DEATH may be certain in Italy, but taxes are another matter: an estimated €285 billion remained unpaid last year, about 18% of GDP. Yet this will change if a new way of assessing income, called redditometro, is a success. The system, which became law on January 4th, aims to winkle out many of the large number of Italians who cheat on their annual income tax returns.
The redditometro, which will first be used in March to examine income tax returns for 2009, is best described as big government meets big data (meaning large data bases and huge computing power). The approach is based on the sensible idea that in order to spend one needs an equivalent income. So if tax authorities can calculate how much a person has spent, they can tell how honest he was on his tax return.
Italy’s tax authorities already know a lot about what people do with their money. All residents have a unique tax number that they have to provide for a wide range of transactions, such as utilities contracts, home mortgages and insurance policies. For everything else, from food to furniture, the Agenzia delle Entrate will use national statistics and complicated formulae to estimate spending. It has divided Italy into five geographical areas and calculate the budget for eleven different family types, from a single under 35 years to a couple over 65 years.
The system will flag tax returns in which the declared income differs from the taxpayer’s estimated spending by more than 20% (although it is expected that the tax authorities will initially target only taxpayers with a much bigger difference). Those who fail the test will be asked to justify their returns. Those who are unable to do so will be given the chance to cut a deal, meaning they will have to pay the evaded tax and a reduced penalty.
Predictably, the redditometro has already proven controversial. Economists worry that it may have a dampening effect on Italy’s already depressed economy. Others take issue with the fact that the system will look at tax returns that were filed three years ago. Yet others object to the use of national statistics and question the accuracy of average spending patterns.
Schumpeter, The Economist.com