Italy May Have to Kick Its Cash Habit as Monti Cracks Down on Tax Evaders

By Alessandra Migliaccio and Sonia Sirletti - Dec 23, 2011 7:52 PM GMT+0700

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Dec. 23 (Bloomberg) -- Niall Ferguson, a history professor at Harvard University and a Bloomberg Television contributing editor, talks about his New Year's resolution suggestions for European leaders including Germany's Angela Merkel and Italy's Mario Monti, as well as U.S. President Barack Obama. Ferguson speaks with Sara Eisen on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

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The reform pits the government against some Italians who prefer to pay for everything from wedding receptions to home renovations with cash, allowing merchants to underreport or not declare the revenue, and gaining a discount in exchange. Photographer: Alessia Pierdomenico/Bloomberg

Floriana d’Andrea, a Naples musician, carries rolls of euro notes when she buys instruments and audio gear, a practice she’ll have to change as Italy sets new limits on cash payments in a bid to curb tax evasion.

“I bought some expensive sound equipment and the shop owner jacked up the price when I asked for a receipt,” said d’Andrea, 41, who paid 1,600 euros ($2,093) in cash in the transaction. She has a credit card, but rarely uses it, she said..

Prime Minister Mario Monti, in office just over a month, wants landlords, plumbers, electricians and small businesses to stop conducting large transactions in cash, which critics say helps them evade taxes. The government on Dec. 4 reduced the maximum allowed cash payment to 1,000 euros from 2,500 euros.

“If they force us to use credit cards, prices will go up,” said d’Andrea, noting that many retailers offer discounts to customers who pay in cash and don’t demand a receipt, in effect splitting with them the savings from evading the country’s 21 percent sales tax. She may curtail future purchases if she’s unable to use cash, d’Andrea said.

Italy loses more than 120 billion euros in unpaid taxes every year, according to the Equitalia tax collection agency. The country spends another 10 billion euros annually on security and labor for processing cash transactions, according to banking association ABI.

Debt Crisis

Monti is focusing on curtailing evasion as one way to reduce Italy’s 1.9 trillion-euro debt, which is bigger than Spain, Greece, Ireland and Portugal’s combined. Investor concern that Italy remains at risk of being overwhelmed by the region’s debt crisis pushed the country’s borrowing costs to euro-era records last month.

Italian consumer confidence fell in December to the lowest in 16 years as the crisis forced austerity measures and intensified households’ concerns about a probable recession. The sentiment index declined to 91.6, the lowest since January 1996, from a revised 96.1 in November, national statistics office Istat said in Rome today.

“Tracking cash payments won’t automatically ensure lower evasion, which often involves transactions smaller than 1,000 euros,” said Luca Mezzomo, head of economic research at Intesa Sanpaolo SpA in Milan. The new measures “could, however, be a good instrument for the tax authorities to identify people who spend more than they’ve officially earned.”

Wedding Receptions, Renovations

The reform pits the government against some Italians who prefer to pay for everything from wedding receptions to home renovations with cash, allowing merchants to underreport or not declare the revenue, and gaining a discount in exchange. Many small companies pay salaries in cash, allowing employees to report less income, the Finance Ministry said last year.

“Businesses make us accomplices, because nobody wants to pay extra on a large transaction,” said Adele Costantini, a professor of medicine in the southern region of Abruzzo, who had to argue to get a receipt from a house painter. “I want them to pay the tax, not unload it on me.”

Italians are the euro region’s least-indebted consumers and among its biggest savers, according to data from the European Union’s statistics office, Eurostat. Their frugality may be at least partly linked to a distrust of paying with anything other than cash. Italian credit-card holders use their cards on average only 26 times per year, or five times less than in the U.K., according to the Bank of Italy.

‘Culture of Cash’

“The culture of cash is strongly ingrained in Italians, even those that don’t evade,” Deputy Finance Minister Vittorio Grilli said at a Dec. 5 press conference in Rome. The government initially wanted to set a 300-euro or 500-euro cash limit but decided against it, Grilli said, reasoning that citizens needed time to adapt to new rules.

Italian banks, which charge businesses up to 2 percent for credit-card transactions, could end up being the main beneficiaries of the new rules, according to Rome-based consumer group Adusbef. “Unless banks cut fees on credit cards and current accounts, they’ll just make more money from the new law,” said Mauro Novelli, the general secretary of the organization, which represents banking and insurance customers.

Consumer advocates say the new law also discriminates against older Italians, many of whom don’t use credit cards. As many as 7.5 million Italians have never had a bank account, according to Adusbef. “The law cannot force old people to use plastic or open bank accounts,” Novelli said.

Bank Fees

The government is negotiating with the banks to get them to cut fees on credit cards and lower costs for bank accounts to encourage the move away from cash, Grilli said Dec. 5.

Banks are willing to consider zero-cost current accounts for low-income retirees and discuss credit-card costs “in light of the government’s new measures,” Giuseppe Mussari, head of Rome-based ABI, said Dec. 11. However, lenders won’t “give away” services that carry a cost for them, he said.

Italy’s tradition of saving won’t be at risk from the new measures, said Nicola Borri, an economics professor at Rome’s LUISS University. “Italians mainly use debit or credit cards with stringent limits,” he said. “Financial instruments that allow you to pile up debt are very limited in this country.”

Politicians have seized on the cash issue as a way to build support among a public reluctant to change. “There’s a real danger of crossing over into a fiscal police state,” former Prime Minister Silvio Berlusconi said at a political convention on Nov. 27 in Verona, about two weeks after the debt crisis toppled his government.

“What we need is a revolution in Italians’ thinking and that takes time,” Monti told reporters on Dec. 5. “This is meant to be a first step.”

To contact the reporters on this story: Sonia Sirletti in Milan at ssirletti@bloomberg.net; Alessandra Migliaccio in Rome at amigliaccio@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net