The crisis and tax evasion in Greece

What are the distributional implications?

Manos Matsaganis, Chrysa Leventi & Maria Flevotomou

2nd Microsimulation Research WorkshopBucharest, 11 October 2012

the paper

o introduction

o methodology and data

o results - discussion

o conclusion

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the paper

o introduction

o methodology and data

o results - discussion

o conclusion

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introduction

o The current Greek crisis and the country’s fiscal consolidation effort have elevated tax evasion to one of the most crucial policy issues of our times

o Tax evasion hinders the fiscal efficiency of tax policies most recent estimate of Greece’s informal economy: 24% of GDP

(Schneider 2012)

o Tax evasion creates horizontal inequality, leads to unfair social outcomes and distorts the intended distributional effect of the tax system

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aim of paper

to estimate non-compliance patterns of income under-reporting in Greece by comparing the incomes reported in a large sample of tax

returns in 2007 (incomes earned in 2006) with those observed in the EU-SILC survey of that year

redo the exercise for incomes earned in 2010

to estimate the distributional implications of personal income tax evasion in the general population by using EUROMOD

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the paper

o introduction

o methodology and data

o results - discussion

o conclusion

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empirical research

o Two main approaches

1. Macroeconomic approach: use of macroeconomic indicators

2. Microeconomic approach: use of microeconomic data expenditure based method discrepancy method: comparing two alternative and independent

measurements of the same variable comparing income declared to tax authorities to income declared

to household income surveys

crucial assumption: individuals reveal their income to survey interviewers more truthfully than they do when filing their tax return

1.

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discrepancy method: studies

source reference year country method income under-

reporting

Slemrod & Yitzhaki 1988 U.S.A. tax auditing empl: 0.5%

self empl: 58.6%

Johns & Slemrod 2001 U.S.A. tax auditing empl: 1%

self empl: 57%

Fiorio & D’ Amuri 2000 Italy comparison with

hh surveysempl: 1.9%self empl: 27.7%

Marino & Zizza 2004 Italy comparison with

hh surveysempl: -1.6%self empl: 56.3%

Benedek & Lekles 2005 Hungary comparison with

hh surveysempl: 4%self empl: 67%

Matsaganis & Flevotomou 2004 Greece comparison with

hh surveysempl: 0.6%self empl: 24.4%

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our dataset

1. A large panel data sample of income tax returns filed in 2007-2011 (incomes earned in 2006-2010) 301,577 tax filers in 196,742 tax units (4.3% of tax filers in 2007)

2. EU-SILC 2007 (incomes earned in 2006) 14,759 individuals in 5,643 households

EU-SILC 2011 (2010 incomes) has not yet been released. Solution:

• uprate EU-SILC 2007 (2006 incomes) to 2010

• on the basis of estimates provided by the Bank of Greece, EL.STAT.

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improvement\

methodology [1]

1. Create comparable reference populations both datasets were reduced to:

a. people reporting annual income from wages/pensions above €6,000

b. people reporting annual farming/self-employment income above €3,000

(i.e. restrictive set of rules for filing a tax return)

2. Create comparable income variables gross incomes minus social insurance contributions

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methodology [2]

3. Allocate the reference population into 16 categories defined as combinations of 4 macro-regions and 4 income sources:

Focusing on income sources allows us to account for individuals earning income from multiple sources (‘moonlighting’)

macro regions (i) income sources (j)

Attica wages and salaries

northern Greece pensions

central Greece agricultural income

islandsother self-employment income (income from commercial business, liberal professions, property)

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improvement\

methodology [3]

4. Create adjustment factors: ai,j = ỸRi,j / ỸT

i,j where:

ỸRi,j = average income from source j by people in region i in tax returns

ỸTi,j = average income from source j by people in region i in EU-SILC

5. Use these factors for the estimation of a ‘synthetic’ (i.e. adjusted for under-reporting) EU-SILC income distribution

introduction of a zero-mean random term around the estimated

rates of income under-reporting by category

6. Use EUROMOD to calculate tax liability and disposable income based on the original and the ‘synthetic’ EU-SILC income distributions

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improvement\

the paper

o introduction

o methodology and data

o results - discussion

o conclusion

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results [1]

o Under-reporting by income source and region (%)

population share 2006 2010

income source

wages 40.2 -3.9 -4.0

pensions 38.4 0.0 0.0

farming 8.0 -47.3 -49.4

self-employment 30.4 -33.2 -33.9

region

northern 30.5 -8.5 -8.4central 18.7 -17.7 -17.7Attica 39.5 -8.9 -9.3

islands 11.2 -20.0 -20.8total 100.0 -11.8 -12.0

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results [2]

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results [3]

o Income - tax variables (2006)

full compliance

tax evasion

difference(%)

mean reported income 15,422 13,602 -11.8

mean tax due 4,261 3,613 -15.2

mean disposable income 11,993 12,512 4.3

total tax receipts (mill. €) 12,131 8,762 -27.8

Note: mean incomes/taxes are non-equivalised annual personal incomes/taxes in €. They are constructed excluding those earning zero or negative incomes/ paying zero tax. Actual total income tax receipts in 2006 were €8,318 million. The share of positive income earners paying non zero tax is 40.3% under full compliance and 34.4% under tax evasion.

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results [4]

o Poverty and inequality (2006)

full compliance tax evasion difference

poverty line (€ p.a.) 6,041 6,146 +1.7%

poverty rate 19.7 20.0 +0.3 p.p.

Gini 0.340 0.357 +4.9%

S80/S20 5.845 6.263 +7.1%

coefficient of variation 0.771 0.854 +10.8%

Note: poverty and inequality indices are computed on the basis of equivalised household disposable income (HDI). The poverty line is set at 60% of median equivalised HDI.

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results [5]

o Personal income tax progressivity (2006)

full compliance tax evasion difference

Kakwani 0.031 0.021 -31.6%

Reynolds-Smolensky 0.052 0.035 -32.2%

Note: tax progressivity indices are computed on the basis of equivalised HDI. In the absence of any re-ranking of individuals pre and post-tax, the two indices are proportional.

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discussion

o Income under-reporting: varies widely by income source and region is biggest at the two ends of the income distribution (U shape)

concentration of pensioners and wage earners in the middle of the distribution

reduces personal income tax revenues by 27.8% 14.6% fewer persons paying on average 15.2% less tax

o Tax evasion causes a slight increase in relative poverty but a significant increase in income inequality

o It severely reduces the progressivity of the tax system

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the paper

o introduction

o methodology and data

o results - discussion

o conclusion

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reasons for caution

o measurement & sampling errors

o bias from the exclusion of people not filing a tax return

o income uprating imperfect

o assumption that people reveal their true income in EU-SILC

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policy implications

o fight against tax evasion both fiscally important and politically crucial

o refinement of audit targeting and audit coverage

o policy making in the field of taxation should consider tax evasion’s distortionary effects in the intended progressivity of personal income tax

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further research

o add more dimensions in the construction of adjustment factors

o perform sensitivity analysis

o re-estimate 2010 under-reporting factors when EU-SILC 2011 becomes available

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