Italy’s Ambitious Plans to Recover Billions From Tax Evaders

Italian Prime Minister, Silvio Berlusconi

Italian Prime Minister Silvio Berlusconi raised eyebrows back in 2004 when he publicly philosophized over whether Italy’s heavy taxes made tax evasion a “natural right.”

Now that Italy is staring into the abyss of the euro zone debt crisis, Mr. Berlusconi is no longer waxing philosophical.

Measures aimed at fighting tax evasion are a central plank in Rome’s efforts to balance Italy’s budget by 2013 and appease the European Central Bank, which is currently propping up the Italian bond market.

Billions in revenue will be recovered by cracking down on Italy’s infamous tax-evaders, the government argues, plugging large holes that emerged in Rome’s €45.5 billion austerity budget after the government scrapped politically unpalatable proposals, including tax increases and a pension overhaul.

“The problem is that we have an unsustainable fiscal pressure weighing on the official side of the country”, Industry Minister Paolo Romani said in a recent interview at the Ambrosetti conference in Northern Italy. “We have to get €240 billion in phantom income back into official circulation, which means €120 billion in evaded taxes,” he added.

Economy Minister Giulio Tremonti said he expects to recover from tax evasion €700 million in 2012 and €1.6 billion in 2013, by introducing prison sentences for evaders and by forcing tax payers to provide more detailed banking information with their tax returns.

Speaking at the Ambrosetti conference, Mr. Tremonti noted that only 796 people in Italy declared incomes above €1 million last year while little more than 3,300 people earned more than €500,000.

Analysts and European Union top brass question whether Italy is betting too heavily on its ability to rein in tax evaders.

Similar policies have fallen short of their revenue-boosting goals in other countries, such as Greece, because the effectiveness of anti-evasion measures are hard to predict. Measures such as Italy’s jettisoned plan to levy a 5% tax on people who earn more than €90,000 tend to deliver more reliable results, because they target salaried workers who can’t hide their income from the tax man.

The government, however, argues the fairest way to restore Italy’s fiscal health is to simply to make the chronic evaders pay up, rather than levying heavier taxes on those who have already borne the brunt of Italy’s fiscal burdens.

That rationale offers a new spin on Mr. Berlusconi’s past musings on Italian-style fiscal justice. In his 2004 address to Italy’s tax police, the billionaire media mogul declared:

“There’s a norm of natural right that says if the state asks you for a third of your hard-earned money, the request seems right and you’ll give it in exchange for state services. But if the state asks you for more, or much more, you’re being bullied. Thus, you focus on finding ways to avoid–or even evade–that feel in harmony with your inner sense of morality, that don’t make you feel guilty.”

Berlusconi has ceded power to ECB

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 Union demands detail on deal with ECB over bond-buying

* Opposition says Berlusconi has surrendered sovereignty

* Monti says key decisions now being taken outside Italy

ROME, Aug 8 (Reuters) – Italy’s opposition accused Prime Minister Silvio Berlusconi on Monday of surrendering sovereignty to the European Central Bank after he pledged to speed up reforms in return for help in facing a dangerous debt crisis.

The ECB agreed on Sunday to buy Italian and Spanish bonds to calm markets after a huge selloff last week sent yields climbing to record levels for the euro zone’s third and fourth largest countries, threatening to unleash an uncontrollable situation.

Berlusconi had agreed late on Friday to bring forward the government’s target of balancing the budget by a year to 2013, following pressure from the ECB.

Antonio Di Pietro, head of the opposition Italy of Values party, said Berlusconi had been “dragged by the ear by the EU and international economic institutions” to the news conference where the measures were announced.

“Berlusconi should perform a service to his country for the first time and go,” he said.

“Palazzo Merkel”, read an editorial headline in the left-leaning La Repubblica daily, referring to Berlusconi’s official residence, Palazzo Chigi, and German Chancellor Angela Merkel.

Behind the rhetoric, the criticism from opposition parties and unions reflect broad concern about the apparent deal between the ECB and the government, suggesting growing political resistance.

European sources told Reuters last week that the ECB had demanded Italy fast-track reforms and budget measures to reduce a large debt burden in return for the agreement to buy bonds.

The daily Corriere della Sera newspaper said that the ECB demands for accelerated reforms were contained in a letter President Jean-Claude Trichet and Bank of Italy Governor Mario Draghi had written to Berlusconi.

TECHNICAL GOVERNMENT

In an interview with the newspaper on Monday, Susanna Camusso, head of the CGIL, Italy’s largest union federation, demanded that Berlusconi declare “what conditions were imposed by the ECB for buying Italian bonds.”

She said the text of any communication with the ECB should be published in full “without omissions so that everyone can judge at what point we are with the crisis without the veil of government lies”.

Berlusconi and Economy Minister Giulio Tremonti have so far given very little detail on what they plan to do beyond declaring they will accelerate measures agreed in a 48 billion euro austerity package approved in parliament last month.

But there are growing questions about how much freedom of manoeuvre they really have.

Mario Monti, a former European Commissioner widely seen as a potential head of a so-called “technical government” of experts which some opposition parties want to replace Berlusconi’s struggling centre-right coalition, said the government had effectively ceded power.

In a guest editorial in Corriere della Sera at the weekend, he said a “technical government” was now effectively in place.

“Form is upheld, ministers remain in office. The primacy of politics remains intact. But the principal decisions are taken by a ‘supranational technical government’ and one could add a ‘market government’ spread between Brussels, Frankfurt, Berlin, London and New York,” he wrote.

On Saturday, Berlusconi once again ruled out calling an election before the next due date in 2013 but he has been badly damaged by recent local election and referendum losses and has struggled to control his fractious coalition.

Last week, he promised a comprehensive reform pact with unions and employers to cut red tape, break down regulatory barriers in product and service markets, reduce the costs of government and fight tax evasion.

However no firm details are expected until September.

The CGIL has made it clear that it will not accept a deal in which the bulk of budget savings come from welfare cuts and has demanded a special wealth tax to balance such measures. (Additional reporting by Francesca Piscioneri and Ian Simpson in Milan; editing by Barry Moody/Mark Heinrich)

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