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I spent last week with my wife in Europe. We spent a few days of that time in Italy, most in Rome, doing all of the touristy sight-seeing: the Coliseum, the Vatican, the Spanish Steps. Essentially, we retraced Audrey Hepburn’s route in Roman Holiday.
And, of course, my wife wanted to buy a souvenir. So we toured the myriad street markets of Rome, where street vendors hawked their wares: knockoff purses, paintings, cheap trinkets. Despite the troubles with the euro, the dollar still compares poorly in terms of value (current exchange rate: 1 Euro to 1.3 dollars), so everything was relatively expensive. But the markets were packed, and with good reason: Italy’s real economy is these off-books markets, paid for in cash.
Some economists estimate that a full 50% of the Italian economy is the black market. Even the Fodor’s tour book is stunned by the sheer size of this underground market: “if the highest estimates are correct, Italy’s black market is about as large as the entire economy of Switzerland or Indonesia. If the estimated black-market figures were added to the official GDP, Italy would likely leapfrog France, the U.K., and China to become the world’s fourth-largest economy.” This has, of course, been a problem for Italy since the end of World War II; in 1951, Time reported, “Tax collecting in Italy is a cat & mouse game, well understood by both sides. Italian taxpayers declare only a tiny fraction of their true incomes; the government in return automatically triples whatever declaration the taxpayer makes.”
There’s a reason the black market is so large in Italy: it’s the only way anybody can survive. Housing prices in Rome are egregiously high, and taxes are even more extreme: the individual income tax rate tops out at 43%, and the corporate tax rate is 31.4%. There’s also a 20% value added tax (sales tax). No wonder so many businesses in Italy don’t open every day – why bother, when the government will punish you for obeying the law in the form of confiscatory taxation?
And yet Italy still can’t pay for its massive social safety net. Italy’s debt to GDP ratio is now 120%. Its average age is well above 40, and there is no robust new generation of children on the way. Rome has become a gorgeous relic, not just in architecture, but in population.
While we were in Italy, the government had to ram through a $40.3 billion austerity measure; this week, they were only able to raise $9 billion in bond sales. The government dumped its inflation-pegged payments to pensioners, which means that seniors effectively took what the Reuters called an “income cut” – though those seniors are not being paid for anything but sitting around drinking espresso. In fact, pension age was raised to 66 by 2018 and incentives were put in place to keep workers employed until 70. The Italian government also raised taxes yet again, this time in the form of a 1.5% tax on money sent back to Italy; the government also wants to raise the VAT another 2%. So apparently, the solution to a horrible tax system driving people into an underground economy is to raise taxes. The Italian government’s new slogan: veni, vidi, I tributarium.
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