Tax Evasion in Italy and the EU: Investigating a Relationship

9 Introduction Taxes and duties are a coercive levy whose primary function is to allow the financing of services and goods offered by the State regardless of the demand from citizens. This definition that highlights the power of the State to compel, by force, people to devolve part of their resources, assumes implicitly, at the same time, that coercion sometimes might as well result in resistance, fraud or illegal economic activities. [Guerra, 2010] The interest in tax policy has pushed the economic literature to evaluate the effects of fiscal policies on the behaviour of the various economic agents and to research for an optimal level of taxation, although with poor practical results. According to Arthur Laffer, “Economic activities are a decreasing function of the taxation rate”. [Heijman and Ophem, 2005:714] Graph 1: The Laffer curve Source: Adapted from Sloman (2005) As showed in the graph above, when the tax rate is zero there is no revenue for the government. Equally, when the tax rate equals 100% there would be no revenue as well, since no one would bother to work. As the rate rises above zero then tax revenue starts increasing. “The more laws are enacted and taxes assessed, the greater the number of lawbreakers and tax evaders” Lao Tzu Tax Revenue Average tax rate (%) R max 0 100 t 1