Taxes and Incentives: The Italian Version

Basic economy theory, depicted by supply-and-demand curves, tells us that taxes will cause “deadweight loss.”

This is the economic activity that no longer occurs because taxes creates a wedge between buyers and sellers.

And this analysis applies whether we’re looking at taxes on income, taxes on consumption, taxes on trade. or taxes on investment. And “sin taxes” as well, for those who want to discourage certain behaviors.

That’s a good segue to today’s topic, which involves how taxes are being used to discourage a particular kind of tourism in Italy.

Here are some excerpts from a story by Colleen Barry for the Associated Press.

Venice is charging day-trippers to the famed canal city an arrivals tax for the second year starting Friday, a measure aimed at combating…overtourism… Visitors who download a QR code at least three days in advance will pay 5 euros ($5.69) — the same amount charged last year throughout the pilot program. But those who make last-minute plans pay double. …2.4 million euros…is the amount Venice took in during a 2024 pilot program for the tax. The city’s top budget official, Michele Zuin, said last year the running costs for the new system ran to 2.7 million euros, overshooting the total fees collected. This year, Zuin projects a surplus of about 1 million euros to 1.5 million euros, which will be used to offset the cost of trash collection and other services for residents.

I’m sharing this story because it illustrates that politicians understand tax policy when they want to.

Venice wants to reduce the number of tourists, so they’re following Ronald Reagan’s insight about how you get less of something.

What frustrates me, however, is that the same politicians conveniently forget this lesson when they push for class-warfare tax policies and pretend those taxes won’t discourage work, saving, investment, and entrepreneurship.

And since Italy ranks next-to-last for tax competitiveness among developed nation, that’s a lesson that desperately needs to be heeded.

P.S. I can’t resist making one final observation about Venice spending more money to administer the tax (2.7 million euros) than they actually collected (2.4 million euros). Sounds like their foolish German cousins (who have some weird tax policies, as seen here, here, and here).