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Data Mining

Even a Supercomputer Won't Fix Italy's Tax Problems

Italy had been looking to an IT solution to tackle its tax cheats, but it looks like no one is keen to use a new supercomputer to its full potential. Named after the famous policeman who exposed police corruption, Serpico is a trillion-byte-per-second supercomputer. It was switched on in January and it mines data in bank accounts, cross-referencing these to the paperwork supplied by businesses and individuals.

The technology specification is impressive. Stowed in the Roman basement of Sogei, which is part of the Information and Communication Technology of the Ministry of Economy and Finance, Serpico uses more than 2,000 networked servers. A server back-up is located in a bunker in Abruzzo so the service will not go down. Under an agreement with the banks, Serpico will take a copy of every transaction over €1000 and investigate it to see if that transaction tallies with Inland Revenue declarations.

There is some support for the government to take on tax fraud within Italy. The problem is so endemic that the country loses more than €120bn a year in unpaid taxes. Last year, 15 million people claimed a net income of zero. The Italian government says that Italy is one of the richest companies in the world and it should be paying more tax.

Most Italians will tell you that is untrue. While the north of Italy is traditionally better off, south of Rome is relatively poor. Ordinary Italians are not paid well in comparison to other countries and they also have a higher cost of living. A shop worker in Rome might hope to take home €1000 a month after tax. However, the rent for a small flat in Rome is about €900. Many cannot afford to leave their parents’ houses.

Coffee maker Riccardo Illy told the Wall Street Journal that, because of Italy’s dependence on payroll tax, the situation has become so absurd that an Italian worker costs more than a Spanish worker, but has a lower income.

The reason for Italy’s tax evasion problems are obvious to the self-employed of Rome. There is an unspoken Italian rule that if something is unreasonable, every effort should be expended to avoid it… and Italy does have one of the most bizarre tax regimes in the world.

The self-employed have to give half their income to the government and official accountants until they reach a magic €15,000 a year. Each invoice has to be registered online with the government, but only a certain number are filed so the tax office does not become suspicious.

As contract gardener Guido Colombo explained to me, the status quo was a uniquely Italian solution that assumes wide-scale avoidance. At the time the tax regime was designed, the government was not getting anything; this way it could be guaranteed to get something out of the self-employed.

However, there is a real fear that with Serpico the government is about to start changing the rules and demand that the self-employed pay everything the government expects. These people are already paying a higher proportion of their real earnings to the taxman.

“It is not avoidance, it is what they think they should be getting and they had to invent some stupid laws to get to that figure,” Colombo said.

Most Italians do not believe that it is the self-employed who should be going to jail for tax evasion, but the country’s business elite.

The worst of Italy’s black economy is run by mafia money laundering and big business cover-ups. Former Prime Minster Silvio Berlusconi was bought down by his conviction in the Mediaset tax evasion case  which was a tax fraud equal in total to more than €62m between 1988 and 1998. The prosecution charged Berlusconi with having committed a personal tax evasion of €7.3m.

Although Serpico was not behind that arrest, it is the sort of operation that many Italians expected it to provide and want to see happen. For that reason, soon after Serpico was switched on, tax police swooped on hotels and restaurants in Cortina to scare the ski resort's high concentration of wealthy holidaymakers. In what amounted to show arrests, the police netted some “hard-up” yacht and private aircraft owners who were claiming to earn less than €20,000 a year.

It was a PR coup for the system, but, strangely, it has not been repeated. Since the new Leftist government took office, the tax police have been making more conventional arrests. Recently they raided Apple for a tax underpayment of around €1bn. That particular case did not require Serpico: the Italian authorities are claiming that profits made in Italy are subject to Italian tax.

It appears that Serpico is a weapon that the government no longer seems keen on using. There are two very good reasons for this. Economists are starting to suggest that the unfair tax burden is stifling the Italian economy. Enforcement will make things worse. The other is that there could be large-scale civil disobedience if it was used as a Big Brother weapon.

The Prime Minister Enrico Letta seems to have seen the problems with using Serpico when he presented his draft 2014 budget that included €3bn in cuts to business and payroll taxes. This did little to raise an average worker's take-home pay but it does indicate that for now the Italian government does not really want to hit its struggling economy by electronically enforcing the existing rules.

Civil disobedience is always a potential problem in Italy. Although things have been quiet for a while, Serpico arrests would create a crisis for Letta that he does not need. Opposition leader Beppe Grillo dubbed Serpico a “Big Brother operation that Nazis could have invented.” There has already been one attempted anarchist bomb attack related to the computer and more discontent is certain if the system is seen to be used.

While the computer system is not going to go away, it appears that it is being used to support existing tax fraud investigations, rather than being the automatic taxman it was advertised as. Meanwhile, it will remain gathering data until one Italian government decides that it is ok to use Big Brother.

 

Nick Farrell is a freelance writer who was born in New Zealand and recently migrated from Bulgaria to Italy. He writes widely on technology, magic and the esoteric.

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Nick Farrell

Nick Farrell is a freelance writer who was born in New Zealand and recently migrated from Bulgaria to Italy. He writes widely on technology, magic and the esoteric.

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