Show me the money

MOST people agree that big piles of cash are nice things to have. But not everyone thinks it is good for a country if its citizens conduct their business with big piles of cash. Specifically, some Italians object to a move by the prime minister, Matteo Renzi, to triple the limit on cash transactions to €3,000 ($3,200). The existing ceiling was introduced in 2012, at the height of the euro crisis, when the European Union was pressing Italy to crack down on tax evasion. Since credit-card payments are easier to trace, the thinking went, a cash limit would force shopkeepers and others to declare more of their turnover. Mr Renzi has already raised from €50,000 to €150,000 the amount of tax that can be evaded without criminal sanctions. Both moves raise the question of what exactly Italy’s young prime minister, praised for his reformist agenda, is up to.

Mr Renzi’s critics, including some in his own centre-left Democratic Party (PD), accuse him of trying cynically to win support from small-business owners and the self-employed (including many doctors and lawyers), who have traditionally voted for the right. Unlike salaried employees of large firms or the state, they find it laughably easy to submit tax returns that understate their earnings. Pier Luigi Bersani, Mr Renzi’s predecessor as leader of the PD, said it insulted voters’ intelligence to pretend that someone able to pay €3,000 in cash might not possess a credit card. Mr Renzi counters that cash transactions can also be monitored with digital technology.

But Mr Renzi’s main contention is that encouraging the use of cash would spur consumption and accelerate Italy’s recovery from the longest recession in its history. How? Certain visitors to Italy might be happier to splash out in cash than with credit cards (perhaps for tax-related reasons of their own). The unspoken point, though, seems to be that if Italians pay even less tax, they will have higher disposable incomes.

The view that indulging tax evasion is good for the economy has a long history in Italy. It was common among the Christian Democrats who dominated Italian governments until the 1980s. Whether Mr Renzi shares that belief is impossible to say. But he certainly feels passionately about the issue: in October he said he was ready to gamble the future of his government on it by putting the increased cash threshold to a confidence vote in parliament.

For Mr Bersani encouraging tax evasion would be like pouring gasoline on a bonfire. Italy, he said, has “a shadow, ‘black’ economy, and [levels of] tax evasion and money-laundering that no other country in the West has.” According to a 2012 study for the social democratic group in the European Parliament, EU governments in 2009 lost €860 billion to tax evasion. Of that, €180 billion—almost a fifth—was dodged in Italy, by far the biggest figure for any member state. As a proportion of overall tax revenue Italy ranked tenth, behind Greece and several eastern European states, but in western Europe it was the worst offender.

Italy’s problems are common in southern Europe. The region combines high tax rates with lax enforcement and poor public services. Since the euro crisis, austerity policies have pushed those tax rates even higher. Paying one’s full whack is thus both painful and avoidable. Cheating seems rational, given that everyone else is doing it and the state offers lousy value for money. Businesses stay small to avoid the taxman’s eye; workers are self-employed for the same reason. A brave Italian government might try to fix this mess by lowering rates, improving enforcement and broadening the tax base. Instead, by making it easier to cheat, Mr Renzi would guarantee that the burden of paying for the state will fall on fewer shoulders.