Tuesday, September 4, 2012

Tax evasion in Greece: In flagrante

September 4, 2012

"If I could get everyone in this room to pay their taxes, I wouldn’t need to be here." So muttered a member of the troika last year, in a room filled with Greece’s great and good. The problem of tax evasion in Greece has been pointed out many times during the debt crisis: Christine Lagarde, the head of the IMF, got into hot water over the summer with her comments that she felt more sympathy with children in Africa than tax evaders in Greece. But eradicating a culture of tax evasion is no small task, as a new paper by Nikolaos Artavanis of Virginia Tech and Adair Morse and Margarita Tsoutsoura of the University of Chicago Booth School of Business underlines.

The trio use a novel technique to calculate levels of tax evasion in Greece. The authors look at a dataset from a large Greek bank, which contains information on individual borrowers’ credit applications between 2003 and 2010. Taken at face value, the data for self-employed borrowers make no sense. On average, self-employed Greeks spend 82% of their monthly reported income—ie, the amount they declare to the tax office—on servicing debt payments. Some professions, like lawyers and doctors, appear to spend more than 100% of their income on debt servicing.

That cannot be right: a rough rule of thumb is that a third of income should go on debt payments. Banks would not lend at these steepling debt-to-income ratios. Weirder still, the delinquency rates on loans do not seem to vary in line with these ratios: self-employed Greek doctors are both the most indebted profession and the one with the lowest delinquency probabilities.


Read the Paper

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