Passaparola - The income meter and the Tax State - Beppe Scienza

The Income Meter and the Tax State
(12:00)
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"Perhaps the tax authorities have made some mistakes in the manner in which they announced the idea, but it has actually created quite a few concerns, not so much amongst the perfect tax evaders who received payments in cash, paid in cash or falsified the account books and managed to hide the money, but rather amongst the many others who are saying things like: "So what am I supposed to do now? Presumably I must be able to produce receipts dating back to 2009, but how am I supposed to prove exactly what I spent?"
The starting point was a flawed equation upstream, in other words, they are somehow trying to push through the unsustainable principle that, as a rule, the amount that an individual spends has to be less than or equal to his/her earnings for that year, as declared in his/her tax return, with certain exceptions.
The problem is that there are indeed many exceptions and while the principle may not be absurd in itself, the reality is far more complex than it initially appears. "
Beppe Scienza

Mathematician and economist Beppe Scienza's Passaparola

The burden of proof has been shifted
"Greetings to all the friends of Beppe Grilloís Blog. My name is Beppe Scienza and I lecture at the department of mathematics in Turin and I deal mainly with the areas of savings and social security.
This time around I would like to talk about something that is linked to the problem of savings and is a hot topic these days, namely the issue of the income meter.
This issue that exploded onto the scene following a circular released in the first few days of January, according to which the Italian taxpayersí expenses for the 2009 tax year will be compared with the income they declared in their tax returns for that year.
Now, while I donít want to get into a war with the Department of Revenue, I am well aware of how difficult it actually is to make the Italians pay their taxes and the fact that any action taken by the tax authorities immediately unleash a flood of protests, many of which may well be in bad faith, However, when it comes to the so-called income meter, not all the protests are made in bad faith. If the truth be told, many criticisms have been made, some of which are undoubtedly unfounded and it may be worthwhile to take a bit of a closer look at the situation as it stands.
The point is that what they are saying is in essence that anyone whose expenditure in 2009, calculated according to the information at the Department of Revenueís disposal, was greater than the income that declared in their 2010 tax return, in other words relative to the 2009 tax year, it would seem to indicate that the individual in question is indeed a tax evader and, if called upon to do so, the individual would have to go in and explain how he/she managed to do whatever they did since the burden of exculpatory proof lies with the individual in question.
Now perhaps the tax authorities have made some mistakes in the manner in which they announced the idea, but it has actually created quite a few concerns, not so much amongst the perfect tax evaders who received payments in cash, paid in cash or falsified the account books and managed to hide the money, but rather amongst the many others who are saying things like: "So what am I supposed to do now? Presumably I must be able to produce receipts dating back to 2009, but how am I supposed to prove exactly what I spent, etc?"
The starting point here is that there was a flawed equation upstream, in other words, they are somehow trying to push through the unsustainable principle that, as a rule, the amount that an individual spends has to be less than or equal to his/her earnings for that year, as declared in his/her tax return, with certain exceptions.
The problem is that there are indeed many exceptions and while the principle may not be absurd in itself, the reality is far more complex than it initially appears. "
Letís look at an example: anyone who has received some help from relatives, say an elderly person whose children gave him/her some money to help cover the expense o fan aide/companion, well that personís expenditure for 2009 will undoubtedly be substantially higher than their declared income, especially so if the aide/companion was officially employed and not paid ďunder the tableĒ in cash and the INPS records will show that the person has paid out far more than what he/she receives as a pension.
Or perhaps vice versa, in other words the grandchildren received some money from their grandparents, which they spent quite openly since they thought that there was no reason for them to conceal this fact.
Remember that back in 2009, it was quite legal to give someone up to 12,500 Euro in cash without any restrictions whatsoever, so it was okay to give someone money, even in cash, say to family members, and it was all quite above board. Now these old people are going to be called in and they are going to have to prove that they did indeed get that money, and how exactly are they going to prove this? Yes, I agree, perhaps they could bring along witnesses and what about individuals who took out a loan. Perhaps they took out the loan in order to purchase something, to fund a trip, or perhaps they took out the loan in order to sort out their prosthesis. But here again, back in 2009 this individual easily spent more than the income they declared on their tax return. Then thereís the case of something that is very close to my heart, namely the people that save.
These people receive interest on their investment in government bonds, bonds, shares or savings accounts, which they are free to spend as they see fit, are they not? The principle is that, when all is said and done, these people want to use their savings to create additional income, which does not need to appear in the tax return because that interest is taxed at the source. For the past few years, even rental income does not need to be declared on the tax return if it has been taxed at the flat rate. Then perhaps one may have dipped into oneís savings and subsequently spent not only the interest but also all or part of the capital amount of the savings that had been set aside, in other words expenses would be much higher than declared income for the 2009 tax year in this case, or in 2010, 2011, and so on. These individuals may suddenly find themselves at risk of being called into the revenue offices now, in 2013, and having to explain their actions and what they spent back in 2009. Now, in 2013, they may have to prove what they earned back in 2009 because the authorities are now saying that the burden of proof has been shifted and itís up to the individual to prove that he/she is not guilty of tax evasion.

Where did the money come from
Now, how does one go about proving that, for example? So an economics lecturer at the Turin Polytechnic, Marco Gallea, who happens to be a tax expert, wrote an article for a technical magazine, in which he lays out a system that I believe would be very workable indeed, so let me explain. The individual would be required to set up a sort of income and expenditure sheet, say for 2009, a kind of balance sheet for 2009 that reflects all outgoings on the one hand, such as cash withdrawals, cheques and payments, utilities payments, bank charges, etc, and on the other hand all incomings, such as interest received, dividends, incoming payments, etc. A kind of asset sheet showing real estate investments, movable assets, current accounts, outstanding debtors, an net opening balance, increase in value during that tax year, loan and other repayments. So one then draws up this document and I agree that Professor Galleaís idea is quite right, namely that this would probably be a pretty convincing document if one were to submit it in the event of a possible tax audit.
The only pity is that in order to do this, one would have to have a particular love of accounting in the sense that, on the one hand, you would have to have all of the documentation at hand dating back to 2009 and thatís a mission in itself ... Some people have asked me: Now that we are in 2013, can I turf out everything relating to 2012? I tell them No, you must never, ever do anything like that. Perhaps they donít have the paperwork dating back to 2009, but could they get this information from their bank? Well, yes they could, but the banks charge quite a bit for providing that documentation. Then, letís say you have managed to get hold of all of the necessary documentation, then I would have to say that your average factory worker, office worker, musician, chef and even your average computer specialist or engineer, not to mention those of us who, although bright, have no idea of how to go about drafting such a balance sheet would be obliged to go out and hire the services of a professional accountant.
In my opinion this is a good idea, at least from a technical perspective, but it certainly wonít resolve the current problem. It indicated what one could do to defend him/herself but, if anything, it explains what one could do now in relation to the 2012 tax year so that one would be ready for a potential 2012 tax audit at some stage in the future. Drafting this kind of balance sheet, which involves two or three other documents as well, takes time since adding up all the various interest payments means having to go and dig out each bit of interest and if one uses two or three different banks, plus government bonds, post office vouchers, etc, then it becomes one hell of a job.
Unfortunately this has had a logical outcome and certainly not the one that the Department of Revenue wanted, in fact anything but. The result was that people started saying hang on, this means that if I spend any money then these guys are likely to come and demand an explanation, such as where did that money that I spent come from, which has resulted in a major drop in spending, to the point of stopping spending over the past few years, especially since it became mandatory to get the individualís income tax reference number for any expense above 3,000 Euro and the purchase of luxury items, artworks, antiques and jewellery. So what has happened is that the jewellery stores, especially the more exclusive ones in Rome or Milan, are now selling their goods mainly to foreigners while it appears that the Italians are now travelling from Milan to Geneva and from Turin and Genoa to Monte Carlo because they are upset. They are saying: "You had better believe it Ė if it were to come out that I purchased 20,000 Euro of jewellery ... then it would reveal that I have all this money."
Now, clearly some of the people who have this kind of money to spend are indeed tax evaders, we cannot deny the reality that there are indeed certain people who need to hide some of their tax evasion revenues, but what is equally true is that there are people around who are not in the least bit guilty of tax evasion but who feel that they would rather avoid potential problems in future.
As regards the luxury sector, we could rightly say that its only a small market sector, and thatís true, however, the problem is that the problem is so wide ranging and when they say "we suspect one out of every five Italian families and there wonít be any mass auditsĒ well, if one out five is suspected, but no mass audits, there are 60 million of us and one in five would be 12 million so if suspecting 12 million Italians is not classified as mass auditing, then what is? I call this critical mass, thatís what it is!
So there is an effect, although it may yet turn out to be a storm in a teacup. Perhaps they will yet decide to do an about-turn. They will undoubtedly have to be extremely careful too and they may be very reluctant or, better still, apply some common sense, but as things stand at the moment the impression that is being given by what has been stated and what is contained in the law, in other words that the burden of proof shall lie with the investor, or in any event on the taxpaying citizen, letís just say the citizen, to prove that his/her income was sufficient to cover any queried expenses, the situation remains disturbing, sufficiently disturbing to cause a drop in spending.
Now, while I am the last person on earth to exalt consumerism, restricting spending when the Country is in the midst of a serious economic crisis is what we call going against the stream, which is simply not the right thing to do. I repeat that this may simply have been a communication problem but undoubtedly the initial dissuasive effects of this income meter idea implemented by the Department of Inland Revenue still have to be felt, but where will it be felt? On tax evasion or on spending? These are two very different things.
Will it discourage tax evasion? Well, perhaps ... but all in all, the fact remains that something is not working. As always, it would be advisable for them to continue to be reasonable with taxpayers and perhaps a few things could be changed, such as example, just one small detail that is by no means a minor one, regards the types of expenses classified as indicators of higher than declared earnings and tax evasion and charitable donations.
This includes donations to non-profit organisations, to the Church parish, to the African missionaries, to combat global hunger, to Unicef, etc. Iím sure that the Italian Government could even allow the countryís citizens to donate money to whomever they wish, even if perhaps sometimes that money may even be revenue from illegal activity or tax evasion because itís all going to a good cause in any event.
As for the individual citizen, one thing is not to go any try to dig up all your tax receipts for 2009 and 2010 because it will be a useless exercise in any event since all that proves is that the money was spent, but not that that is all the individual spent and the individual may have spent money on other things for which he/she did not get the applicable tax receipts, or perhaps lost them in the interim. I repeat, all that is needed is some common sense by the citizens in the hope that an equal amount of common sense will be displayed by the tax authorities.

Posted by Beppe Grillo at 05:51 PM in | Comments (0) | Comments in Italian (translated) Post a comment | Sign up | Send to a friend | | GrilloNews | listen_it_it.gifListen |
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