Tax and Trust: The Fiscal Crisis in Greece

Abstract

This paper aims to highlight a number of shortcomings in the design and enforcement of the tax system in Greece, which have played a key role in the exacerbation of fiscal deficits that led to the current sovereign debt crisis. More precisely, we argue that these shortcomings resulting in low tax revenue are related to the structure of the Greek economy and to the failures of formal institutions (such as the poor functioning of the tax administration and lax tax enforcement). Such failures are rooted in and at the same time reinforce failures of informal institutions, namely low levels of trust in institutions and perceived fairness of the tax system.

Keywords:

• Greece
• Crisis
• Tax System
• Tax Morale
• Institutions
• Tax Administration

Notes

 [1] See, for example, European Commission (2010a).

 [2] Border taxes are hardly detectible in Greece as a result of EU membership.

 [3] Implicit tax rates are computed as the ratio of total tax revenues of the category (consumption, labour and capital) to a proxy of the potential tax base defined on the basis of national accounts.

 [4] The effective VAT rate is calculated as the ratio of VAT revenue to private consumption, while the effective corporate tax rate is calculated as the ratio of corporate taxes to GDP.

 [5] Technically, VRR = VR / (B ×  r), where VR stands for actual tax revenues, B represents the potential tax base (namely final consumption expenditure) and r is the standard VAT rate.

 [6] For a precise definition, see http://www.fiscalreform.net/index.php?option = com_wrapper&Itemid = 132

 [7] For an analysis of the distributional effects of personal income tax expenditure programmes, see Loizides and Kaplanoglou (2006).

 [8] The influx of immigrants during the last 20 years is among the factors contributing to the size of the shadow economy. According to the OECD International Migration Outlook for 2009, Greece has the highest number of illegal employed immigrants as a share of total employment, among 12 surveyed OECD countries (4.4 per cent compared with an average of 1.6 per cent).

 [9] Since the VAT gap is estimated primarily on the basis of national accounts data, it depends on the accuracy and the completeness of such data. Furthermore, due to lack of data, the estimates of the VAT gap are not adjusted to remove the VAT that is not collected due to insolvencies arising as a result of regular business activity, yet this portion of VAT that is not remitted is not due to VAT fraud. For a complete discussion of the methodological issues, see Reckon (2009).

[10] This estimate is close to the findings of Kanellopoulos, Kousoulakos and Rapanos (1995) for 1988.

[11] This is to a large extent explained by the fact that expenditure includes home production and imputed rent.

[12] For such recent analysis and proposals for improvement, see Bank of Greece (2010, pp. 170–181), Rapanos and Kaplanoglou (2011) and OECD (2011a).

[13] http://www.fiscalreform.net/index.php?option = com_wrapper&Itemid = 132.

[14] For a more detailed analysis of these factors see OECD (2010b).

[15] See for example Braithwaite (2003; 2009), Kirchler (2007), Torgler (2003a) and Traxler (2005).

[16] See e.g. Erard and Feinstein (1994) and Porcano (1988).

[17] For a detailed treatment of the role of trust in public economics, see Slemrod (2003).

[18] The revenue shortfalls are documented in e.g. the latest annual report of the Bank of Greece, where it is also mentioned that tax evasion has even increased (Bank of Greece 2012, p. 113).