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Distributional implications of tax evasion in Greece
Manos Matsaganis1 and Maria Flevotomou2
1
Athens University of Economics and Business
2 Bank of Greece
Hellenic Observatory
London School of Economics
18 November 2008
structure of paper
introduction
data and methodology
results
conclusion
introduction
data and methodology
results
conclusion
motivation
tax evasion interesting for distributional analysis
equity (horizontal)
•
equity (vertical)
•
•
fairness, equal treatment, reciprocity
“If the poor had more opportunity of evading taxes than the
rich, or were better at it, then the egalitarian policy maker
might have good reason to smile indulgently on evasion: up
to a point anyway” (Cowell, 1987)
does income tax evasion soften or strengthen the
redistributive impact of the income tax system?
efficiency
•
•
higher tax burdens on those who do not evade
opportunities to evade differ by occupation or/and sector of
the economy tax evasion distorts labour supply decisions
aim of paper
to provide preliminary estimates of the size and
distribution of income tax evasion in Greece …
•
•
shadow economy up to 37% of GDP
tax evasion up to 15% of GDP
… by exploiting unprecedented access to a large
sample of income tax returns
introduction
data and methodology
results
conclusion
two datasets
the most recent Household Budget Survey
•
•
•
carried out by the National Statistical Service in Greece
covering the income year starting February 2004 and
ending January 2005
17 386 individuals in 6 555 households
a random sample of unaudited income tax returns
•
•
•
income tax returns filed in 2005 (incomes earned in 2004)
41 283 individual tax payers in 27 714 tax units (sampling
fraction approximately 0.53%)
provided to the authors in anonymous form by the Ministry
of Economy and Finance
intuition
tax evaders have no incentive to conceal their true
income when responding to an income survey
reasonable assumption …
•
see e.g. Fiorio and D’Amuri (2005)
… though not necessarily true!
•
•
consumption-based approach takes it for granted that
income surveys unreliable
see e.g. Pissarides and Weber (1989), Lyssiotou et al (2004)
general strategy (1)
compare the income survey with the tax returns
assume survey incomes are “true”
• no particular reason to believe this (and some evidence to
the contrary) …
• … but weaker incentives to understate one’s income in a
survey (compared to when on is filing one’s tax return)
• our (eventual) estimates of tax evasion will be conservative!
… except for measurement or reporting error
• relevant in the case of incomes that need to be adjusted
upwards to correct for under-reporting in the survey (e.g.
pension incomes)
general strategy (2)
construct a synthetic distribution of reported income
• i.e. as assumed to be revealed to the tax authorities
by “adjusting” survey income
• for under-reporting
• in the light of information from the tax returns
adjustment factors
• tax returns income ÷ survey income
• by region and main source of income
general strategy (3)
apply the synthetic distribution of reported income to
compute the potential effects of tax evasion in terms
of:
• tax receipts
• progressivity of tax system
• poverty and inequality
• re-ranking effects
• errors in targeting benefits
• etc.
… using the tax-benefit model Euromod
methodological issues
variable definitions
variable definitions have to be consistent
• gross incomes
• survey: compute income taxes and, in the case of the selfemployed, SESIC
• tax returns: compute EESIC in the case of income from wages,
salaries and pension benefits
• property income
• rents etc. significant source of income in tourist areas
• added to (non-agricultural) self-employment income
methodological issues
reference population (1)
identify reference population
• survey and tax return populations likely to differ
• reweighting for concilation with population needed
• identifying reference population an iterative process
step 1: reweight tax returns sample
• by occupation
• by region
methodological issues
reference population (2)
some individuals are not in the labour force nor
receiving pension benefits
• survey: n = 4 476 (25.7% of all individuals)
• tax returns: n = 1 333 (3.2%)
step 2: restrict to active workers + pension recipients
methodological issues
reference population (3)
some individuals are classified as active …
… but actually report zero income
• survey: n = 2 343 (18.1% of active population)
• tax returns: n = 5 737 (14.4%)
step 3: restrict to to those earning non-zero incomes
methodological issues
reference population (4)
below a certain income threshold …
• €6 000 if employee with no other income
• €3 000 otherwise
… individuals legally exempt from filing a tax return
• survey: n = 1 092 (10.3% of non-zero earners)
step 4: restrict to to those filing a tax return
methodological issues
reference population (5)
below a certain income threshold …
• €10 000 if employment status is employee or pensioner
• €8 400 otherwise
… individuals pay no tax (i.e. marginal rate = 0)
• survey: n = 4 447 (46.9% of tax filers)
• tax returns: n=19,335 (56.5%)
step 5: restrict to to those earning enough to pay tax
methodological issues
reference population (6)
‘employment status = not identified’ likely to be
heterogeneous / not comparable across data sets
• survey: n = 235 (4.7% of tax payers)
• tax returns: n = 3 726 (25.0%)
step 6: allocate ‘employment status = not identified’
to one of the other employment status categories
according to highest income source
• survey: n = 94 (1.9% of tax payers) could not be recovered
• tax returns: n = 1 096 (7.4%)
methodological issues
tax evasion vs. income under-reporting
decision to exclude those earning too little to pay tax
has crucial implications
• income under-reporting causes no tax evasion in the
income bracket where marginal tax rate = 0
• even though it may cause evasion of other taxes (e.g. VAT)
or social contributions (EESIC and ERSIC)
topic of interest is evasion of income taxes, rather
than income under-reporting as such
resulting estimates likely to be lower-bound
introduction
data and methodology
results
conclusion
adjustment factors
Athens
Northern
Southern
Islands
wages / salaries
1.000
0.978
0.992
1.000
pensions
1.000
1.000
1.000
1.000
agriculture
0.468
0.412
0.530
0.519
self employment
0.770
0.860
0.640
0.712
Note: Adjustment factors were set equal to 1 in the cases of income from dependent employment
in Athens and the Islands (small rates of under-reporting, ignored on the grounds that there is no
incentive to over-report one’s income in one’s tax return), and of income from pensions (small
variations from 1 ignored on the grounds that pension income is taxed on the basis of statements
issued by the pension benefit agencies).
under-reporting by level of income
“true” income
“reported” income
difference
decile 1 (poorest)
1 963
1 769
-9.9%
decile 2
3 540
3 174
-10.4%
decile 3
5 667
5 031
-11.2%
decile 4
7 079
6 715
-5.1%
decile 5
8 191
7 723
-5.7%
decile 6
9 867
9 172
-7.0%
decile 7
12 298
11 322
-7.9%
decile 8
15 447
14 314
-7.3%
decile 9
19 869
18 525
-6.8%
decile 10 (richest)
39 650
33 839
-14.7%
top 1%
96 526
73 732
-23.6%
total
12 455
11 220
-9.9%
Note: Mean annual personal income in €. Income quantiles constructed excluding those earning
zero or negative incomes (38.3% of total population). “True” income as observed in the HBS.
“Reported” income adjusted for under-reporting using adjustment factors by region and income
source as shown previously.
Annual personal income in €
under-reporting by level of income
50000
40000
30000
20000
10000
0
1
2
3
4
5
6
7
8
Income deciles
“True” income
“Reported” income
9
10
under-reporting by source of income
% of all earners
“true” income
“reported” income
difference
wages / salaries
41.5
13 085
13 007
-0.6%
pensions
37.1
7 960
7 960
0.0%
agriculture
6.3
12 353
5 819
-52.9%
self employment
15.1
19 327
14 616
-24.4%
12 455
11 220
-9.9%
total
Note: Mean annual personal income in €. Earners as defined as those with non-zero income (61.7% of total population).
“True” income is as observed in the HBS. “Reported” income is adjusted for under-reporting using adjustment factors by
region and income source as shown previously.
under-reporting by region
% of all earners
“true” income
“reported” income
difference
Greater Athens
39.2
14 555
13 733
-5.6%
Northern
27.4
11 152
9 859
-11.6%
Southern
22.7
10 839
9 110
-16.0%
Islands
10.8
11 534
9 991
-13.4%
12 455
11 220
-9.9%
total
Note: Mean annual personal income in €. Earners as defined as those with non-zero income (61.7% of total population).
“True” income is as observed in the HBS. “Reported” income is adjusted for under-reporting using adjustment factors by
region and income source as shown previously.
under-reporting by family type
% of all earners
“true” income
“reported” income
difference
single
35.5
9 970
9 252
-7.2%
married no children
34.5
11 310
10 136
-10.4%
married 1 child
12.5
16 250
14 446
-11.1%
married 2 children
13.7
17 034
15 133
-11.2%
married 3 children
3.1
17 042
14 818
-13.1%
married 4+ children
0.6
17 225
14 348
-16.7%
12 455
11 220
-9.9%
total
Note: Mean annual personal income in €. Earners as defined as those with non-zero income (61.7% of total population).
“True” income is as observed in the HBS. “Reported” income is adjusted for under-reporting using adjustment factors by
region and income source as shown previously.
income tax variables
full compliance vs. tax evasion
full compliance
tax evasion
difference
reported income
12 455
11 220
-9.9%
taxable income
11 957
10 724
-10.3%
tax allowances
499
499
0.0%
tax reductions
182
181
-0.6%
tax due (all)
1 175
868
-26.1%
tax due (non-zero)
3 263
2 716
-16.7%
disposable income
11 280
11 587
+2.7%
Note: Mean annual personal income in €. “Full compliance” provides estimates of income tax
variables assuming incomes are reported to tax authorities as observed in the HBS. “Tax evasion”
provides estimates of the same variables assuming incomes are under-reported to tax authorities,
as implied by the adjustment factors by region and income source shown previously.
distributional implications of tax evasion
full compliance
tax evasion
difference
tax receipts (€ million)
7 890
5 830
-26.1%
poverty line (€ p.a.)
5 578
5 636
+1.0%
poverty rate
18.9
19.3
+2.3%
poverty gap
6.0
6.1
+1.6%
Gini
0.320
0.331
+3.5%
S80/S20
5.424
5.705
+5.2%
Atkinson e=0.5
0.088
0.094
+7.2%
Atkinson e=2
0.422
0.434
+2.7%
Theil
0.177
0.194
+9.2%
Kakwani
0.116
0.104
-10.0%
Reynolds-Smolensky
0.028
0.022
-23.5%
Suits
0.207
0.173
-16.2%
Note: “Full compliance” provides estimates of income tax variables assuming incomes are reported
to tax authorities as observed in the HBS. “Tax evasion” provides estimates of the same variables
assuming incomes are under-reported to tax authorities, as implied by the adjustment factors by
region and income source shown previously.
introduction
data and methodology
results
conclusion
main findings (1)
aggregate rate of under-reporting ≈ 10%
under-reporting by income source
• agriculture: 53%; self-employment: 24%
• wages and salaries: <1%; pensions: 0%
under-reporting by region
• Southern: 16%; Islands: 13%; Northern: 12%
• Athens: 6%
under-reporting by family type
• single: 7%
• up to 2 children: 11%
• 4+ children: 17%
main findings (2)
distribution of under-reporting by income U-shaped
• large number of precarious, unregistered, informal jobs
petits boulots
• under-reporting of such incomes leads to considerable
social contributions evasion (both EESIC and ERSIC!) …
• … but to little income tax evasion
progressive tax schedule
significant tax-free allowance (especially for large families)
main findings (3)
implications of under-reporting at high incomes
• significant fiscal effects
10% of income under-reporting 26% shortfall in tax receipts
• considerable effects on income inequality
increase by 3.5% (Gini), 7% (Atkinson e=0.5), 9% (Theil) etc.
• strong effects on tax progressivity
decrease by 10% (Kakwani), 23% (Reynolds-Smolensky) etc.
reasons for caution (1)
datasets comparable / correctly matched?
• tax records truncated
low-income families file no tax returns + pay no taxes
• limited reliability of income surveys …
… at either end of income scale
reasons for caution (2)
incomes in the household budget survey “true”?
• the factors causing tax evasion …
low trust, low tax morale etc.
subconscious tendency to be consistent
• … may cause under-reporting in income surveys
if so, tax evasion will be higher than estimated here
reasons for caution (3)
static vs. dynamic effects
• taxes (and tax evasion) affect decisions concerning:
supply of, and demand for, labour
allocation of consumption between different goods
allocation of income between consumption and savings
etc.
• only static effects on disposable income considered here
reasons for caution (4)
income taxes vs. other taxes
• taxes not considered here:
value added tax, company tax, property tax etc.
• social contributions
EESIC flat effects of evasion less regressive
ERSIC evasion very regressive
… but unknown dynamic effects on employment, prices etc.
possible refinements
improve matching
• follow different approach
• collect larger sample
• include more variables
stochastic variation
• lift assumption that all members of a given category (defined here
as combinations of region and main income source) under-report
their incomes by the same ratio
• introduce a random term (with zero mean, and a variance possibly
suggested by the data) around the estimated average rate of
under-reporting by category