June 15, 2011. Copyright 2011, Graphic News. All rights reserved 

Black economy casts shadow over Athens

LONDON, June 15, Graphic News: There is no question that tax evasion is a huge problem in Greece, with an estimated 30 percent of GDP hidden in the shadow economy. And its not just back street traders who neglect to declare their earnings to the tax collector, but professionals like doctors, dentists and lawyers.

According to Friedrich Schneider, an economics professor at Johannes Kepler University in Linz, tax evasion can trigger a destructive cycle: as shadow transactions escape taxation they keep tax revenues lower than they otherwise would be. If the tax base becomes eroded, authorities may respond by raising tax rates -- driving an even greater proportion of the population into the informal economy and ultimately reducing public revenues.

On a recent visit to Thessaloniki, Dr. Schneider told reporters that Greece has reached the point where there is no point in increasing taxes.

Dr. Schneider calculates that Greece’s informal economy accounts for the largest proportion of GDP among the 21 countries of the Organisation for Economic Cooperation and Development (OECD). “If the recession continues, meanwhile, the informal economy will increase in size, especially if the Greek government is forced by the IMF and EU to proceed with another round of tax increases.”

This is exactly what is happening. With the economy continuing to shrink, Prime Minister George Papandreou has unveiled a new 28.5 billion euros ($38.7bn) austerity plan, including a contentious crisis levy of between 1 percent and 3 percent that is to be paid by all taxpayers. The plan goes before parliament on June 28.

According to Dr. Schneider, a return to growth could be achieved through privatisations, tax incentives and developing tourism. In fact, he asserted that a reduction of some taxes would actually bring in higher revenues for the government by increasing the purchasing power of Greeks.

Tourism accounted for 13.8 billion euros ($20.2bn) of Greece’s informal economy in 2009-2010, or 22 percent of the total, followed by construction (20 percent), vehicles/machinery trade (19 percent) and various other services (18 percent).

Surprisingly, he observed that stamping out tax evasion may not be an entirely good thing, because most of the money made in the shadow economy is spent -- and taxed -- in the official economy. “The shadow economy, at least in Greece, creates additional income and welfare which wouldn’t [otherwise] exist during this recession,” said Dr. Schneider.
/ENDS