Italy's dilemma: tax the church or find the cheats?

In a nation of tax cheats, who is Italy's biggest tax dodger? The Catholic Church, evidently. Pressured by the EU and the Prodi government, Vatican officials say they are willing to go back to the negotiating table with government bean counters to determine which of the estimated annual 1.3 billion euros in tax breaks is legit. The issue is over ICI, the local tax. The Church has long been exempt from paying ICI on the grounds, to put it simply, it is a non-profit. The only problem is the church runs a healthy commercial business in the form of health clinics, hostels and schools all over Rome, and beyond.

But a rewrite of the tax code last year, aimed at chiseling away at Italy's teetering national debt, means the Church's commercial businesses (in other words, any Church business that competes with local hotels, schools and clinics) are eligible for taxation.

Italy's public debt ratio is the second highest in the OECD, making any fresh tax revenues urgent. The problem is an obvious one: it doesn't collect enough in taxes to fund its ballooning expenses. A big problem is tax cheats. Italians dodge taxes to the tune of 100 billion euros (or 7 percent of GDP) annually, Reuters reports. It's not just famous motorcycle riders either; major corporations who hide their money in off-shore tax havens is a common accounting trick here, and everywhere. Thus, going after the church makes sense in a country that can ill afford to let anybody slide on their taxes. Ah, but if it were that easy.

In the coming days, Pope Benedict is expected to publish his latest encyclical. In it, he is expected to denounce tax cheats as robbing the well-being of society. His big target is expected to be the use of tax havens by big business to cut out the tax man.
On the eve of such an important encyclical for Italy's treasury, I would imagine the negotiations have already begun between church and state.