Tax evasion in Greece: Billions earned by high-income professionals go untaxed

Dec 18, 2012

Wide-scale tax evasion in Greece accounts for 28 billion Euros in unreported taxable income –just among the self-employed, according to a new study, "Tax Evasion Across Industries: Soft Credit Evidence from Greece," by Adair Morse, a visiting assistant professor of finance at Berkeley-Haas.

At a tax rate of 40 percent, that's a revenue loss responsible for nearly one-third of Greece's deficit in 2009 or almost 50 percent of the deficit in 2008, according to the study co-authored by Margarita Tsoutsoura, assistant professor, University of Chicago Booth School of Business, and Nikolaos Artavanis, PhD candidate, Virginia Tech Pamplin College of Business.

Using bank data on household borrowing, the paper finds that highly paid, highly educated professionals are at the forefront of in Greece: doctors, engineers, private tutors, financial services agents, accountants, and lawyers. Morse contends the findings are troubling from a perspective of in the financially struggling country.

"The goal of the paper is to use our rich bank data to provide a country-representative estimate of tax evasion in aggregate and by occupation, and to offer analysis relating to factors that allow the tax evasion to persist," says Morse. "But we were also very aware that understanding who is paying taxes and who is not is important to the people of Greece. One might ponder how it can be a good thing that the higher-income professions 'tax evade' a higher proportion of this income."

The researchers further sought to understand how such dramatic tax evasion could exist and continue, with two main conclusions. First, the tax evaders tend to work in occupations that are least likely to leave a verifiable "paper trail" for tax collectors. Second, legislation, including a 2010 bill addressing the widespread tax evasion, has been slow to win approval. Morse asserts that it may not be mere coincidence that the majority of Greek Parliament members' professions correlate with the largest tax evaders', even excluding lawyers. "Industry associations are strong," Morse suggests. "Parliament members face enormous loyalty pressure."

The data consist of credit applications for consumer credit products at one of the ten large Greek banks from 2003 to 2010. The authors study situations in which the bank determines the credit level such as refinance loans, new credit cards, and a sample of loans in which borrowers requested more money than they received. In these situations, Morse uses the bank decision on the appropriate credit level to understand how much income the bank must perceive individuals to have to back out the bank's estimate of true income. The authors term such lending "soft credit" since the information about true income is soft information. The researchers infuse this new insight with the observation that Greek banks have learned to adapt to an economy where income is often hidden to remain competitive.

Morse hopes the study's findings will encourage EU and Greek policymakers to create incentives for more accurate income reporting such as paper trial mandates or occupation licenses for tax evading industries. Already the research is having an impact on the rhetoric in Greece, encouraging the population to think about the culture of tax evasion and how tax evasion does not equally benefit all Greeks. The Greek government recently approved new regulations requiring all businesses to issue receipts for transactions so it may track business taxes due. If a business doesn't comply, the customer can reportedly walk away –without paying.

Explore further: The significance of digits: just how reliable are reported numbers?

More information: See full paper: faculty.chicagobooth.edu/adair… rs/TaxEvasionWeb.pdf

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hb_
3.7 / 5 (3) Dec 18, 2012
Well, now we know the extent of the tax evation at the higher income level.. Big enough to cover half the budget deficit..

And to think that the average Joe of Germany and France will have to pay for these tax evading rich guys in Greece just makes me sick to my stomach! Put pressure on Greece to make a functioning tax system! If they cannot do it themselves, outsource the whole "running-of-government-and-taxes" to a german firm..
hb_
3.7 / 5 (3) Dec 18, 2012
I must congratulate the authors on their clever approach to gauging the true incomes of the self employed. It is a good method, since they employ the combined work force of the banks (they make the financial estimates), compile a large data-set and circumvent the tendency for greeks to lie about their income.

The latter is true since the loan taker must prove to the bank that they can finance their lone, and hence have no incentive to lie about their financial status.
frajo
not rated yet Dec 18, 2012
You are generalizing ("the Greek", "the Germans", "the French").
Birger
3.7 / 5 (3) Dec 18, 2012
So...high income earners cheat on taxes, low income earners get screwed by economic cuts by government. Sounds like Montgomery Burns designed the system.
BSD
2.3 / 5 (6) Dec 18, 2012
I didn't know the GOP were elected in Greece.
VendicarD
3 / 5 (2) Dec 18, 2012
Corruption among Conservatives is a universal trait.

"I didn't know the GOP were elected in Greece." - BSD

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