STOCK MARKET WATCH -- Tuesday, 8 October 2013

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38. Persistent Support: How Italy's Tangled Taxes Help Berlusconi

http://www.spiegel.de/international/europe/a-complicated-tax-system-in-italy-buoys-berlusconi-a-926692.html

Former Italian Prime Minister Silvio Berlusconi failed last week to bring down Prime Minister Enrico Letta's fragile coalition government, but he came dangerously close. Despite being convicted for tax fraud and facing expulsion from the Senate and potentially house arrest, Berlusconi managed to throw the entire Italian political establishment into disarray, rattle global financial markets and threaten to thrust the larger euro zone back into crisis.

How did Berlusconi -- a man who in most other countries would have long ago been politically dead -- manage to orchestrate such a political drama? In large part, the answer comes back to taxes. In threatening to bring down the government under the guise of his opposition to a property tax and a planned increase of value-added tax (VAT), Berlusconi attempted to play to Italians' deep disdain for the country's tax code.

"The tax evader in Italy is a hero. Tax evasion is the ultimate form of tax revolt," says Leonardo Facco, founder of the Friuli-based Libertarian Movement. Facco, who was formerly a leader within the populist Northern League party that has been aligned with Berlusconi's People of Freedom party, believes the Italian tax system is "characterized by a bureaucracy and zany collection system worthy of the worst medieval extortionists." While Facco suggests Berlusconi's tax stance is built on rhetoric rather than substance and that he is not a true economic liberal, he concurs with Berlusconi's position on the VAT and property tax. "They are robbery," says Facco.

Mass Tax Evasion

Italy has one of the highest tax evasion rates in the developed world, according the the Organization for Economic Cooperation and Development. The Bank of Italy estimates that 27.4 percent of the Italian economy avoids taxation. Moreover, a recent poll compiled by the University of Milan found that 29.9 percent of Italians think it is "legitimate" to evade taxes. Berlusconi himself has suggested in the past that tax evasion was simply a logical response to excessively high tax rates. Fabrizio de Pasquale, a member of the Milan city council and of Berlusconi's party, says tax evasion is indicative of "a lack of civic sense." "But also," he adds, "the problem is that we have very high taxation for the people who make a lot of money and the self-employed, so it's convenient to avoid paying taxes."