Tax Evasion Dogs Greece

The Wall Street Journal

Greece has one apparently simple option for reining in a budget deficit that has roiled financial markets: Clamp down on widespread tax evasion, which costs the country an estimated €15 billion ($20.5 billion) a year, an amount that would pay off a big chunk of the budget deficit.

The trouble is, tax evasion in this Mediterranean country is extremely difficult to eradicate.

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Trying to cope with its budget problems, Greece announced new austerity measures Tuesday.

Finance Minister George Papaconstantinou said public-sector salaries would be frozen and supplemental incomes for civil servants cut by an average of 10%. Salaries and bonuses for the prime minister, senior government officials and officials at state-owned enterprises will be frozen, and under some conditions reduced.

The measures would save some €850 million this year, said Mr. Papaconstantinou.

The government also announced a higher marginal tax rate of 38% on people earning more than €40,000 a year, up from about 25%.

In addition, dozens of tax loopholes and special rebates will be eliminated, and taxes will be increased on dividends and offshore companies. The tax measures would yield some €1.2 billion in revenue this year, the government said.

The Greek shadow economy, which is made up of unreported income, was 25.1% of gross domestic product in 2007, according to Friedrich Schneider, a professor at Johannes Kepler University in Linz, Austria.

The shadow economies of Spain, Portugal and Italy were all around a fifth of GDP. That compared with just 11.8% for France and 7.2% for the U.S., he said.

Trying to explain the rampant tax evasion, Prof. Schneider said countries like Spain, Portugal and Greece have had continuous democracies only since the 1970s, and people aren't used to governments representing the public interest.

"In most of these countries, what matters is your family. … There is less of a sense of duty towards the state," said Alberto Alesina, a professor of political economy at Harvard University. "Evading taxes is something you can freely talk about—and be proud of—at a dinner party in these countries."

Media reports are rife with accounts of corruption among tax officials.

Meanwhile, in a government survey last year of 150 doctors in Kolonaki, an upmarket Athens neighborhood, half of the doctors said they were paid less than €30,000 a year. Thirty said they made less than €10,000.

"It is not possible for a taxpayer to declare an income of €15,000 while at the same time maintaining a big house, a big car, a recreational boat and sending his kids to private school," Mr. Papaconstantinou said Tuesday.

The Athens doctors association didn't respond to requests for comment on the pay survey.

A taxi driver last week offered a business traveler a €50 receipt for a €40 ride, to enable the traveler to overclaim expenses to his company. The condition was that this receipt be scribbled on a piece of paper and not a printed receipt from his meter, which would result in the payment being registered.

Dimitris Mavrogiannis, 58, who owns an auto-paint shop in the New Kosmos district of Athens, says he usually issues receipts, especially as a lot of his work is for insurance companies, which insist on them.

"In the majority of cases, I do issue receipts," says Mr. Mavrogiannis,. "But sometimes people ask for a discount on the [value-added tax] and I say, 'OK.' "

Such tax dodging is a problem now, as Greece's budget deficit was likely around 13% of GDP in 2009. which led to a selloff of Greek government debt and boosted the interest rate the government has to pay.

Economists say the only way to solve Greece's tax problems is through incremental measures. Greeks say they would like a fairer system.

"I work for a large Greek construction company … but of course, I have also done my own jobs on the side, off the books," says Alexandros Foukis, 27, a building contractor. "What the government needs to do is provide incentives to people to issue a receipt."

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