Download Tax Morale in Greece

Tax Morale in Greece
Aristidis Bitzenis and Vasileios Vlachos
University of Macedonia, Thessaloniki, Greece
Shadow Economy: Definition
It includes illegal activities involving the supply
of legal goods and services (for example,
smuggling)
but excludes illegal activities involving the
supply of illegal goods and services (for example,
drugs).
Definition from a study prepared on behalf of the European
parliament by the European Commission.
Shadow Economy: Importance
The exclusion of illegal activities is justified
because on the one hand, the income derived
thereof cannot be incorporated into formal
economy, and, on the other hand, the inclusion
of illegal activities would excessively extend the
field of research to criminal policy matters.
Determinants of the
Greek Shadow Economy
Bitzenis, Vlachos and Schneider* find that tax
morale is a key determinant of the Greek
shadow economy.
The other key determinants are unemployment,
tax burden and self-employment.
* forthcoming: Journal of Economic Issues.
Tax Compliance and Morale
Tax morale is an important component of tax
compliance decisions.
In some cases as much as enforcement, which is
the primary driver of compliance according to
the literature.
Luttmer and Singhal, Journal of Economic Perspectives, 2014.
Determinants of Tax Morale
• intrinsic motivation, which is the additional term in the utility
function that increases in the amount of taxes that the individual decides
to pay;
• reciprocity, in which an additional utility term for paying taxes depends
on the individual’s relationship to the state (perceptions about the fairness
of the tax system and quality of public services);
• peer effects and social influences, in which the additional utility
term for paying taxes depends on views or behaviours of other individuals;
• long-run cultural factors that may affect the willingness to pay taxes;
• information imperfections and deviations from utility
maximization (i.e. cases where individuals misperceive the probability
of being detected in evading taxes or may exhibit loss aversion).
Luttmer and Singhal, Journal of Economic Perspectives, 2014.
Tax Morale in Greece: Reciprocity
Tax morale in Greece has been explored
• either through studies on tax evasion
• or papers that focus on the shortcomings of
the country’s official institutions.
Both highlight the reciprocity dimension of tax
morale.
Low Tax Morale in Greece
Low tax morale is influenced by distrust,
• both in government or state institutions
(reciprocity) and
• in other taxpayers (peer effects, cultural
factors, information imperfections)
Tax Morale in Greece:
Clientelism and Rent-seeking
The reciprocity dimension of tax morale in Greece has
been affected greatly by the phenomena of clientelism
and rent-seeking (corruption in the public sector).
Government decisions are not depicted only in the size of
fiscal deficits that increase the tax burden (like in the case
of Greece),
but also set the overall stage on which the economy
performs, through regulations that shape labour and
product markets and impact on the quality of official
public institutions and administration.
Size of the Greek Shadow Economy:
previous research
Study
Schneider and Buehn (2012) provide estimates for the size of
the shadow economy in 39 OECD countries (estimates for
1999-2010).
Method
MIMIC approach.
Size of the Greek shadow
economy (% of GDP)
26% in 2008
(27.4% is the average value for
1999-2008)
26.5% in 2007
Schneider et al. (2010) and Buehn and Schneider (2012a)
provide estimates for the size of the
shadow economy in 162 countries (estimates for 1999-2007).
MIMIC approach.
(27.5% is the average value for
1999-2007)
Dell’Anno et al. (2007) provide estimates for the size of the
shadow economy in France, Spain and Greece (estimates for
1968-2002).
MIMIC approach.
Approximately 28% in 2002
Τάτσος (2001) provides estimates for the size of the shadow
economy in Greece (estimates for 1967-1997).
Currency demand approach.
36.7% in 1997
(30.1% is the average value for
1967-1997)
Comparison of data from the Household Budget
Survey with private consumption as registered in the
National Accounts.
27.6% in 1982 and 34.6% in
1988
Κανελλόπουλος κ.α. (1995) provide estimates for the size of
the shadow economy in Greece (estimates for 1982 and 1988).
18.9% in 1984
Νεγρεπόντη-Δεληβάνη (1991) provides estimates for the size
of the shadow economy in Greece (estimates for 1970-1985).
Currency demand approach.
Βαβούρας κ.α. (1990) provide estimates for the size of the
shadow economy in Greece (estimates for 1958-1988).
Currency demand approach.
31.6% in 1988
(26.6% is the average value for
1958-1988)
Παυλόπουλος (1987) provides estimates for the size of the
shadow economy in Greece (estimates for 1984).
Assuming for discrepancies on the macro level: i.e.
accounting for underestimation of value-added
activities.
28.6% in 1984
(11% is the average value for
1958-1988)
Size of the Greek Shadow Economy:
our estimates
Country/Year
Bulgaria
Romania
Croatia
Lithuania
Estonia
Latvia
Cyprus
Malta
Poland
Greece
Slovenia
Hungary
Italy
Portugal
Spain
Belgium
2003
35.9
33.6
32.3
32.0
30.7
30.4
28.7
26.7
27.7
28.2
26.7
25.0
26.1
22.2
22.2
21.4
2004
35.3
32.5
32.3
31.7
30.8
30.0
28.3
26.7
27.4
28.1
26.5
24.7
25.2
21.7
21.9
20.7
2005
34.4
32.2
31.5
31.1
30.2
29.5
28.1
26.9
27.1
27.6
26.0
24.5
24.4
21.2
21.3
20.1
2006
34.0
31.4
31.2
30.6
29.6
29.0
27.9
27.2
26.8
26.2
25.8
24.4
23.2
20.1
20.2
19.2
2007
32.7
30.2
30.4
29.7
29.5
27.5
26.5
26.4
26.0
25.1
24.7
23.7
22.3
19.2
19.3
18.3
2008
32.1
29.4
29.6
29.1
29.0
26.5
26.0
25.8
25.3
24.3
24.0
23.0
21.4
18.7
18.4
17.5
2009
32.5
29.4
30.1
29.6
29.6
27.1
26.5
25.9
25.9
25.0
24.6
23.5
22.0
19.5
19.5
17.8
2010
32.6
29.8
29.8
29.7
29.3
27.3
26.2
26.0
25.4
25.4
24.3
23.3
21.8
19.2
19.4
17.4
2011
32.3
29.6
29.5
29.0
28.6
26.5
26.0
25.8
25.0
24.3
24.1
22.8
21.2
19.4
19.2
17.1
Czech Republic
Slovakia
Sweden
Denmark
Finland
Germany
Ireland
France
19.5
18.4
18.6
17.4
17.6
17.1
15.4
14.7
19.1
18.2
18.1
17.1
17.2
16.1
15.2
14.3
18.5
17.6
17.5
16.5
16.6
15.4
14.8
13.8
18.1
17.3
16.2
15.4
15.3
15.0
13.4
12.4
17.0
16.8
15.6
14.8
14.5
14.7
12.7
11.8
16.6
16.0
14.9
13.9
13.8
14.2
12.2
11.1
16.9
16.8
15.4
14.3
14.2
14.6
13.1
11.6
16.7
16.4
15.0
14.0
14.0
13.9
13.0
11.3
16.4
16.0
14.7
13.8
13.7
13.7
12.8
11.0
United Kingdom
Netherlands
Luxembourg
Austria
EU28
unweighted
average
12.2
12.7
9.8
10.8
12.3
12.5
9.8
11.0
12.0
12.0
9.9
10.3
11.1
10.9
10.0
9.7
10.6
10.1
9.4
9.4
10.1
9.6
8.5
8.1
10.9
10.2
8.8
8.5
10.7
10.0
8.4
8.2
10.5
9.8
8.2
7.9
22.6
22.3
21.8
21.1
20.3
19.6
20.1
19.9
19.6
Tax Morale vis-à-vis Tax Burden
Two out of four key determinants of Greece’s shadow
economy have undergone great changes due to the crisis:
1. The tax burden increases as Greece’s financial
position deteriorates.
2. Unemployment has exploded.
Assuming that unemployment’s importance increased
due to the substitution effect,
has tax burden become more important than tax
morale, due to the crisis?
Tax Morale vis-à-vis Tax Burden:
Fact 1 – Income tax rate
Although the tax burden in terms of the average
wage-income tax rate has increased, it still remains
below the respective average OECD rate.
However, wage earners cannot conceal part of their
income.
Over 85% of income tax revenue in Greece was and
still is from physical entities.
Tax Morale vis-à-vis Tax Burden:
Fact 2 – Employers/ees contributions
Tax wedges in Greece (up to 100% of average tax
wedges) are lower from the respective wedges
of eurozone’s core and peripheral economies
(France, Germany, Italy, Portugal and Spain).
Tax Morale vis-à-vis Tax Burden:
Fact 3 – Business taxes
Business total tax rate as a percentage of
commercial profits in Greece is higher than the EU
average.
However, business tax burden per se is not
correlated to the size of the shadow economy.
Countries with bigger shadow economies, such as
Bulgaria and Cyprus, and countries with smaller
shadow economies, such as Portugal, have
considerably lower total tax rates as a percentage of
commercial profits.
Tax Morale vis-à-vis Tax Burden:
Fact 4 – Value Added Tax rate
The standard VAT rate in Greece is well above
the OECD average respective rate and above all
standard VAT rates across the OECD (except
from Finland and Hungary).
VAT rate per se may be a motive for Greek
taxpayers to engage in VAT evasion.
Tax Morale vis-à-vis Tax Burden:
Fact 5 – Sense of unfairness
• Over 85% of income tax revenue in Greece
was and still is from physical entities.
• Tax amnesties.
• Preferential tax treatments.
• Poor performance in tax audits and collection.
Enforcement or motivation?
The definition of the shadow economy reveals what the
policy aim should be:
Transferring part of it to the formal/official economy
and not simply terminating shadow economic activities.
Considerations:
• Slippery slope framework: motivation (tax morale) is
highly important for achieving such a transfer.
• Shadow economy also provides succor for the
economic crisis.
Conclusion:
Slippery slope framework and the key
determinants of the Greek shadow
economy
• Unemployment (shadow economic activities
should not be terminated due to the crisis).
• Self-employment (enforcement in terms of
frequent audits).
Conclusion:
Slippery slope framework and the key
determinants of the Greek shadow
economy
• Tax morale: reciprocity will improve directly
through fighting rent-seeking and clientelism
(enforcement), the negative effect of other tax
morale determinants will diminish through
improvements in other key shadow economy
determinants.
• Tax burden (better allocation).
Conclusion:
An endeavor that requires time
Although a transfer of the shadow to the official
economy will provide economic succor amid the
crisis,
the time required for institutional change (tax
morale) indicates that results will occur in the
medium-long term.