Rewarding the honest

Comments - The weapon against more tax evasion

Rewarding the honest

by Luigino Bruni

published on Avvenire on 28/08/2011

logo_avvenireFor teachers exams are a sad ritual in search of hidden notes and of new tricks to pass the test without studying. When a course is particularly led to these malpractices the first and natural reaction of the faculty is to increase controls and harsh punishments. I too have fallen into this temptation, but I learned that the main, if not the only, effect one gets is a double failure: it creates a crime atmosphere in the classroom and all students work badly, and the "copying professionals" always find more sophisticated systems that circumvent the controls while the average student falls in tighter controls, because now even a harmless look at the neighbor’s desk is punished.

Last year I happened to teach Economics at a prestigious foreign university and I discovered that the exams were "open book." Obviously I had to develop a more structured exam but I'm even more convinced that the best way to increase efficiency and fairness in any system involves the right design of institutional mechanisms. Tightening controls and sanctions in my exams, with the best intentions and without wanting it I sent a strong message to my students: "you are basically dishonest and unfair," a message that frustrated the intrinsic motivation of good students and unleashed the imagination of the few unfair students to the point of wanting to prove that they were more cunning than me.

I believe there is a link between this experience and the debate against tax evasion which is in progress in Italy today. The first step for a real tax reform is to rethink the design and overall logic of the tax system: returning to the school metaphor, to switch from "note hunting" to "open book exams," where appropriate incentives are given to citizens to demand their own and others’ transparent transactions, allowing, for example, families to have less expenses and a more appropriate rate than the present ones.

A second element of a serious tax reform should begin with the realization that even if we were to sanction all bakers, bartenders, craftsmen and professionals who do not issue receipts and invoices (which is obviously necessary), there exist a mega tax and ethical issue for large companies and individuals who have registered offices and homes in tax havens, and easily exchange enormous wealth in international financial markets evading taxes (just see the reactions to the Tobin tax proposal or the taxation of Credit Default Swaps (CDS)), perhaps of pending future amnesties. Without a serious fight against these macro fiscal scandals, we can also close down some activity that does not issue a receipt (an appropriate thing in itself, especially when it comes to freelancers or medical professionals with villas and SUVs), but we would do the grave error of who treats the tooth decay of a patient and neglect to care about a tumor: treat well the tooth decay (which is very painful when inflamed: the dental metaphor is purely coincidental), but let us also remember of the tumor.

But there's more. In 1766 Giacinto Dragonetti, lawyer from Aquila, Italy, published a book entitled "On Virtues and Rewards," not by chance two years after the publication of the famous "On Crimes and Punishments" by Cesare Beccaria. In Dragonetti’s Introduction, it reads: "Men have made millions of laws to punish crime, and they haven´t established even one to award virtue," and therefore proposed to his Kingdom of Naples to give life to a true and real "Code of Rewards" which would accompany the "Penal Code," based on the extraordinary intuition that a country cannot develop if, while punishing the dishonest, it does not reward the virtuous citizens. It is true that an indirect way to reward the honest is to punish adequately the opportunists and the cunning ones, and today Italy also needs this. But we must bear in mind one of the lessons of economic science: the laws are mostly symbolic signals and messages, and those that are based on anthropological hypothesis that humans by nature are dishonest and opportunists ultimately produce opportunists and dishonest citizens. A tax reform that aims to be efficient and equitable must rely primarily on virtuous and law-abiding citizens that, we must not forget in these hard times, are always the vast majority of the population, including the Italian one, because if the opposite were true the common life would implode in the space of one morning. It is therefore the foundation of a healthy people that must be mobilized for a tax reform, with credible signs of confidence, esteem and gratitude. The biggest failure of a tax reform would be to further ruin the relationships between citizens, bringing them to look at colleagues and neighbors as dishonest and potential tax evaders, and not as valuable allies in the common construction of the city.

All of Luigino Bruni's comments on Avvenire can be found under Avvenire Editorial.

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