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Italians Have a New Tool to Unearth Tax Cheats

Monday, 28 Jan 2013 | 4:21 AM ET
Ian Cumming | Axiom Photographic Agency | Getty Images

Despite the government's best efforts, tax evasion remains something of a pastime in Italy, where, famously, more than a few of the Ferrari-driving set claim impoverishment when it comes to declaring their incomes.

So this month, not without controversy, the National Revenue Agency decided to try a new tack. Rather than attempting to ferret out how much suspected tax cheats earn, the agency began trying to infer it from how much they spend.

The new tool, known as the ''redditometro,'' or income measurer, aims to minimize the wiggle room for evasion by examining a taxpayer's expenditures in dozens of categories, like household costs, car ownership, vacations, gym subscriptions, cellphone usage and clothing. If the taxpayer's spending appears to be more than 20 percent greater than the income he or she has declared, the agency will ask for an explanation.

In a country that is desperate for revenue to straighten out its ailing public finances -- and where newspapers routinely publish articles about Lamborghini-loving proletarians -- one might expect the redditometro to attract some support, at least among Italians who file truthful tax returns. Yet the redditometro has run into strong opposition, not least from the nation's suffering retailers, who are worried that it will discourage consumer spending and sink their businesses further. Others have criticized it on civil rights grounds, saying it is overly intrusive.

However it is received, the measure reflects the government's widening effort to persuade more Italians -- some say, to bully them -- to comply with the tax code.

''This tool is part of a broader strategy of tension, which is the real objective,'' said Andrea Carinci, a professor of tax law at the University of Bologna. ''Not to create panic, but to make taxpayers understand that they have to be virtuous, because there is no escaping. The revenue agency wants to give a message to frighten people.''

The message is being received.

Serena Sileoni, a legal expert with the Bruno Leoni Institute, an Italian research organization, said in an interview on Radio 24 that forcing taxpayers to keep receipts to document their spending amounted to ''an act of psychological terrorism.''

Even before the redditometro was introduced, the Italian tax authorities had been steadily adopting tougher measures that have begun to bite. The financial police said last week that in 2012, they uncovered more than 8,600 full-blown tax evaders -- individuals who were not in their files at all -- with more than $30 billion in undeclared income. Another $23 billion in income that should have been declared on Italian tax returns was unearthed abroad, they said.

Even so, those figures represent a relatively small part of Italy's tax collection shortfall. The national statistics agency estimates that as much as 18 percent of Italy's gross domestic product comes from the underground economy; if taxes were paid on all of that money, the state would take in as much as $162 billion more each year.

When the redditometro was first presented in November, the tax authorities said that by their analyses, about one-fifth of all Italian households exhibited ''contradictory results'' in their returns. Such contradictions do not necessarily imply tax evasion, officials hastened to add, but they would be enough to warrant closer scrutiny in some cases.

The redditometro cross-checks spending against the type of household -- say, young single adults, families with children, or retirees -- as well as where the taxpayer lives. It also considers national averages for various kinds of spending, calculated by the national statistical agency, Istat.

Critics decry what they say is a presumption of guilt, and say the hunt for tax evaders is having a chilling effect on parts of the economy.

Sales of domestic sports cars and luxury autos plummeted last year, in part because of higher taxes and tighter tax scrutiny, industry experts say. Other big-ticket luxury goods are also suffering. ''People feel under such scrutiny, they're afraid -- and that stops them from purchasing items that are seen as luxury goods,'' said Raffaella Cortese, the owner of a gallery in Milan that specializes in contemporary art. ''It's paralyzing for our field.''

Even the Italian Association of Veterinarians raised an alarm last week, saying that one pet owner refused to have an identifying microchip placed in his dog because he did not want to turn up on the radar of the redditometro, which monitors pets as one sign of wealth.

Others object to the way the new focus on spending is being applied retroactively -- officials are starting with income tax returns filed in 2010 -- and have even questioned the redditometro's constitutionality.

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Ms. Sileoni, of the Bruno Leoni Institute, said the new approach would probably prompt a flood of lawsuits from taxpayers -- cases that, statistics show, the agency often loses, she said. A consumer advocacy group said this month that it would challenge the redditometro in court.

Others say that using national averages will unfairly ensnare honest Italians whose spending habits happen to be outside the norm.

''If this instrument is used in a bureaucratic and automatic way across the board,'' it could be ''very dangerous,'' said Enrico Zanetti, a tax expert and fiscal consultant for Italia Futura, a centrist political party. No matter what the statistics say, not everyone eats meat, has a dog or goes to the hairdresser each week, he said.

With an election campaign looming this year and populism in the air, candidates have begun distancing themselves from the genesis of the tax tool. But there is plenty of credit -- or blame -- to go around.

The redditometro was originally proposed in 2010 by the conservative government of Silvio Berlusconi, and approved by its successor, the nonpartisan government led by Mario Monti. Both men are in the running for prime minister this year.

Mr. Monti, who now leads a coalition of small centrist parties, described the redditometro as a ''time bomb placed on the road'' by his predecessor. For his part, Mr. Berlusconi has argued that the Monti government transformed it ''into an instrument that frightens citizens.''

The tax authorities are trying to quell some of those concerns, insisting that the redditometro will be used only on the most egregious tax evaders -- ''fake poor people'' who brazenly lie about their incomes, as Marco Di Capua, the deputy director of the national revenue agency, has called them.

''It is not an instrument of mass verification,'' he said.

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