or raising taxes. And that sort of grueling austerity could hurt Italy’s economy even further, worsening the problem. A more appealing possibility is for Italy to crack down on rampant tax cheating in the country. My Washington Post colleague Anthony Faiola has a great exploration of Italy’s untaxed “shadow economy” today, with this striking stat:

But no problem is more glaring than Italy’s thriving “shadow economy,” where evaded taxes on legal commerce coupled with lost taxes from illicit or under-the-table deals are costing the national treasury about $340 billion a year. If collected annually, that amount could pay back every last cent of Italy’s $2.6 trillion debt in just under eight years. ...

If official tax returns are believed, this nation of 60 million with some of the most expensive urban real estate in the world is home to only 394,000 people earning more than $135,000 a year. Newspapers in Rome and Milan are rife with stories of “evasione totale ” — or entrepreneurs caught tooling around in Ferraris and Porsches despite declaring almost no income.

But why does Italy have so many tax cheats? A lot of the reporting suggests it’s just part of Italian culture—”only fools pay,” as the common saying has it. Back when he was prime minister, Silvio Berlusconi used to argue that high taxes caused tax evasion. Indeed, some research has found a vicious tax cycle in Italy, where tax evasion leads to higher taxes on the remaining taxpayers to make up the revenue, which leads to more evasion…

But a simpler explanation still comes from economist Tito Boeri, who notes that tax structure can have a big influence on evasion rates. Italy has remarkably low taxes on assets that are difficult to hide, like property. Only 2 percent of Italy’s total revenues come from these sources, compared with 10 percent to 20 percent in other wealthy countries like the United States and Britain. Not surprisingly, one of the big new moves by new prime minister Mario Monti to reinstate the property tax — which, incidentally, was abolished under Berlusconi.