Tax Evasion At 50%?

``There are certain provinces and certain sectors where fiscal irregularities are higher than 50 percent and the level of tax evasion is higher even than the income being declared''

This according to Italian Deputy Finance Minister Vincenzo Visco is a reasonable estimate of the efficacy of the fiscal authorities in collecting revenue in some parts of Italy. One example given by Bloomberg: a recent study by the Italian fiscal agency (using 2004 data) found that the median salary declared to tax authorities for 50 professions, ranging from seamstresses to dentists, was 26,095 euros, a figure more or less equivalent to the salary of a public high-school teacher. In 2003 ISTAT estimated the informal economy in Italy as being worth some 16.7 percent of gross domestic product, a figure which is surely a substantial underestimate.

Now one point needs to be made very clear here. The high level of informal economic activity is often cited as evidence for the fact that Italy is a much richer country than appears to be the case, and that is almost certainly true. However this argument is often brought out when discussing the fundability of the Italian government debt moving forward and the possibility of default. Unfortunately this argument is entirely irrelevant here, as Standard and Poor's recently pointed out in the context of Greece's surprising upward revision of of its GDP: informal activity does not in and of itself influence the fundability of the deficit since it is, by definition, not taxed.

However, clearly the existence of such activity does mean there is a potential for revenue raising by incorporating it into the formal economy. One such move has been the regularisation of 'irregular' migrants (and one wonders how much of the industrial output increase this year has been a result of the 'officialisation' of such previously unofficial activity). Other such measures are contained in the 2007 budget proposals, and obviously one way of measuring just how much progress Italy makes next year towards sustainability will be in just how much extra revenue the Italian exchequer is able to generate in this way.