Tax Analysts Blog

La Bella Italia: Fast Cars & Loose Taxes

Posted on Feb 12, 2013

Ever dream of driving a $200,000 Ferrari around the Amalfi coast? Me too. But ask an Italian taxpayer and their response might include a warning — be careful what you wish for! That's due to the Italian government's bold new tactic for reducing the country's tax gap.

The tactic has a name, redditometro, and it involves a detailed 'lifestyle' audit that tips off tax authorities to noncompliance. If the police observe an Italian resident living the high life (for instance, by zooming around in an expensive sports car) they can stop the individual and demand their taxpayer identification numbers, regardless of whether any criminal offense has taken place. The information is conveyed to the tax authorities, the Agenzia delle Entrate, which subsequently audits the driver. On audit, revenue officials ask probing questions about how the taxpayer was able to afford the fancy wheels given their meager reported income.

The goal is to catch people who under-report their taxable income. This is a major problem in Italy, especially among the owners of small businesses and merchants who regularly deal in cash. In this era of fiscal austerity, the government needs all the revenue it can get. Collecting taxes that are already due and owing often seems like a better idea than raising tax rates or imposing entirely new taxes. Thus the focus on closing the tax gap, which in Italy is estimated at 18% of GDP or €120 billion in annual lost revenue. (By comparison, the U.S. tax gap is estimated at 15% of GDP or $385 billion.)

Nowadays being seen driving a Ferrari isn't so cool; it has become a glaring audit flag. Ditto for renting a weekend villa in the Tuscan hill country, or applying for membership at a Ligurian yacht club. And don't even think about heli-skiing at Cortina. Other activities being monitored include shopping for high-end fashion items. So think twice before you hit the Gucci boutique.

Redditometro was approved by Parliament in 2010, but wasn't widely enforced until January 2013. Most Italians don't like the practice. They find it intrusive. Piero Ostellino, an Italian news commentator, recently told the BBC: " I'm against the Redditometro not because I'm in favor of evading taxes, I don't think tax collection should be done by trampling on individual liberties." He then added, "I would like to live in a country where a cardinal can, every month, buy a pornographic magazine without having to explain this to the tax authorities. This is like the former East Germany."

Is the plan working? While we don't yet know if Italy's tax gap is shrinking, we can report that new Ferrari sales are down 56%.

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