The response of taxpayer compliance to the large shock of Italian unification

Abstract

Because of differences in the levels of taxation among pre-unitary states, Italian unification in 1861 determined differential increments in the tax burden among areas of the country. We constructed an index of these tax shocks and collected province-level data on historical and current indicators of tax evasion to evaluate the impact of the unification on tax compliance. We show that the historical variability in tax evasion reduced a lot in the following decades and that the convergence process preserved quite well the ranking in compliance among provinces. We also find that the shock to the tax burden explains much of the historical and current variability in tax evasion. The role of local congestion externalities, arising within a decentralized system of tax enforcement as that set in Italy, is formally explored to account for such evidence.