Italy: Could This Be Us?

By Jeffrey W. Ferguson

I recently returned from a family vacation in Tuscany. The countryside is among the world’s most magnificent, the people friendly and welcoming, the food excellent, and the wine plentiful and varied. But I  experienced an interesting and somewhat alarming phenomenon in purchasing goods and services over there. Everyone, including  those who advertise that they accept credit cards, wants to be paid in cash. A group of locals came to our Villa on our fist night to prepare an evening meal for us and returned the next night to give us a lesson in Italian cooking. They requested payment, which wasn’t unsubstantial, in cash.  I began to pick-up on this preference for cash as the week progressed.  Cab drivers, gelato vendors, tour guides, and merchants – they all preferred, or insisted upon, cash.

That vendors would prefer to be paid in cash is understandable. Payment is immediate, there are no credit card merchant fees, and bookkeeping is minimized. And in a high tax area like the European Union, the payment may well not get reported as income. Economists have long observed that as tax rates become more progressive, the underground economy (cash-and-carry) thrives.

Looking further into Italy’s economy, I found high and rising unemployment (8.9% for the population in general, 29.5% for youth); an export-driven economy with weak industrial and consumer spending; high income taxes; low participation in the labor market in comparison to France, Germany and most of the other euro zone countries; and, the “casa integrazione” program, which keep people on the payrolls (and off the unemployment statistics) at a reduced rate even though they are at home; and out-of-control deficit spending. Italy, like the other PIIGS (Portugal, Italy, Ireland, Greece and Spain) is in financial crisis.

How does the U.S. compare? Like the Italians, we have a beautiful country with great people, good food and a rich heritage bestowed by our founding fathers. Also, thanks to our current administration and Congress, we have new taxes, higher tax rates and deficit spending to pay for an ever-expanding government at both federal and state levels. Our economy is stagnating and in fact, reeling from a variety of crises.  Unemployment, hovering about 10% nationally, would be much higher if government weren’t hiring at unprecedented rates.

Look at what the legislature passed in Maryland two years ago – “the millionaires tax”.  The legislature was giddy with the extra revenue that this would generate for the state.  But their analysis didn’t take into account that taxpayers modify their behavior to protect their interests. The number of millionaires in Maryland dropped by one-third last year when the additional tax went into effect. The state predicted extra income of $106 million turned into $100 million LESS than the millionaires had paid in the prior year – a negative swing of more than $200 million from prediction to reality.  This lower revenue collected was in spite of the new higher rate.  Hyper regressivity again leads to failed collections.

Why don’t our politicians look at the Mediterranean countries to see where these types of policies lead? While the Europeans have begun to turn away from their welfare policies in favor of private enterprise, our leaders seem to be following the practices that lead to the European crises in the first place. I am hopeful that the anger towards entrenched politicians, exemplified by the tea partiers, will last until November, and that incumbent ideologues will be replaced with pragmatists who understand and subscribe to free market principles. America needs to return to an economy that relies on the private sector rather than the government to create new jobs and has a tax structure that invites more participants and drives fewer Americans to the cash-and-carry underground.

Jeffrey W. Ferguson has been President of Sentient Medical Systems, Erickson Retirement Communities and Marriott Senior Living Services. He serves on several boards of directors, writes and on business and social issues, and frequently participates in business and academic conferences as a featured speaker or panelist. He has a PhD. in management from the The Weatherhead School at Case Western Reserve and an a MBA from The Wharton School at the Univ of Penn. jwfergus5@aol.com.