financial

Greek tax evasion runs rampant

If Greece is ever to achieve fiscal sustainability—something European officials insist is both necessary and achievable—then more Greeks must be persuaded to pay their taxes.

Greece has criminalized tax evasion (Photo: Ris Messinis/Getty)

Some tasks are unavoidably gruesome. Emergency workers dispatched to a crashed airliner can anticipate a grisly scene. So can city employees sent to mend a ruptured sewer main. But imagine the trepidation of those charged with reforming Greece’s tax collection system. Rather than catalogue its deficiencies, one is tempted merely to identify what’s working, which, last time anyone checked, was virtually nothing. Yet if Greece is ever to achieve fiscal sustainability—something European officials insist is both necessary and achievable—then more Greeks must be persuaded to pay their taxes.

Many don’t. A report published by the International Monetary Fund in December claimed roughly three-quarters of Greece’s self-employed workers declare incomes beneath the minimum taxable threshold. This includes doctors and lawyers—in other words, some of the country’s wealthiest citizens. Greeks are also proficient at evading sales taxes. Their underground economy is estimated to encompass 30% of all activity. The resulting revenue shortfalls contributed powerfully to the unsupportable debt that now threatens the world economy.

For decades, paying taxes was largely a matter left to citizens’ discretion. As in many countries, Greeks self-assess their income taxes owing. But verification is haphazard at best. Until last year, Greek law required that all tax returns be audited. In practice, this prevented authorities from targeting the rich and those believed to be cheating. It didn’t help that on many of Greece’s small islands, taxpayers were often personally acquainted with employees of their local tax office. Few anomalies were so glaring as to defy resolution over a few glasses of ouzo.

Enforcement was even worse. In the unlikely event a taxpayer found himself challenged by the authorities, resolving the dispute would take on average seven to 12 years. At the end, he needn’t bother paying any penalties levied; the state successfully collects only about 1% of outstanding balances.

Greece’s revenue authority has tried to improve over the past two years, under watchful and sometimes disapproving foreign eyes. The European Union and IMF provide what they call “technical assistance” to the country’s central revenue authority, as part of a wider initiative to reform Greece’s moribund institutions. Last year, the counterproductive audit laws were amended, and audits began of Greece’s top 1,200 taxpayers and 1,700 wealthiest individuals. New auditors are being hired, and old ones receive more rigorous reviews of their performance and qualifications. Most significantly, Greece has criminalized tax evasion—a measure rare elsewhere in Europe. Stories of mass arrests for tax evasion now spatter the front pages.

The scope of these efforts has at times been exaggerated, though. Recently the Financial Times reported that the EU and IMF dispatched no fewer than 160 German tax officials to Athens seeking to get more Greeks to pay up. One vexed Greek newspaper described this as “an assault force of German tax collectors.” But officials familiar with the matter said this is simply false; the IMF has only two full-time tax advisers in Athens, plus one from the European Commission. Other experts are parachuted in when necessary. But it would be impractical to deploy platoons of foreigners with no knowledge of Greek language on the front lines. For now, frustrated Teutonic tax crusaders remain bottled up in Berlin.

Expectations, too, should be restrained. Implementation of announced reforms is already behind schedule, and so far there’s no discernible uptick in tax revenues. Experience shows that administrative reform is a marathon, not a sprint. In other states where the IMF provided technical assistance to central revenue authorities, such as Macedonia and Bulgaria, it took between five and 10 years for tax revenues to show any improvement. Greece won’t be able to mend its finances simply by hanging deadbeats from their ankles and shaking.

Even with sustained outside help, there are reasons to doubt Greece will overcome a deeply ingrained culture of evasion. Yet doing precisely that will be crucial for the state’s long-term viability. The country’s medium-term fiscal survival as a eurozone member state depends on continued drastic spending cuts, plus regular cash transfusions from the EU and IMF. But political support for those transfusions, already tenuous, would wane mortally without evidence that Greeks are reforming their free-riding ways. Of equal importance, those Greeks already paying their taxes will more likely support necessary but painful reforms once they see wealthy elites chipping in their fair share.

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