Distributional Implications of Tax Evasion in Greece

Abstract

The shadow economy and resulting tax evasion are both very widespread in Greece (up to 37 % and 15 % of GDP respectively, according to some estimates). This has adverse effects in terms of horizontal and vertical equity, as well as in terms of efficiency. The paper takes advantage of access to a large sample of income tax returns (approximately 41,300 tax payers in 27,700 tax units, a fraction of 0.53%) in Greece in 2004/05. Specifically, the paper compares incomes reported in tax returns with those observed in the household budget survey of the same year. It then calculates ratios of income under-reporting by region and main source of income. The synthetic distribution of reported income is then fed into a tax-benefit model to provide preliminary estimates of the size and distribution of income tax evasion. Income under-reporting in Greece is estimated at 10%, resulting in a 26 % shortfall in tax receipts. The paper concludes that the effects of tax evasion are higher income inequality and poverty, as well as lower progressivity of the income tax system.