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.
But no one is paying the tribute. Even as the government pushed through the new measures, it knew that no one would comply with them. Just this week, The New York Times reported, “On a recent morning, Maurizio Compagnone, an employee of Italy’s internal revenue service, stood before a classroom of middle school students in a leafy neighborhood here, preaching the virtues of paying taxes. ‘You may think, “I’m 13, why should I care about taxes?” he said with earnest enthusiasm as the students looked on, slightly bored. ‘But you can take a step in the right direction. You can change the behavior of the people around you, your parents and friends.’” “And the children shall lead them” seems to be the philosophy of the Italian government. Only there are no children, and if the people of Italy were to comply with the government laws, they’d starve.
So what’s a poor Italian to do? Go to work, and leave the government to fend for itself. I have never seen so many working poor as in Italy. Where Los Angeles’s impoverished areas are hangouts for drug pushers and gang members, Rome’s seem to be thriving market areas where hustlers sell prints of the city at jacked-up prices, and where the police look the other way.
My wife and I bought a couple of paintings from a nice enough young man who told us he was an art student. We probably paid too much for them, and he probably wasn’t an art student – when I returned to the site of the purchase five minutes later to ask for directions, the young “artist” had vanished into the night. But so what? At least he was selling something. I’ll still frame the paintings, and I’ll still put them up. And if he can keep that cash rather than handing it over to a 65-year-old pensioner, more power to him. If Italy’s lucky, he’ll use the money to settle down and get married (Italy’s Catholicism means that unlike Britain or the Netherlands, people still wed) and pop out a few baby Italians, who will then use papa’s entrepreneurial skill to produce goods and services others want to buy.
The lesson for the U.S. is clear: no matter how hard government cracks down on tax evasion and black markets, such activity will only rise with the growth of big government. If we want a functioning system, we must give people a stake in that system by protecting their right to earn.
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