Doing As the Romans Do

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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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  • UCSPanther

    It appears Italy has forgotten one key lesson of the fall of their ancient empire: The price of setting up a social structure (Bread and circuses) that drains the strength of your nation over time until its fall.

    You can also bet that this "underground economy" is also going on in other countries, especially ones with heavy tax rates (IE Sweden), and it is so prevalent that many revenue agency employees are resigning themselves to the fact that enforcing tax laws is an exercise in futility.

    • http://libertyandculture.blogspot.com/ JasonPappas

      I find mixed reports on Sweden. It doesn't seem so straight forward to compare Sweden with other countries. You'd think a cost of living comparison should be straight forward. Yet I read vastly different reports. Does anyone have a good article on the actual cost of living in Sweden?

      Generally, the Scandinavian countries have maintained a dedication to the work ethic even in the face of paternalistic government. There are some cultural differences that keep them from becoming as poor as other welfare states. It's something I think we should know more about–not because they are a model to emulate–but because they are an interesting exception.

  • Hikerdude1776

    The entire Planet seems to have embraced "Insanity" . Criminals are now considered victims . Victims are now considered criminals . Common sense has been replaced with
    political correctness ( the greatest distortion of truth ever invented ).
    American Christian Infidel
    Michael Canzano

  • Ann

    The black market is raw capitalism—long live freedom—long live capitalism—keep going Italy — even in Cuba they have pure raw capitalist Black Market—!!!

  • mrbean

    Ah yes, let us do as the Romans did, go to the feast and commit gluttony and then to the vomitorium, and right back to the feast and….. and…..,

  • Malcolm

    As an inveterate tourist, I had similar experiences in money changing in Third World countries. When I went to Brazil, the official exchange rate for the cruzeiro was just a third of the black market rate. Exactly the same thing applied in Tanzania. Most other African and South American countries were more reasonable, but there was still a very substantial difference between the official and the market rate, and the only way to travel comfortably was to break the law. Not only that, but the only way the locals could obtain foreign goods was also to break the law. The governments were robbing both the citizen and the visitor.
    Personally, I am normally in favour of obeying the law, but if a country has a substantial black market, it is because it needs it.

  • avantibev

    First off, Mr. Shapiro, count yourself blessed to be able to travel to la bella Italia.
    My Italian immigrant Nonno went to his small Michgian store every day until a few weeks before his death. Even though my uncle and cousins were running the family store by then, Nonno thought it important to greet each customer and (probably) keep an eye on the cash register. :-) He was well into his 80's when he died. My point is that it is STATISM and "SOCIALISME" that has wrought this indulgent early retirement. It is not an inherenet flaw in the Italian character. My Southern Italian ancestors carved out a hard scrabble life from the sea and rugged land but they fed their families without a massive bureaucracy handing out bread and circuses. Blame the system of so-called enlightened progressives for bringing this upon an otherwise creative, energetic, talented populace.