Tax Morale in Greece Aristidis - PowerPoint Presentation

Slide1

Tax Morale in Greece

Aristidis Bitzenis and Vasileios VlachosUniversity of Macedonia, Thessaloniki, GreeceSlide2

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.Slide3

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.Slide4

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.Slide5

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.Slide6

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.Slide7

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.Slide8

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) Slide9

Tax Morale in Greece: Clientelism

and Rent-seekingThe 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. Slide10

Size of the Greek Shadow Economy: previous research

Study

Method

Size of the Greek shadow economy (% of GDP)

Schneider and

Buehn

(2012) provide estimates for the size of the shadow economy in 39 OECD countries (estimates for 1999-2010).

MIMIC approach.

26

% in 20

08

(27.4% is

the

average value for 1999-2008)

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.

26.5% in 2007

(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)Κανελλόπουλος κ.α. (1995) provide estimates for the size of the shadow economy in Greece (estimates for 1982 and 1988).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 1988Νεγρεπόντη-Δεληβάνη (1991) provides estimates for the size of the shadow economy in Greece (estimates for 1970-1985).Currency demand approach.18.9% in 1984(11% is the average value for 1958-1988)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 1984Slide11

Size of the Greek Shadow Economy: our estimates

Country/Year

2003

2004

2005

2006

2007

2008

2009

2010

2011

Bulgaria

35.9

35.3

34.4

34.0

32.7

32.1

32.5

32.6

32.3

Romania

33.6

32.5

32.2

31.4

30.2

29.4

29.4

29.829.6Croatia32.332.331.531.230.429.630.129.829.5Lithuania32.031.731.130.6

29.7

29.1

29.629.729.0Estonia30.730.830.229.629.529.029.629.328.6Latvia30.430.029.529.027.526.527.127.326.5Cyprus28.728.328.127.926.526.026.526.226.0Malta26.726.726.927.226.425.825.926.025.8Poland27.727.427.126.826.025.325.925.425.0Greece28.228.127.626.225.124.325.025.424.3Slovenia26.726.526.025.824.724.024.624.324.1Hungary25.024.724.524.423.723.023.523.322.8Italy26.125.224.423.222.321.422.021.821.2Portugal22.221.721.220.119.218.719.519.219.4Spain22.221.921.320.219.318.419.519.419.2Belgium21.420.720.119.218.317.517.817.417.1Czech Republic19.519.118.518.117.016.616.916.716.4Slovakia18.418.217.617.316.816.016.816.416.0Sweden18.618.117.516.215.614.915.415.014.7Denmark17.417.116.515.414.813.914.314.013.8Finland17.617.216.615.314.513.814.214.013.7Germany17.116.115.415.014.714.214.613.913.7Ireland15.415.214.813.412.712.213.113.012.8France14.714.313.812.411.811.111.611.311.0United Kingdom12.212.312.011.110.610.110.910.710.5Netherlands12.712.512.010.910.19.610.210.09.8Luxembourg9.89.89.910.09.48.58.88.48.2Austria10.811.010.39.79.48.18.58.27.9EU28 unweighted average22.622.321.821.120.319.620.119.919.6Slide12

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:The tax burden increases as Greece’s financial position deteriorates.

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?Slide13

Tax Morale vis-à-vis Tax Burden:

Fact 1 – Income tax rateAlthough 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.Slide14

Tax Morale vis-à-vis Tax Burden:Fact

2 – Employers/ees contributionsTax 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). Slide15

Tax Morale vis-à-vis Tax Burden:Fact

3 – Business taxesBusiness 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

.

C

ountries

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

.Slide16

Tax Morale vis-à-vis Tax Burden:Fact

4 – Value Added Tax rateThe 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

.Slide17

Tax Morale vis-à-vis Tax Burden:Fact

5 – Sense of unfairnessOver 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.Slide18

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.Slide19

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).Slide20

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).Slide21

Conclusion:

An endeavor that requires timeAlthough 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.