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Is Berlusconi Getting a Poll Bounce From Tax Evaders?

Silvio Berlusconi
Jock Fistick | Bloomberg | Getty Images
Silvio Berlusconi

Former Prime Minister Silvio Berlusconi made gains in opinion polls earlier this month, narrowing the gap between the front-runner Pier Luigi Bersani and his center-right coalition.

But the way in which he has done it is probably the most striking.

The media mogul, who has been convicted of tax fraud, has promised to introduce a tax amnesty for evaders if elected and to abolish the real estate tax.

Berlusconi told a talk show on state television station RAI in early February that he would grant a "full tax amnesty" despite a rejection of such a move from his coalition partners, the Northern League.

"If voters give a majority to me and my People of Freedom party alone, I will immediately pass a full tax and building amnesty," he said.

Berlusconi narrowed the gap between him and Bersani to just 6 percentage points in a poll by SWG Institute published on February 8, the last day before a blackout on opinion polls began.

According to Massimo Bordignon, an economics professor at the Catholic University of the Sacred Heart in Milan, tax evaders had indeed become an influential part of the electorate - from some small business owners not declaring their real incomes to the wealthy cross-border evaders.

(Read More: Italy Loosing Its Savior?)

"When a lot of people do evade, they become important even as an electoral group; ultimately, the reason why we still have so much tax evasion is because the Italian governments and in particular center-right governments…have not done their best to eradicate it," he said.

Bordignon says Italy's economic structure is made up of many small firms and up to 5 million self-employed people, making this a powerful electorate.

Around 120 billion euros ($160 billion) is lost to tax evasion every year, the Italian treasury and revenue department estimates, money sorely needed as Italy's official public debt is at a record high of 2 trillion euros or 127 percent of gross domestic domestic product (GDP), according to the Bank of Italy.

The Swiss Formula

The Italian revenue agency estimates that Italians have stashed over 100 billion euros in Swiss bank accounts. Talks are being held between Swiss and Italian authorities to create cross-border cooperation on tackling tax evaders, but so far no deal has been signed.

(Read More: Swiss Tax Evasion Crackdown Watered Down)

"Switzerland desperately needs to find an agreement with some big European Union (EU) country or it risks some kind of sanction from the EU," Bordignon, who has written extensively on tax evasion, told CNBC. "Italy on the other hand needs to get money quickly and cheaply, given its very high tax level to ease taxation and finance some public expenditure."

(Read More: Will Italy Need a Bailout in 2013?)

But he warned that without generous terms, the move could backfire: "In the end, if you ask Italian residents who have unlawfully moved their money to Switzerland to pay too much, they will simple move their money somewhere else."

Evasion Everywhere

Tax evasion is something of a national pastime in Italy and revelations have reached the top of Italian society. Berlusconi was himself convicted for tax fraud in October 2012 but has appealed the decision and his case is pending review, hence allowing him to run in the election.

"Italians traditionally do not put much social stigma on tax evasion," Bordignon said. "A large part of the citizenship does not trust the government, believing that this is there to exploit them, rather than serve or represent them. Add an extremely vexing bureaucracy and high statutory tax rates and tax evasion is seen by many as an act of self-defense," he added.

From the selling of counterfeit goods such as cigarettes, designer ware and bootleg DVDs on street corners, underpinned by organized crime networks, to wealthy individuals heading over the border to Switzerland with cars full of cash, the underhand nature of tax evasion means that the authorities are always playing "catch-up."

In 2012, Italy's tax police, the Guardia di Finanza, checked tax returns against yacht owners in the seaside town of Bari and discovered tax evasion on an immense scale. Almost a third of 963 yacht owners reported low tax returns or none at all and 42 percent of the yacht owners declared incomes under 20,000 euros a year, the police found.

Evasion Strategy

The Italian National Revenue Agency has changed tack in combating tax evasion. It has introduced the "Redditometro" strategy to measure the expenditure of all taxpayers, rather than investigating incomes. If expenditure appears to be more than 20 percent great than the income declared, the agency will investigate further.

The linking of observed consumption to presumed income has drawn widespread criticism with many Italians fearing that they will be looked at as guilty before they are proven innocent. There are fears that it could damage the economy further by deterring Italians from spending, lest they come under the tax collectors' spotlight.

Bordignon said the government needed to get Italians on-side: "One thing which would help and that has been promised several times by governments without actually doing it, is some kind of political commitment to give back to citizens in the form of reduced taxation, any single euro collected by fighting tax evasion. This would help in reducing the consensus towards tax evaders that is still high in Italy."

There have been a number of high profile tax evasion cases in the Italian press recently including a case involving Argentinian footballer Diego Maradona who denied evading 40 million euros worth of tax during his footballing career in Italy and the fashion designers Dolce and Gabbana, who deny evading 400 million euros of taxes when they sold their D&G and Dolce & Gabbana brands to a holding company, Gado, which they set up in Luxembourg in 2004.

The European Commission reported in January that 1 trillion euros ($1.33 trillion) a year is missing from the budgets of European countries due to tax fraud and evasion.

Contact Europe: Economy

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