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First Posted: 11/14/2012 (AP) Good plumbers may be worth their weight in gold, but when one was spotted zipping around in a bright red Ferrari, Italian tax police were fast on his trail.
Stamping out entrenched tax evasion is crucial to Premier Mario Monti's quest to keep Italy from succumbing to the European debt crisis, and it is critical to fellow eurozone members in more dire straits, such as Greece and Spain which are also notorious for making cheating the taxman a way of life.
Indeed, Greece's international rescue creditors have been pressing Greece for two years to reform its ailing tax system, citing poor collection as a key factor keeping the country mired in crisis. In Spain, where tax fraud is rampant, as much as 90 billion ($150 billion) is lost each year to tax fraud -- the equivalent of the country's national debt, according to Spain's main tax inspectors union.
To succeed in Italy, authorities will have to catch the legions of self-employed and small business owners who brazenly lie about their earnings, like the plumber in the eastern town of Pescara, who socked away undeclared income in 30 bank accounts, or a successful pastry shop owner in Calabria, who on his tax return claimed he was earning next to crumbs.
And those are the less sophisticated schemers.
Tax police officials say that wealthy Italians, their companies and foreigners who make their money in Italy are increasingly trying to avoid taxes by using such strategies as falsely declaring that their base of operations or residence is abroad.
Another daunting challenge is the so-called submerged economy, a term embracing Italians who declare only a fraction or nothing at all of their earnings -- and dentists, lawyers, doctors and other big-earning professionals are frequently among the worst offenders.
Tax evasion of all types in Italy totals about euros 240 billion ($300 billion), or 15 percent of the country's gross domestic product of 1.6 trillion ($2 trillion), tax police estimate. Winning the war on tax cheats could therefore more than wipe out the country's budget deficit, which is expected to increase to euros 42 billion ($53 billion), or 2.6 percent of GDP this year. That would start knocking away at the nation's colossal public debt of 2 trillion ($2.5 trillion), or 125 percent of GDP.
But big international frauds are up, lamented Lt. Col. Gianluca Campana, in charge of the income tax unit revenue protection office at the Guardia di Finanza, Italy's financial police corps which reports to the Economy Ministry.
The entrenched practice by many cafes, eateries, hair dressers and similar small business of neglecting to give customers mandatory cash register receipts commonly grabs the attention in crackdowns on tax evasion in Italy.
But, cautioned Campana, one false (big business) invoice can equal no cash register receipts for coffees for two months.
Over all of 2011, the total of non-declared income discovered by tax police amounted to some 50 billion ($65 billion), of which some 20 percent was due to international tax evasion, he said. By comparison, in the first nine months of this year, tax police discovered some 40 billion in undeclared income, with 30 percent of that blamed on international tax evasion, Campana said.
With the economic crisis shrinking bottom lines, and Italy increasingly on the hunt for big-time evasion, especially by big businesses, there is a tendency to move capital abroad, using maneuvers apparently legal but which really are not, Campana said. A classic technique consists of declaring one's formal residence abroad in tax havens like Monte Carlo. Also common are companies that clearly have their business base in Italy but claim it is abroad in countries with far lower tax brackets.
Campana is armed with three degrees, including a masters in tax law from Milan's Bocconi University, the prestigious economics institute formerly headed by Monti. He brings skills to this specialized police corps that are as finely tuned as sharp-shooting.
We are going after the big cases (of evasion) in order to rake in more money, Campana said.
The Ferrari-driving plumber hid some 2 million ($2.6 million) of his income over several years by giving his customers invoices -- for jobs ranging from fixing leaks to installing new bathrooms -- for the actual cost of his work, but kept a second, false registry of much lower figures for tax purposes, said Pescara tax police Col. Mauro Odorisio.
Armed with a 2008 law, authorities confiscated assets belonging to the plumber equivalent to the approximately 1 million ($1.3 million) they contend he owed in taxes, Odorisio said.
With Ferraris in red or yellow, and snazzy Porsches parked inside, Guardia di Finanza garages practically resemble luxury car dealerships.
The cars get sold to help recoup unpaid taxes and interest.
Overall, tax revenues in Italy were up by 4.1 percent, says the Economy Ministry, when comparing figures from the first eight months of 2012 with the same period in 2011, but much of that was due to new taxes, and not necessarily a revolution in citizens' consciences about tax obligations.
Monti's recipe relies heavily on taxes that are nearly impossible to avoid, such as sales tax. He also revived a property tax that his populist predecessor, Premier Silvio Berlusconi, had abolished in a promise to voters.
The ministry's report last month noted that the property tax figured prominently in the tendency toward growth in tax revenues. But sales tax revenue dropped slightly despite higher sales tax rates, indicating that consumers were feeling the pinch of the stagnant economy.
The heavier fiscal burden seems to have driven some honest citizens to rebel against the engrained culture of tax evasion.
The number of phone calls from the public to the tax police's hotline to report stores, restaurants and other businesses that didn't give customers sales receipts has almost doubled in the first nine months of this year, compared with the same period in 2011.
It's apparently dawning on Italians that shirking taxes in the end only costs them, in terms of ever-higher levies and cutbacks in public services.
Citizens now increasingly understand that the lack of revenue over time caused by tax evaders forced the government to stiffen the tax burden on categories where you can't evade taxes, Campana said, referring to workers whose taxes are deducted from paychecks. Another area where evasion is close to impossible is real estate ownership.
Odorisio noted the crackdown included extending the statute of limitations on tax evasion from six to eight years and establishing prison as a penalty for big-time evasion.
Other weapons include a measure promoted by the Monti government that limits cash payments to no more than 1,000. Paying by credit card or personal check is a relatively new habit for Italians, who are used to carrying wads of cash in their pockets, even for big-ticket items like home renovations or vacations.
Past governments in Italy sometimes resorted to tax amnesties to try to boost revenues. But critics, contending some Italians counted on such a possibility, described that strategy as only perpetuating the tax cheat culture.
Spain hasn't had much success with its own tax amnesty introduced by the conservative government in March. That measure, expiring soon, allows undeclared assets or those hidden in tax havens to be repatriated by paying a 10 percent tax without criminal penalty. The amnesty is estimated to recuperate far less than the expected 2.5 billion ($3.25 billion).
Greece saw demands for tax system reform from international rescue creditors added on to conditions for future rescue loan payments, as Greek authorities acknowledged that a high-profile campaign to crack down on major tax cheats has produced disappointing results.
The cash-strapped government over the last 10 months recovered just 19 million ($25 million) of the 13 billion ($17 billion) of arrears on the list. A prominent Greek magazine publisher recently tapped anger over rich tax evaders by publishing a list of people allegedly holding Swiss bank accounts. He was acquitted this month of breaching privacy laws.
Meanwhile, Italian tax police are chasing after cheats who have shown some of the most chutzpah about not paying their fair share of taxes, like the Padua woman who advertised on the Internet that she had a couple of cash-only bed and breakfast rooms to let.
Tax police discovered the lodgings are part of an apartment in public housing she was given after falsely declaring she was indigent on her annual tax forms.
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AP reporters Derek Gatopoulos in Athens and Ciaran Giles in Madrid contributed to this report.
<a title=Associated Press href=http://www.ap.org class=url org fn>Associated Press</a>

Beating tax cheats key to Italy's recovery plan