Small Business, Credit Card Costs and Tax Avoidance
Italian prime minister Giorgia Meloni proposed rescinding a fine on retailers who refuse to accept electronic payments for less than 60 Euro.
The rule was instated to boost tax compliance as part of Italy’s pandemic recovery plan agreed with Brussels.
Italian small businesses complain that payment processing charges are too high.
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Why are payment processing charges high?
Credit and debit card fees are set by Visa and Mastercard. Fees are regulated by the EU and are low for debit cards. However, payment processors bundle their services across all cards. So small businesses end up paying a high percentage fee plus a flat charge (e.g. 30c) on transactions.
Apple and Google have made payments even easier for customers - with contactless payments. However, Apple and Google often charge an even higher percentage fee to the merchant.
Why does Italy have an issue with tax avoidance?
Many Italian businesses do pay tax. While tax avoidance is higher than some other developed economies, it’s unfair to generalise.
One reason might be a culture of tax avoidance. If so, why did that culture develop?
Another reason might be the high costs of running a small business. Running a business, particularly a small business with low profit margins, is really hard. Businesses in the EU have a lot of consumer regulations to comply with. A lot of these regulations, e.g. around employment, have strong support in the EU. It wouldn’t make sense to remove these regulations if they have broad support. I’m pointing out that running a business isn’t easy.
The carrot and the stick for tax avoidance
The stick approach is to track every payment and force compliance.
The carrot approach - not easy - is to develop trust in government and social norms that encourage tax compliance. Another carrot approach is to have better and cheaper payment processing for small business. Another carrot approach still is to pair tax avoidance regulations with steps to simply regulations and costs for small business.
Cash and Financial Privacy
The EU is moving to a cashless society where all payments are tracked. Brussels is enforcing this as a term of providing recovery funds to Italy.
Should there be any financial privacy?
Perhaps private payments (including cash) are only for criminals. If you pay in cash, you are encouraging tax avoidance and money laundering.
Two positives of EU policy:
Open banking - driven by regulation - is making it easier to pay directly by bank, which is cheaper.
However, the digital interface (api) with each bank is different. The solution isn’t straightforward to scale (companies like Tink, Plaid and Column are doing this).
Hardware manufacturers are being asked (forced) to make their contactless features available to developers.
Today, the only real contactless options are Google or Apple Pay. It’s positive that steps are being taken to open up contactless features on phones to other developers.
Solutions to Payment Processing Costs
One option is to make use of open payment networks, such as Ethereum, combined with digital currencies (digital dollar, digital euro etc.). These networks aren’t yet usable in terms of cost and user experience, but things are improving quickly. The advantages they offer are standardisation and open access. Traditional payment networks either involve custom integration for each bank (ACH/SEPA transfers) or a walled garden (e.g. Visa / ApplePay). Using open networks is the approach I am taking in building Trelis. Trelis takes care of the user frictions with open payment networks (like paying gas, allowing refunds, avoiding fraudulent merchants) - allowing merchants and payment processors to easily integrate via a simple API.
Another solution is to have a government coordinated payment system that is uniform, like PIX in Brazil. The European Central Bank could and perhaps will create a system like this for the Euro. A key issue risk is that Eurozone countries do not share the same tax policies and government debt. Unless and until the Eurozone governments decide to integrate their taxation and debt (which may not be what citizens want), the Euro is on an unstable foundation.
Solutions to Tax Avoidance and Privacy
Making all payments - including cash-sized - digitally tracked is deep financial surveillance. There is a risk to policymakers that citizens will realise the hidden downsides in this (financial censorship of minority groups). A system that tracks rather than trusts by default runs the risk of losing public trust. Then again, there are Asian countries where this is (largely?) accepted. Nordic countries also have a low level of cash usage and a high level of government trust. Maybe this surveillance is the best approach?
A near-term alternative is to enshrine a right to privacy for cash or cash-like payments.
A medium term alternative is to legislate to allow for “zero knowledge” technology for compliance. This allows users to digital prove financial actions (e.g. tax has been paid, revenue has been received above/below a certain amount, a verified individual received the payment) without revealing details (such as the amount or recipient). This allows for dual benefits of privacy and tax compliance (and/or money laundering compliance).
I’m optimistic for payment systems that allow for better privacy and better trust between customers, businesses and governments. However, there are strong head-winds:
Since September 11th 2011, security and surveillance has changed. Systems have moved to an approach of detecting criminals and movements of their funds at all costs. There is no encroachment on privacy that cannot be justified by the prevention of money laundering and criminality.
Work on cryptography and privacy is synonymous with recent rampant fraud and speculation in crypto.
There is strong inflation of the Euro and Dollar. Government deficits owing to Covid and war will make it hard for central banks to slow inflation, resulting in continued weakening of the currencies. This creates drivers to restrict capital movements and the use of other currencies/commodities. Fraud and speculation in crypto and stock markets provide an easy justification for broad bans, even if it is incorrect to generalise.
What is the Italian perspective here? Is this a case of right wing politics pushing back against Brussels’ efforts to improve tax collection and reduce corruption in Italy? It seems to me there are a number of nuanced, and perhaps deeper issues at play here. I’m interested to learn and understand more.
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