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Paying It Forward: Attempts to Increase Tax Compliance in Italy

November 05, 2015

They say the only guarantees in life are death and taxes, but along the Mediterranean, even the taxes seem optional. For Italy in particular, low tax payment rates represent a significant problem. In the face of a struggling economy, growing public debt, and government instability, it has become increasingly difficult for the government to collect revenue and pay for public services.

The problem can trace itself back a ways. Since the Berlusconi administration, Italian tax revenues have fallen dramatically, in large part due to non-payment. This is not a problem endemic to a specific subset of the population either, with everyone from doctors to taxi drivers complicit in the problem.

The Italian government has been at a loss about how to confront the problem. Prime Minister Matteo Renzi has made government reform the basis of his administration.[1] This includes a bevy of tasks, not the least of which includes restoring faith in the government, and in this case it is a significant to note that Renzi himself has never served in Parliament. Renzi’s agenda is crucial step toward revitalizing government revenues — lack of faith in the government has proven a critical factor in the unwillingness of workers to pay taxes.

Italian President Matteo Renzi 
Italian President Matteo Renzi 
(Source: Reuters)

The Root of the Problem

Solutions to the problem will not come from Italy alone. Instead, a number of outside groups have begun working to resolve this issue – including Penn professor Diana Mutz. Mutz, a professor of both communications and political science, spent a week in mid-October as an advisor at the European University Institute in Florence, working with scholars to find ways to pin down the causes of non-compliance and the means to correct it.

According to Mutz, trust in government is the linchpin of the problem, “People have even lower levels of trust in government in Italy, so the problem really is that they don’t want to give money to the government, because they think government is going to waste it. And there’s some truth to that.”

To some degree, non-compliance occurs out of a self-perpetuating cycle. People blame ineffectual government, the government then cannot provide necessary resources, thus becoming ineffectual, and the process repeats itself. To focus on this cycle is a losing battle. “It’s one of these negative spirals that it’s hard to know how to stop, because people cheat the government of taxes, and the government is also cheating people of some of the resources that would come from that,” Mutz commented. “So pointing fingers isn’t nearly as helpful as figuring out what you can do to generate a spiral in the other direction.”

Current Efforts

 Scholars at the EUI, along with Mutz, have looked at a number of means of resolving the issue. One consideration is auditing more citizens. This alone, however, may not be the driver of higher compliance. As Mutz points out, the U.S. has a relatively high level of tax compliance, yet audits relatively few people.

A growing method of evaluating public policy has been through the use of field experiments. In the U.K., and more recently, the U.S., governments have begun dabbling in field experimentation to test out the success of various policies before implementing them on a wider scale.[2] Italy is now considering this as well, toying with changing forms to emphasize the negative effects of non-payment and conducting survey research on what colors the people’s faith in government. “We know that Italians have very low levels of tax compliance…being able to take care of the infrastructure of the country requires that they collect more of what is actually owed and they know their level of compliance is low,” Mutz said. “What they don’t know is why, and thus, what they can do about it to change it.”

One of the current problems with present studies in Italy, according to Mutz, is that the research has either failed to include a control group or has consisted largely of non-representative samples of college students. There is also the added struggle of non-documentation. “You can’t get a taxi driver to give you a receipt if you pay by credit card because they don’t want the income being reported, they don’t want to pay taxes on it,” Mutz noted. “Interestingly, the occupation that is known to cheat on their taxes more than any other [is] doctors.

“So if you go to a doctor, ‘Here’s how much you owe paying by credit card’, it’s much cheaper if you pay by cash, because then the doctor doesn’t have to pay taxes on the income.”

Moving Forward

The key, according to Mutz, is re-establishing a social norm around tax compliance. “Social norms, we know, can be very motivating to people,” she explained. “We can tell people that most people like them are, in fact, paying most of their taxes…so forth, that will change the likelihood that they will [too].”

A lot of the research being done through the EUI is in its early stages. Not only will field experiments be implemented to try to nail down the causes of non-compliance, but also how to rectify it. Italy is looking to a trendy, new approach, integrating academic research and public policy. The Italian people have looked in vain to politicians to resolve the country’s problems. They are now giving a voice instead to the academics.

If the academics have their way, the Italian people can consider taxes a guarantee again.


References:

  [1] Dinmore, Guy. “Matteo Renzi intalled as leader of Italy’s new government.” 

  [2] Sunstein, Cass. “Making Government Logical.”

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