Friday, February 27, 2015

Tax Avoidance and the Greek Debt Crisis

With Greece and its debt problems still in the news five and a half years after it began and four years after it reached the critical point in June 2011, the country still has to find a long-term solution to its $374.5 billion potential debt default.  As it stands now, Greece's debt is 168 percent of GDP and it is accruing interest at $28.1 billion annually.

A paper by Nikolaos Artavanis, Adair Morse and Margarita Tsoutsoura at the Booth School of Business at the University of Chicago examines one of the key issues that worsened Greece's fiscal health.  The authors use an interesting approach to estimate income tax evasion from Greece's private sector by examining the amount that banks lend to individuals.  They note that banks are most likely to lend to all individuals based on the banks' perception of true income meaning that tax-evaders will be granted credit far in excess of what they would normally be given if their incomes were as low as they reported to the government.

The authors used household credit data from tens of thousands of applications by wage and self-employed workers for credit products between 2003 and 2010; this data includes credit cards, mortgages, term loans, overdraft facilities, appliance loans and refinancing, with all data sourced  from a large Greek bank, to estimate the true income of individuals.  The bank being used in the study is one of ten large Greek banks that has branches throughout Greece.  Mortgage data, in particular, is useful for determining real household income since individuals that take out a mortgage generally choose to buy as much house as their household income permits and the standard rule of thumb states that mortgage payments should not exceed 30 percent of monthly income.  The authors note that they only had mortgage data from 2006 onward, however, 80 percent of Greek households end up owning a home so the sample size is reasonable.  The authors also use a standard tax evasion assumption which states that for wage workers, reported income is generally equal to real income.  On the other hand, those that are self-employed will find it much easier to declare less income than what they earn since the income paper trail is less robust.

Now, let's look at the findings which vary somewhat depending on the credit facility used (i.e. refinancing, credit cards, mortgages).

From the data on refinancing, lawyers, engineers, accounting, finance and medicine are identified as professions in which the self-employed neglect to declare at least half of their income.  Surprisingly, refinancing data shows that education is a significant tax-evading industry.  This is because many families in Greece hire private tutors for their school-aged children.  As well, those who are employed in media, particularly journalists, are high tax-evaders, largely because they have influence over political decision-making and have enjoyed relatively little scrutiny regarding their incomes.

From the data on credit cards, the authors looked at credit card limits with the largest being 35,000 euros.  This data shows that the biggest tax evaders are employed in education, construction, law, the media and the arts.  Accounting, financial services and medicine also appear, however, at rates that are slightly lower than for other types of credit since the credit card model is less robust for high income individuals.

From the data on mortgage payments, the authors found that accountants, financial service professionals, doctors and engineers are the biggest tax evaders.  Lawyers have slightly lower tax evasion that what is shown for other types of credit but still appear high on the list of income under-reporting.

The authors found that, in general, tax evasion increased as wealth increased as shown on this graph which shows the difference between reported income and real income for each 5th of a percentile:

Overall, the biggest reported-to-true income multipliers by industry in Greece are as follows:

1.) Education.

2.) Medicine.

3.) Engineering.

4.) Law.

5.) Media.

6.) Fabrication.

7.) Accounting and Financial Services.

On average, these occupations reported well less than half of what is actually earned.  It is interesting to see that these occupations require advanced degrees and that revenue depends on reputation.

In terms of the amount of tax evaded as measured in euros, the ranking is as follows:

1.) Doctors.

2.) Private Tutors.

3.) Engineers.

4.) Lawyers.

5.) Accounting and Financial Services

Here is a table showing the level of tax evasion in euros by occupation:

As an aside, Transparency International's National Survey on Corruption in Greece for 2010 showed that Greeks reported paying the largest bribes to hospitals, followed by lawyers, doctors, banks, vehicle inspection centers, clinics, civil engineers and other engineers.  The payment of bribes is the most significant way that wage earners can evade taxes.  

For the sake of completeness, here is a map showing the percentage of tax evasion by Greek zip code with the darker colours showing a higher level of tax evasion:

The red circled area is Larissa which, coincidentally, has the largest number of Porsche Cayennes in Europe.

One of the biggest problems facing Greece is its inability to collect income taxes owed by some of the nation's wealthiest and most highly educated professionals.  Using the data in this study, the authors estimate that, in 2009 alone, 28 billion euros in self-employed income went untaxed which amounted to 31 percent of the government's deficit in 2009 or 48 percent of the deficit in 2008.  Without more a more robust tax collecting mechanism, all of the actions by the EU, IMF and World Bank will obviously not solve Greece's long-term debt problems.


  1. The Greek problem is so much more than just collecting extra taxes. You last few sentences touched on it even if say 50% of the deficit it covered by getting 100% of the taxes owed, that’s now taking that money out of the economy causing it to shrink even more. So you hurt the economy more and you have only covered 50% of the deficit. Greece has to default there is no other way around it. They have to start over and do thing responsibly the next go around.

  2. To make matters worse recently Greece has become rather obnoxious and unruly to the members of the euro-zone who have continually loaned it the money to stave off default. It appears that at least inside Greece they have accepted the argument that they are the victims of lenders willing to allow the country to fall deeply in debt.

    Sadly, a conflict or problem exist within these policies because the Greeks deplores paying taxes to the government supplying these gifts. It appears those in power will again try to devise another way to kick the can down the road. Below is more on why this is a problem that simply won't go away.

  3. Here are a couple of things I don't understand about the article. (1) Greece has to find a long term solution to its debt problem, you write, but why? What's wrong with a short term solution? Are you getting bored hearing about yet another Greek financial crisis?
    (2) Institutions are willing to extend credit to Greeks if they think individual Greeks will have enough future income to repay the loans, and apparently the estimates of future income exceed past and present income. This is taken to show that Greeks are tax evaders. It just seems like a non sequitur. If they grant what seems like excessive credit to individuals, maybe institutional lenders are just optimists, instead of believing that all credit applicants are crooks.

  4. Its amazing how 99% of the economical debate in Western countries starts and finishes with the fiscal policy. Nobody talks anymore about industry, added value, and those things that used to create jobs and wealth. Everybody is wondering how to give more money to politicians. Sad but true.

  5. Can anyone explain the tax-evasion table to me?
    Doctors and Medicine, mean tax evasion: 29,343 euroes.

    Is this for everyone within this proffesion or for each individual? Is it calculated on monthly basis or yearly basis?

    The numbers in the table are collected from a report from Chicago Booth School of Business which also provides a table of reported income by proffesions in Greece. Doctors & Medicine have a monthly reported income of 1,479 euros. (

    I fail to see the comparison in the numbers. I'm working on my thesis at the moment and would love to have someone explain this to me. Thank you in advance.


    Somebody posted that somewhere else but it was a good link.
    Here's the debt as a graphic timeline... Greek has nothing but payments several times every month for the next 30 years. And elsewhere it becomes obvious that industry has left and what is left is leaving, in general the income for the govt is only what it gets as EU payments.. which are used for the payments back to basically where the money came from lol. Greece is never coming back. I'm from Finland, the EU.. and basically only Germany is benefitting because of it's uber strong economy, the other smaller countries are all used to having their own currency that they can revalue.. but not this time, devaluation only comes when the german economy needs it which is when it's export are costly in the importing country ie rarely.