Italian newspapers say that new budget measures were likely to be unveiled within two weeks, with a property tax abolished by Berlusconi set to return, plus moves to tackle tax evasion and a cut in payroll taxes to lift employment. (GIAMPIERO SPOSITO/REUTERS)

In this nation where tax evasion can be considered part of a solid business plan, even dentists and hairdressers demand payment in cash — payments that then frequently vanish from accounting books like so many Cheshire cats.

But as the world’s eighth-largest economy struggles to pull back from the brink of a debt crisis that has much of the financial world on edge, Italy may be on the verge of a national reckoning over one of its most vexing financial — and cultural — problems: tax cheats.

Crisis-weary Maura Corinaldesi, for instance, joined a fast-growing Facebook group this month called “Friends of the Receipts” with more than 4,000 members naming and shaming tax-dodging trattorias and invoice-allergic plumbers. Corinaldesi, a 30-year-old public servant, took it one step further, calling the cops on a recent afternoon when a fruit vendor refused her a receipt.

A poll released this week by the Italian polling firm Demopolis found that 73 percent of Italians surveyed are now demanding tougher action against evasion.
Italy’s financial police are even taking the fight to elementary schools, trying to nip in the bud a cultural exaltation of the smartest evaders with a comic strip starring Finzy, a cute feathery cop who busts jewelry-wearing tax cheats and sniffs out loot stashed in exotic tax havens.

“If Italians are really going to fight this economic crisis,” Corinaldesi said, “there is only one place for us to start. We have to look at ourselves. We have to look at tax evasion.”

Cordinaldesi and others here appear to have a powerful ally in the anti-evasion crusade: Mario Monti, Italy’s new prime minister, an economist who took the reins from Silvio Berlusconi, the playboy billionaire who openly sympathized with the tax-cheating classes. In contrast, Monti put the nation on notice last week: He will try to pull the country out of its fiscal hole in part by targeting tax evasion, a societal ill seen as more damaging to public coffers than a bloated state sector or overburdened pension system.

Proposed new laws could soon change the way Italians buy and sell services every day, altering local traditions to combat a problem of evasion estimated to equal more than one-fifth of Italy’s entire annual economic output. Monti is also moving to reinstate one of the hardest duties to dodge — property taxes, abolished in Italy under Berlusconi.

The focus on tax evasion — a crime Italy has made surprising inroads against in recent years, only to stir up deep-seated resentments — comes as this nation and other southern European countries including Greece and Spain are coming under international pressure to tackle a host of growth-draining societal norms. In Italy, high evasion levels, for example, have dramatically forced up the tax rates for corporations and individuals who do pay their fair share, severely hurting competitiveness, constricting job creation and contributing to years of low to negative growth.

Failure to fully address such problematic traditions has directly contributed to the debt crisis threatening the global economy. At the same time, it has widened the divide between nations such as Italy and the other more modern, dynamic economies that share the euro, including Germany and the Netherlands.

“These issues are part of the core problem with Italian competitiveness and efficiency,” said Giuseppe Ragusa, economics professor at Luiss University in Rome. “They are also some of the hardest to fix.”

‘Only fools pay’

Dominated by small, often
family-run businesses, Italy’s economy has been hampered for years by, among other things, the common practice of “parentopoli” — the hiring of relatives and friends, often at the expense of building a meritocracy and fostering global competitiveness. Attempts to privatize state services to gain efficiencies, meanwhile, have become clouded by allegations of traditional political favor-pulling, resulting in payrolls stocked with under-qualified but well-connected workers.

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.

Yet in Italy, as a saying goes, “only fools pay,” and fools in some professions are few and far between. Jewelers, restaurateurs and real estate agents all declare an average taxable income of less than $18,500 a year — lower even than mechanics, who at least admit to earning roughly $30,000 a year.

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. Berlusconi himself managed to fend off at least two allegations of false accounting by forcing a law through Parliament that decriminalized falsification of company accounting books.

“Here’s the real problem with Italy: You have people with villas and back yards the size of a park still declaring 15,000 euros a year,” or about $20,000, said Sen. Enrico Morando, a member of a key parliamentary budget committee.

Keeping the change

There is reason, however, for hope. The world’s largest economies, prompted by the U.S. financial crisis, agreed in 2009 to take a zero-tolerance line on tax evasion. Since then, the Italian revenue service has managed to recover $13.6 billion in evaded cash, more than any other nation in Europe. It happened as the Italians pushed through strong new laws, including one that legally declared cash discovered in tax havens to be the spoils of evasion, putting the burden of proof on suspected tax cheats to show otherwise.

Italy’s 63,000 tax police have also stepped up investigations, backed by tougher penalties including mandatory jail time for the biggest cheats. But the recent crusade has provoked a fervor in an anti-tax nation notoriously distrusting of government. A handful of Sardinian shepherds, for instance, are on a hunger strike in opposition to official attempts to collect back taxes, while the imposing revenue service building in Rome has become an increasingly popular protest site.

Nevertheless, Italy is poised to go further. Lawmakers are under pressure to approve a law that would fight evasion by bringing Italy closer to becoming a “cashless society.” All transactions above a certain amount — some are calling for a threshold as low as 100 euros, or roughly $135 — would be required to be made by credit card, debit card, check, electronic transfer or other traceable means.

But not everyone here is optimistic about speedy change. After Corinaldesi, for instance, called the police on the produce vendor who refused to give her a receipt, she discovered that a law on the books still gives him an out for having a broken cash register — despite the fact that it’s been broken for a very long time.

“The country needs to change, but I’m not yet sure it will,” she said.