Striking a Blow for More Efficient Taxation
By Staff News & Analysis - June 14, 2013

Shining the Light on a Culture of Tax Evasion … Tax evasion, particularly among the professional classes, has been an open secret in Greece for years. Such a foregone conclusion, in fact, that banks loaning to individuals find it necessary to estimate their clients' "true" incomes when determining how much money to lend them. Last year, in the midst of the country's financial crisis, the problem took center stage as a result of research by Adair Morse, associate professor of finance, and Margarita Tsoutsoura, assistant professor of finance. The researchers published a groundbreaking paper that quantified the widespread tax evasion for the first time and forced Greek policy makers and the public to confront some unpleasant truths. – Chicago Booth Magazine/Spring 2013

Dominant Social Theme: The Greeks need to understand civil society includes a graduated income tax.

Free-Market Analysis: The research by Morse and Tsoutsoura (see above) continues to make a splash and has been codified in this Spring issue of Chicago Booth magazine because it offers government officials a new way of calculating tax evasion.

By using bank loan data, which presumably included income information, the two academics were able to figure out that the amount of income being reported to the government was a great deal less than the income being reported via loan documents.

It doesn't seem to occur to the two involved, or at least to commentators, that people may have exaggerated their holdings for purposes of receiving a loan and thus the loan data may be no more accurate in aggregate than income tax reporting.

But no matter. The idea that these two may have discovered a way of further enhancing the nanny state's intrusion into citizen affairs has provided them with a high profile in Greece and presumably throughout the EU, where tax evasion is seen as a high priority.

Here's more from the article:

When the researchers presented their findings at a conference in Athens last summer, members of the Greek finance ministry, leading academics, and the media all took note. Officials from the International Monetary Fund and the European Commission did, too. "The paper had significant impact," said Nikos Konstandaras, managing editor of Kathimerini, one of Greece's leading newspapers. "We gave it prominence because it was very interesting to our readers and made an important contribution to the debate."

Not for the first time, Booth research was helping to define the conversation on fundamental economic questions. A native of Greece, Tsoutsoura knew tax evasion was a fact of life in her home country. But just how pervasive was it? She and Morse, along with Nikolaos Artavanis, assistant professor at the University of Massachusetts at Amherst, were determined find out.

The researchers realized Greek banks had a strong financial incentive to calibrate their clients' true incomes against what they reported to the government in order to determine how much loan money to offer. So Morse, Tsoutsoura, and Artavanis obtained access to loan data from one of the country's large banks and compared it with government data. They documented what they found in their paper, "Tax Evasion Across Industries: Soft Credit Evidence From Greece."

They found that self-employed, highly educated professionals such as lawyers, doctors, and accountants evaded more income tax than lower income occupations. In sum, tax evasion by the self employed was worth at least a stunning total of $38 billion (€28 billion) in 2009. Assuming that money would have been taxed at 40 percent, the lost revenue was equivalent to almost a third of that year's budget deficit shortfall of $48 billion (€35.4 billion).

… Perhaps the long-term positive impact of this research and other revelations regarding tax evasion is that Greek citizens now understand the consequences it has on their lives at a time when the country is struggling to emerge from a historically unprecedented debt explosion. "If people were to begin to see fairness in the tax system, they would be more prepared to accept the reforms that have changed their lives," Konstandaras added. "So, for us, taxes are a major issue and this shows in our coverage of the research."

We've pointed out a potential problem with this research, but the larger problem is that people probably never will see a graduated income tax as "fair." This goes for Greece especially where citizens are well aware that their political and industrial elites took vast sums of money from the EU itself, squirreled it away in Switzerland and elsewhere, and then stuck the middle class with the bill.

This is not an idle perspective. There is at least one secret list of top Greek pols who have money abroad and have not been prosecuted for it. Yet the Greek government itself is using satellite photographs to spot hidden swimming pools that might indicate Greek wealth as yet undeclared.

The larger issue as always is the tax itself. In the US, the application of the graduated income tax has just blown up once again in to a full-fledged scandal. In Europe, despite all the efforts at punishing tax evaders, the likelihood that such a battle will ever be won is surely minimal.

The easiest way for a government to collect taxes is via sales taxes and other taxes that don't demand intricate individual reporting. Even a VAT is probably better than the current graduated income tax in vogue around the world.

Of course, a flat sales tax would deprive governments of intimate details about their citizens' finances, and one surely concludes, given the amount of trouble graduated income taxes cause, that this is one of the real reasons for continuing to utilize the situation.

There is a larger argument, of course, about whether one even needs to pay taxes in the current central bank environment where currency can be printed by governments almost at will. But even leaving this aside, there are plenty of reasons to abandon the income tax in favor of various kinds of sales taxes that are easier to collect and far less invasive to the larger society.

The most serious – and therefore least mentioned – argument of all is why societies need taxes in the first place. If one accepts that free-market competition is the best way to expand economies and adjudicate differences of public opinion, then why not allow people to work out their own problems? Why is government necessary at all, other than for purposes, purely, of self-defense?

After Thoughts

You won't read about this larger debate in Chicago Booth magazine.

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