[Dave Birch] The new Italian Prime Minister Mario Monti said, in his initial address to the Senate, that he is declaring a war on cash. Now that the technocrats are in charge, I expect to see more of this kind of fighting talk. Monti is apparently proposing to reduce the maximum cash transaction (i.e., the biggest transaction you can make without reporting it) from the current €2,500 to €300. This would, at a stroke, render all transactions made with €500 notes reportable, just as I was suggesting last week.

Some might argue that you shouldn’t be allowed to purchase anything for more than €450 in cash. I would certainly vote for this

[From Scrap it]

Then the police would be able to stop people in the street and prosecute them for having a €500 note, which would certainly raise the cost of criminal activities! The reason for this drastic announcement is the parlous state of the Italian government, made worse by the enormous scale of tax evasion there.

However, companies deal in cash to evade tax, especially in the south where organized crime is endemic. Untaxed transactions in Italy translate into a loss of about 100 billion euro of revenue annually, or 22 percent of the gross domestic product.

[From The Florentine – article » War on cash]

Tax evasion is pervasive and powered by a cash-based economy. The Italian economy and the British economy are of comparable size, but in the UK last year people spent €356 billion on debit cards (the greatest share, by value, of retail transactions) whereas in Italy they spent only €63 billion, or around a sixth as much.

With a bright blue apron, lip stud and cheerful smile, she is known to all except the Italian taxman — for whom the Neapolitan waitress has never existed and probably never will. Paid 100 euros a week in cash, the high school dropout is one of hundreds of thousands toiling away in a parallel Italian economy where cash is king, contracts or receipts do not exist and the taxman is cut out of the equation altogether.

[From Italy’s shadow economy moves into political spotlight]

Reducing tax evasion by lowering the threshold for the use of cash will both raise revenues for the state and reduce the tax rates, since if everyone pays their share, the shares will be less (all other things, such as government fiscal incompetence, being equal). It really bugs me that I have to pay such high taxes in the UK when so many people evade them completely, and I’m sure a great many Italians feel the same: they would pay their share if they thought other people were.

The reason for such high taxes is mainly because the government has to collect as much as it can from the poor devils who actually do pay taxes – namely those who are paid above-the-board salaries.

[From Clamping Down on Tax Evasion in Italy]

The squeezed middle, as we call them in the UK. But this isn’t really about waitresses hiding tips or childminders working off the books.

Fiorio of the University of Milan says wealthy Italians are adept at shielding income from taxes. And a lot of rich people look poor on paper. “Less than 1 percent of the people earn, say, more than $120,000,” Fiorio says. “At the same time in the last years you had an increase in luxury cars bought, you had an increase in yachts bought. And so clearly this is hiding something.”

[From Avoiding The Tax Man Could Cost Italians Dearly : NPR]

This may well prove to be a real barrier to change. If it were only the poor evading tax on a grand scale, then you might get a crackdown. But when it’s the rich, including members of Parliament (I’m sure), then it’s going to be much harder to take action.

A much bigger chunk of the shadow economy is the “richer” part seen in the country’s north — one of professionals like dentists and doctors who evade tax, and companies that violate rules by paying overtime off the books or failing to issues receipts for some transactions.

[From Italy’s shadow economy moves into political spotlight]

I’m certainly not saying that this is a specifically Italian problem, although the scale of the problem in Italy is certainly significant, but it will be interesting to see how the new technocrats decide to approach the issue of cash and electronic payments, the balance between carrots and sticks.

While the Greek economy has the largest underground estimated at 25.2 percent of GDP, the PIGS countries (Portugal, Italy, Greece, and Spain) average 21.7 percent of their economic activity hidden from the official statistics. For comparison, 14.7 percent of German, and 7.8 percent of American output is estimated to be confined to the underground.

[From Can the Underground Economy Save Europe? – David Howden – Mises Daily]

Now, obviously, I don’t understand the cultural background in Italy, so it’s hard for me to comment on why it is (other than tax evasion, criminal enterprises and bribery) that cash usage is so high there, but it’s not because Italy lacks infrastructure. There are cards and terminals, it’s just that they are used way less than in other European countries. There are 36m debit cards in Italy used for that €63 billion in annual charges, but Italians make 24 card payments each per annum compared to 8 in Greece and 132 in the UK. Carlo Sangalli, head of the retailer’s federation in Italy, blames this firmly on the merchant service charges (MSCs) levied by Italian banks. That may be the case, but even if merchants accept cards, Italian consumers will take some convincing to use them. It will be very interesting to see the balance between carrot and stick that will be needed to change this.

This preference for paper in Italy can be attributed to 52% of Italians not really wanting to use plastic money. The fear of fraud and credit card cloning accounts for 14% of Italians not wanting to use plastic. 10% of Italians simply object to paying a fee for having a credit card, or so research by Alter Ego discovered.

[From Clamping Down on Tax Evasion in Italy]

Perhaps it’s time to go back to my plan of making an interchange-free debit card a condition of having a banking licence, or go down the Dutch route of bundling the MSC for small transactions into the monthly terminal rental or the Brazilian route of offering tax breaks for merchants accepting less cash. If none of these work, then there are still more options. You don’t have to get rid of cash to cut down on tax evasion. Mr. Monti has some other alternatives: he could steal data, for example.

Herve Falciani stole account data for around 79,000 clients three years ago and fled to France while under investigation before eventually handing it over to authorities. In April, French prosecutor Eric de Montgolfier revealed that the stolen files have been decrypted and launched a tax investigation based on over 8000 accounts related to French customers. The following month Italian police launched their own investigation after being given a list of around 7000 account holders by French counterparts.

[From Finextra: Spain uses stolen HSBC data for tax probe]

Hhhmmm… tempting. But with cash accounting for 88% of retail transactions in Italy (second only to Greece in the EU) there’s no doubt that it’s the low hanging fruit.

These are personal opinions and should not be misunderstood as representing the opinions of 
Consult Hyperion or any of its clients or suppliers

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