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Black money hunt makes Ferrari sales drop

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Tax evasion remains very popular in Italy (and in Belgium too by the way) but since January 2013 the Monti and Letta governments are testing a new approach. The latter , as you will in this article, continues to fuel the great 300-year old debate on the very nature of taxes. Based on the Italian example this short article will help you understand the difference between circumstantial tax and declarative tax systems.

How does the Redditometro work?

The “Redditometro” is a tool developed by the Italian tax authorities aiming at determining the wealth of taxpayers (thus their cash flow , that is to say their income ) on the basis of their daily expenses, the type of car they drive, their expenditure on clothing, how much they spend on cell phone bills, … Welcome to the world of Big Brother. If it appears that these expenditures are at least 20 % higher than the reported income, the tax authorities will examine the case in greater detail. In other words a tax control will be started.

The Redditometro was definitely implemented after the scandals revealed by controls conducted in places like Cortina d’ Ampezzo, where at Christmas 2012 forty-two Ferrari drivers were controlled who had declared less than 30,000 Euros annual revenue.

The Redditometro faced a very strong opposition from consumers who saw in this instrument the end of black money and the end of (good) deals made using it. Black money had indeed  a tendency to be used for (over) consumption because, with offshore bank accounts becoming more and more controlled, there was basically no alternative left than actually using it (it seems that keeping money under one’s mattress is a relatively outdated practice) .

Fears of a diminishing consumption proved founded because the sales of certain luxury goods (especially cars) collapsed.

Although it can be feared that the redditometro will also affect honest individuals with a tendency to spend more than what they earn, the Redditometro is nothing more than a tax instrument that finds its roots in the eighteenth century French revolution. It is in fact in 1797 that the first tax instrument of this type became popular after being born in the UK.

Circumstantial taxation versus declarative taxation: simplicity and fairness at the heart of the debate

Before the French Revolution, Mr. Silhouette is appointed “Contrôleur Général des Finances” (the equivalent of the Ministry of Finance). One of his ideas (that he will not have time to implement in his 8-month mandate), was a tax on doors and windows. The latter will eventually be implemented in 1797 and, although harshly criticized , will not be abolished before  1926. This is a pretty powerful evidence that people’s disagreement is not sufficient to get rid of something which is good for the State. This tax on doors and windows (which later got transformed in a tax on chimneys) is of circumstantial nature, as it gives an indication of what the owner can earn. It is indeed pretty logical to think that the more doors and windows, the larger the house,  and the larger the house the richer his owner. Finally the richer you are the more you should contribute to the State budget (by paying taxes of course).

On the contrary a tax system that does not rely on external factors but on the taxpayer’s declarations is called declarative. This is the example of taxes levied on revenues; the revenues get declared by the taxpayer him/herself.

Each type of tax system has advantages and disadvantages: declarative taxes are based on evidences which are easy to check by the tax administration: the surface of a property, the number of windows , … it has however the disadvantage of ignoring the intrinsic changes in the value of property or in the fortune of the owner. This is for instance the problem that appeared on Island of Ré, in France, where retired people who have lived there for decades have seen the value of their property sharply increasing (due to high demand from people on the continent) without having the same increase in monetary revenues. They became unable to pay their taxes.

Declarative tax has the advantage of relying on a very tangible elements which are perfectly representative of the individual’s ability to contribute to the State revenue. Its disadvantage is that it is declarative, that is to say, it involves that the taxpayer be trusted which is quite dangerous. This is why the State in several countries is trying to eliminate this danger by pre- filling tax returns. The risk of fraud is reduced consequently.

Which future for luxury consumption ?

It’s pretty sure that luxury consumption in Europe will be negatively impacted by this hunt for black money. Italian retailers are already feeling the effects of the Monti measures but this is only the way it should have always been. The black money feeds indeed a parallel economy and allows the survival of moribund companies which, without this injection of black blood , would be long dead. The debate is the same for for the HORECA sector (Hotels – Restaurants – Coffee) in Belgium which has now to undergo the implementation of black boxes on the cash registers to ensure that all revenues are declared.

Unfortunately, as this is often the case, those who will survive best are not the small ones but the big ones. Traditional (i.e. non-luxury consumption) will also suffer from these measures but in the end companies active in the luxury segment will not be too affected. Their sales have indeed long shifted to Asia, BRICS and to purchases by non-European customers in Europe. If Europe follows the path for virtue this is not the case of the Far East. Luxury has still a bright future in these countries where black money and bribery have still a future.

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Author: Pierre-Nicolas Schwab

Dr. Pierre-Nicolas Schwab is the founder of IntoTheMinds. He specializes in e-commerce, retail and logistics. He is also a research fellow in the marketing department of the Free University of Brussels and acts as a coach for several startups and public organizations. He holds a PhD in Marketing, a MBA in Finance, and a MSc in Chemistry. He can be contacted by email, Linkedin or by phone (+32 486 42 79 42)

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