Dec 17, 2010

Tax and Controls over People

Yesterday I have known from the radio program of Oscar Giannino on Radio 24 that from January the first Italian citizens are going to be a little bit more ground down by taxes, State and its beaurocracy.
We already have one of the highest tax rates in the world, a messy beaurocracy and an impressive tax evasion rate. Up to now our tax rate didn't do much in reducing public debt and people feel their money are inefficiently used. The impressive number of laws didn't do much in improving legality, nor our freedom. We need lawyers, commercialists and any kind of professionals just to do things that could be easily done at home by ourselves if only well designed. And whatever you do there is almost surely some kind of tiny crazy law you're breaking. Eventually we end up with a rather high degree of illegality, which I would define frictional illegality.
Is then tighter control going to solve those problems? I don't think so. On the contrary my impression is that honest people are going to be worse off. Again.

Before going on I must warn you that I had no time to get into the offical documents, so I will report what I've heard  and read  from sources that I believe reliable. Any mistake is mine.

The news is that from next year we will have some changes in the fiscal control procedure called the "Redditometro" (in English it sounds more or less like "incometer"). The procedure is officially aimed at contrasting fiscal evasion by tracking payments, comparing income and expenditure etc. One of the weird things is that people will have to signal any purchase higher than 3000-3500€. The actual numbers are still unkown as well as the exact procedure (and this is already unaccetable being December 17th). But why should I signal that?
First, I don't believe it's a citizen duty, I believe it is the government that has to control, not the private citizen to signal. Citizens should be free to live as easy as possible.
Second, this stuff is going to challenge smart people to find ways no to pay. And those smart guys are not likely to be among the most honest people nor the poorest (not because poor people aren't smart, but because they often just can't escape taxation).

Why 3000, 3500€ or whatever is unclear. Should that regard any payment, it would mix up stocks and flows, income and wealth, durable and perishable goods. Do you buy a 15,000€ car using your monthly income of 1,500€? Do you buy a 500,000€ house with your annual 20,000€ income?

Another weird thing is that if your expenditure for certain goods, decided by the administration, is more than 20% above your income (why 20%?), than you are subject to control. It is sufficient for the administration to have a suspicion. And at that point it's up to you to prove that you are ok.
I believe here things are dramatically reversed. It's the State that has to prove that I did something wrong, not the citizen that has to prove that he is right. The State can not intervene just for a suspect, something that I find prone to disctretion and abuse; it must have hard evidence, and I don't think this is the case. (While I read that the article requiring sure evidence in order to start the control procedure has been suppressed)

Finally a general thought. Is Italian tax evasion high because of high tax rate or just the opposite?
Of course I don't know. But suppose Italians have an endemic tendency not to pay taxes, which could be true. We start from a situation in which taxes are low, yet tax evasion is relatively high. There might be a public deficit requiring higher taxation. But then increasing taxes is just a stronger incentive not to pay for those who can and those who already didn't are surely not willing to change their behaviour. The burden is on dependent work, normally not very high earners; and maybe employee are even incentivated to switch to an independent activity where they might evade taxes more easily.

Taxing more a population with a tendency not to pay might make things worse off, especially for honest people. You want to pay, you always paid, you hate evaders, but after a certain point you might feel government is stealing half of your income just to throw it in the garbage or to pay 30,000€ a month to some beaurocrat who doesn't do his job. You see your neighbour who's not being paying for years and was able to buy a car nicer than yours. He didn't get punished because of one of the many "una tantum" (only once) tax amnesty (and we all know the last they did is not going to be the last). Some of your friends did the same... Are you ready to be the country saver and to be seen as the idealistic idiot from people around you? I think our current fiscal policy incentivates this kind of bad thinking.
Even though initially tax evasion could have been high for other reasons, then increasing the burden may cause more tax evasion.

But there are people saying that evasion is independent of the tax rate. Some of them also claim that high taxes are a result of evasion. I don't like to think in this way, even though I recognize there is some truth, I just don't think it is the main explanation; but even if that is right still increasing taxes is not desirable for tax payers. Should the government make honest people pay instead of punishing who evades? You do not punish an entire class because a single student cheated: if he is a real cheater he is not going to talk, while the others will feel stupid for not having cheated since they get punished anyway.

Of course, no justification for fiscal criminals, I don't want to incentivate people not to pay; but no justification as well for bad design of Italian fiscal policy. It doesn't really matter who came first if evasion or high taxation, but they might be self reinforcing if we don't find a way to incentivate legality and to make the fiscal law simple and the payment as easy as possible. Private citizens have the right for the State not to bother them, the government should make things easy and simple, efficiency makes people happy to pay. Pushing, suspecting and controlling them, while not making a good use of public money, means oppression and only nurture that feeling even in the most honest people.

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