2. are not congruent, activities in the shadow economy often imply the evasion of direct or
indirect taxes, so that the factors affecting tax evasion will most certainly also affect the
shadow economy. The main issue that arises and afflicts the research community is the
fact that measuring the black economy is extremely difficult by its nature, as it requires
assessment of the economic activity which derives from informal transactions. Usually,
surveys underestimate the size of the shadow economy, but econometric techniques are
nowadays used for better understanding of its size. The following figure depicts the size
of the shadow economy in selected Organization for Economic Co-operation and
Development (OECD) countries (including the seven major advanced economies as
reported by the International Monetary Fund, the so-called Group of 7 or G7) as a
percentage of gross domestic product (GDP), so as to emphasize the size of the problem
(Figure 1).
As it is made clear from the above figure, the black economy is a reality for all the
countries, but the problem focuses on the so-called PIGS, a term that refers to the
economies of Portugal, Italy, Greece and Spain, which were unable to refinance their
government debt or to bail out over-indebted banks on their own during the recent global
debt crisis. Among them, Greece holds the supremacy with the level of its underground
economy in 2015 reaching the impressive 22.4 per cent of GDP, i.e. almost one quarter of
the Greek economic activity. Italy follows closely with 20.1 per cent, while the Spanish
black economy is 18.2 per cent and the Portuguese one 17.6 per cent. An interesting fact is
that the biggest European economy, Germany, is at the level of 12.2 per cent which is
identical with the average of the selected OECD countries shown on the graph. Even
more, the US economy, the largest in the world, has managed to restrict its shadow
economy to 5.9 per cent, which is the smallest one among all and constitutes one quarter
of the Greek one (the biggest one). In less developed countries, the informal economy is
usually 25 to 40 per cent of national income and represents up to 70 per cent of non-
agricultural employment. In these countries, the informal activity often occurs because of
the inadequacies of legal systems to document and formalize the company registration.
The main driving forces of the shadow economy are tax and social security burdens, the
Figure 1.
Level of the shadow
economy in OECD
countries as of 2015
(percentage of GDP)
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3. moral attitude to taxation, the quality of state institutions and labor market regulation.
Reducing the tax burden is therefore likely to lead to a reduction in the black economy,
especially if it is combined with lower tax rates, less shadow work and the potential for
lower prices. Of course, a vicious circle in the other direction can also be created. The
number of participants in the shadow economy globally is very large with some sectors
such as the constructing, having almost half of their staff working informally.
The shadow economy is pervasive and is composed of a vast number of small and
scattered transactions. The policy response should be very careful concerning the
mechanisms and the effort to eliminate the informal economy, particularly in terms of
development and promotion of entrepreneurship and business related to illegal employment.
There are also huge potential benefits from the possibility of formalizing the self-employed
in small businesses.
2. Literature review
At this point and before we proceed with the analysis of the origins and the determinants as
well as the effects of black economy and tax evasion on the Greek economy, a review of both
theoretical and empirical literature on these crucial issues is undertaken so as to highlight
the current research results.
Bitzenis et al. (2016) explore the determinants of the Greek shadow economy and its
interaction with the official economy by undertaking an interdisciplinary review of
economic and political studies on the size and determinants of the shadow economy, tax
evasion and undeclared work in Greece to reveal the extent and complexity of these
phenomena. They estimate the size and determinants of the shadow economy via the
multiple-indicators-multiple-causes (MIMIC) approach and their findings indicate that the
important determinants are factors related to macroeconomic conditions, such as
unemployment and GDP growth, as well as institutional factors, such as tax morale and the
rule of law. The overall conclusion is that an adoption of a policy based on these findings
would lead to a successful transfer of part of the shadow economy to the official economy
thus, boosting government revenues and eventually leading the Greek economy out of the
depression that emerged as a result of the sovereign debt crisis.
Artavanis et al. (2015) used a novel approach to estimate tax evasion using the
adaptation of the private sector to the norms of semiformality based on the bank’s
perception of the individual’s true income. They used bank data on household credit and
replicated the bank model of credit capacity decision to infer the banks estimate of
individuals’ true income. The authors estimate a lower bound of 28.2bn euros of unreported
income for Greece, which accounts for 32 per cent of the deficit for 2009. Primary tax-
evading industries are found to be medicine, law, education, engineering and media. They
also provide evidence that tax evasion persists not because the tax authorities are unaware,
but because of a lack of paper trail and political willpower.
Berger et al. (2014) present new estimates of the Greek underground economy and
explore the link between the shadow economy and aggregate debt. They show that the
Greek underground economy has been underestimated heavily and has been on a rising
trend again, as Greece adopted the euro and also show evidence that the size of the
underground economy is positively related to the debt-to-GDP ratio. Their results suggest
that for a sample of eleven EMU member countries the loss of the inflation tax as an
economic policy instrument had drastic consequences. While the underground economy did
not have a statistically significant impact on aggregate debt before the introduction of the
euro, it has pushed up the debt-to-GDP ratio in the sample ever since.
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4. Remeikiene et al. (2014) point out that, in general sense, shadow economy emerges in
such spheres as taxation, social security and labor aspects of undeclared work. The aim of
their article is to identify what country-level determinants from these spheres have the
strongest impact on the scope of shadow economy in Greece during 2005-2013. The results
show that the country-level determinants that influence mostly the scope of shadow
economy in Greece are the unemployment rate, GDP per capita, total labor force, domestic
credit to private, tax rate and tax payment. Calculations confirmed the results of the
theoretical research by showing that tax rate is the determinant having the most significant
impact on shadow economy emergence and development. The authors of the article also
recommend carrying out a detailed analysis of the components of current tax structure in
business and other spheres so as to lead to the introduction of proper taxes which would not
appear to be the fundamental motive to act in a shadow.
Kaplanoglou and Rapanos (2013) highlight a number of shortcomings in the design
and enforcement of the tax system in Greece, which have played a key role in the
exacerbation of fiscal deficits that led to the current sovereign debt crisis. They argue
that these shortcomings resulting in low tax revenue are related to the structure of the
Greek economy and to the failures of formal institutions, as all available indicators point
to the fact that the low and unfairly distributed tax yield is primarily due to the poor
functioning of the tax administration, lax tax enforcement, inefficiency of tax collection
and the lack of effective dispute resolution mechanisms. Such failures result in high tax
evasion and a thriving underground economy. The authors propose a number of specific
measures such as reorganizing tax offices, simplifying tax laws, rationalizing fines,
improving tax audits and establishing credible dispute resolution mechanisms while
emphasizing the fact that if policymakers are successful in introducing reforms that will
enhance the efficiency of the tax administration, this may be the first step in restoring
confidence in public institutions.
Matsaganis and Flevotomou (2010) use a tax benefit model to provide preliminary
estimates of the size and distribution of income tax evasion in Greece. With that method
they estimate income under-reporting at 10 per cent, resulting in a 26 per cent shortfall in tax
receipts. The paper finds that the effects of tax evasion are higher income inequality and
poverty, as well as lower progressivity of the income tax system.
Danopoulos and Znidaric (2007) highlight the fact that Greece has the highest level of tax
evasion among the 15 nations that made up the European Union prior to enlargement in
2004 and also the country’s underground economic activity remains alarmingly high. They
identify the major factors that prompt tax evasion which include the low level of education
and the high level of tax burden among others. They also refer to the negative effects of
informal economy which include damages in the reliability and trustworthiness of official
government statistics, making government policy, planning and efforts to attract foreign
and other forms of investment less than credible; renders government fiscal and spending
policy ineffective. However, there are also benefits in not paying taxes, as it leaves more
money in the hands of consumer and businesses leading to greater investment and prevents
the burden of excessive taxation.
Katsios (2006) highlights the interaction between the underground economy and
corruption, focusing on the determinants of the Greek economy, the tax and national
insurance burdens and the intensity of the relevant regulations in Greece, concluding that
Greece shows profound signs of a transition country in terms of the high level of regulation
leading to a large shadow economy. The taxation problems arising from high
administrative-compliance costs and bribery indicate the urgent need for tax reforms
designed to simplify the regulation framework. Improvement of the quality of Greek
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5. institutions and rationalization of administrative-compliance costs are a prerequisite for
successful and urgently needed tax reforms in terms of reducing the overall Greek shadow
economy, through the simplification of the regulatory framework.
Christopoulos (2003) uses data from Greece over the period 1960-1997 to examine
whether the underground economy responds asymmetrically to tax changes, both indirect
and direct. Asymmetry implies that taxpayers react in a different manner to tax increases
and to tax reductions. To test this hypothesis, the author specifies and estimates a vector
error correction model, and the empirical evidence suggests that when indirect and direct
taxes rise, taxpayers move into the underground economy as quickly as they move out of it
when indirect and direct taxes decrease. Thus, the empirical results do not give support to
the asymmetry hypothesis, and this has significant implications for the effectiveness of the
country’s fiscal policy.
3. Causes of informal economy and driving factors
For the black economy to exist, the following two conditions must be met:
(1) Those involved in the informal economy must have an incentive in order to decide
to take action in this area. In other words, the benefits they expect from expanding
their activities in the informal sector have to be larger than the suspected cost of
their revelation.
(2) The adequate opportunities should be provided, i.e. there exist employment
opportunities in the informal economy.
The most important factors, as identified by the literature, that lead people to become active
in the shadow economy are as follows.
3.1 The level of the tax burden
The level of tax burden and the high tax rates largely explain the existence and growth of
the shadow economy. Individuals and companies, by keeping hidden a part of their
economic activity, they manage to achieve lower tax burden. Especially in the case of
indirect taxes, there are benefits for all the parties involved, for example, buyers and sellers.
This mutual interest leads to cooperation between them to hide all or part of their trading. A
recent research published by the Institute of Economic Affairs (British Institute of Economic
Affairs, 2013) reveals that high tax rates have led to an underground economy equivalent to
a staggering 10 per cent of Britain’s GDP, with its worth been over £150bn. High levels of
public spending and tax increases led both individuals and enterprises to illegal
employment, thus creating a vicious cycle. The underground economy has as a direct
consequence the loss of tax revenues, and this in turn leads to an increase in tax rates, and
thus to the reinforcement of employment in the black market. Recent findings highlight the
fact that the punitive tax regimes have led to the exacerbation of the shadow economy,
resulting in more than 30 million people across the European Union been employed illegally.
Especially in Greece, a country among the most affected by the crisis in the Eurozone, illegal
activity accounts for over 20 per cent of national income.
3.2 The degree of acceptance of state power
A person will be more willing to develop activities in the black economy if it considers the
state as a power that seeks to limit the fruits of his labors compared to a person who believes
that the role of the state increases prosperity and promotes the common good. This
ideological attitude of people is expressed by the term tax consciousness or tax morality.
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6. 3.3 The level of unemployment
The level of unemployment is a feature of the economic and social structure of a country. The
degree of interaction between the two variables, unemployment and undeclared work, is not
easy to determine. According to a widespread perception, in an economic downturn,
especially in economies characterized by high inflation and rigidities in the labor market, an
increase in the level of unemployment is a reinforcing factor of undeclared employment. As
the recession periods are particularly relevant for the violation of institutional constraints
which weigh heavily on labor costs, unemployment appears to act as a reinforcing demand
factor, and hence supply, of undeclared employment. According to data published by the
Hellenic Statistical Authority, the unemployment rate in Greece in April 2016 stood at 23.3
per cent, versus 25.3 per cent in April 2015 and 27.1 per cent in 2014. The highest
unemployment rate for 2016 was recorded in Western Macedonia (27.6 per cent) and the
lowest in the Aegean (15.4). In 15-24 age group, unemployment increased to 47.4 per cent. A
further important aspect of the unemployment phenomenon is the evolution of the percentage
of long-term unemployed that is both impressive and disturbing. This group of the
workforce, which remains for a long time excluded from the formal labor market and is
inevitably led to social exclusion, is according to all estimates a significant undeclared labor
supply tank.
3.4 The degree of state intervention
The degree of state intervention may be measured in the number of laws and regulations,
including the laws change. In Greece, the laws, reforms and regulations are numerous as
well as the non-stop alterations every now and then, such as the liberalization of closed
professions that require a professional license (e.g. taxi, etc.), market regulations and
restrictions on the job market. The degree of intensity of state rules and regulations are
major factors which lead Greek citizens straight to the black economy. This is directly
related to the burden of social security contributions as regulations lead to an increase in
labor costs in the formal sector which in turn leads to an increase in unemployment (as
occurs in many OECD countries). All of the above provide an incentive for workers to be
used in the shadow economy, especially when labor costs are passed on to the same.
Thus, the unemployed are a double burden for the state, as they continue to receive social
benefits and if these activities, which are undertaken in the black economy, became
official then employers and employees would have payed less tax.
Of course, the percentage change in real labor cost per unit were 2.9 per cent in 2011, 7.4
per cent in 2012 and 1.1 per cent in 2013. This decrease reflects the significant decline in
turnover in almost all sectors of the Greek economy and the existence of significant
employment rate in informal or unofficial forms of employment. There was also a reduction in
the average gross earnings in the whole economy by 4.6 per cent in 2010, 1.7 per cent in 2011,
6.6 per cent in 2012 and 7.7 per cent in 2013 as the efforts made by the government under the
agreed memorandum for the country’s exit from the crisis intensify. There is a general rule that
the greater the number of rules and regulations which exist in an economy, the greater share of
total GDP is occupied by the informal sector. Indeed it has been found that an increase of one
percentage point of government regulations is related with an increase of 8.1 percentage points
to that share. Therefore, many studies suggest that the Greek government should give more
emphasis on the enforcement of laws and regulations rather than increasing their number.
3.5 The social security scheme
Social security charges are considered to be a very influential factor of the extent of the
black economy because, like high taxation, so the contributions paid by employers and
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7. employees contribute to the development of the shadow economy. Also, the fact that the
government provides various kinds of social benefits to poor, unemployed and generally to
people who have low incomes, motivates many people to be virtually presented as
beneficiaries of social benefits, without actually entitled to. Consequently, a number of
citizens have an incentive to operate in the black economy and to declare a lower income to
take advantage of such benefits thus, depriving valuable resources of the state and social
welfare.
3.6 The role of the state
The black economy is related to violation of state rules and therefore the state policy makers
should make serious efforts to mitigate it. In practice, however, often tolerated or supported
by the state, the grey economy, whether this is because it serves the interests of individuals
or social groups that have the ability to influence the institutions’ decisions or because it is
thought to contribute, in short term period, to the achievement of certain objectives of
economic policy as, for example, improving the balance of payments, increasing
employment and stimulating economic growth. Such phenomena are observed in the case
where the governmental mechanisms are loose and show a high level of tolerance on
something which is clearly forbidden, as for example the illegal immigration in Greece that
has skyrocketed the current period and has become a major threat for all Europe.
Therefore, it is not only the level of the administrative machinery but also the political
will that affect the size of the shadow economy. From all the above mentioned, several
studies have concluded that the most important causes for the creation of the informal
economy in many countries are the tax burden, the large number of freelancers and the
government restrictions. For Greece, in particular, it is found that the three most important
causes are unemployment, the large number of self-employed and social levies as part of the
overall tax burden.
3.7 Workforce synthesis and the number of self-employed
The synthesis of the workforce in Greece plays a vital role in creating and strengthening the
informal economy. This is due to the fact that the agricultural sector and related industries,
as well as the tourism sector, employ a high percentage of undeclared workers. So although
these people produce work, it does not appear in official statistics of GDP and their
insurance contributions are not paid despite grants and facilities offered by the state and the
European Union. In addition, self-employed are those who greatly contribute to the growth
of the informal economy according to a related research held by the British Institute of
Economic Affairs (2013). It is also argued that self-employed constitute one of the major
factors that lead to the formation of the underground economy regardless of the level of
economic development. For example, it was found that the informal economic activities
derived from this employment accounted for 10.6 per cent of GDP. This means that there is
lot of chance that all these professionals do not declare all their work and operate in the
black economy, as they have a larger number of deductible expenses, both from their tax
base and the taxation of their personal income, and they are subjected to fewer internal and
external controls compared to larger enterprises. Greece has the highest percentage of self-
employed in the EU according to Eurostat (2012) with 32 per cent of its employees,
compared with 15.1 per cent in the Eurozone and 15.2 per cent in the EU (32.8 million self-
employed). After Greece, the highest percentage of self-employed is found in Italy (23.4
per cent), Portugal (21 per cent) and Romania (20 per cent). In Greece, according to the study,
the percentage of uninsured workers stands at 37.3 per cent of the total, while the country
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8. also holds first place in the percentage of illegal immigrants working (4.4 per cent of the
total) followed by the USA (3.2 per cent).
4. Determinants and causes of tax evasion
Tax evasion is a global problem, but its range and effects depend on several factors, the
major of which are:
4.1 The educational level of the population
The higher the educational level the higher the grade of tax consciousness and the lower the
tax evasion trend. On the contrary, when the educational level is low, tax payers are not able
to understand the fact that tax revenues are the main source for the financing of public
goods (health, security, etc.) which satisfy critical social needs.
4.2 The level of tax burden in comparison to the aggregate income
The higher the level of the burden by a single tax, the higher the benefit for a tax payer by
tax evasion. Subsequently, the higher the average tax burden, the higher the trend for tax
evasion due to the restriction of the individual’s basic needs (food, clothing, etc.) that
becomes more noticeable and the gain by the tax amount outweighs for the risk taken in
case of tax evasion apocalypse.
4.3 The distribution way of tax burdens
If the distribution of tax burdens responds to the prevailing view for social justice, then the
trend for tax evasion is smaller. On the other hand, when the principle of fair distribution is
violated with the implementation of tax exceptions to specific private entities, then a handful
of unpleasant consequences occur:
the sense of unfairness is cultivated among the tax payers and reinforced by their
will to assimilate in any possible way with those excepted from tax;
increases the level of total tax burden as the amounts to be paid by those exempted
have to be given by the rest; and
creates unequal conditions of competition between favored and non-favored
companies as taxes generally affect the production and business plans of private
productive units.
4.4 The structure of the taxation system
The type and cash significance that constitute the taxation system of a country determine
the range of tax evasion. As a result, if the taxation system is dominated by direct taxes, i.e.
income taxes, then the tendency for tax evasion is bigger because private entities have more
opportunities to hide their tax than individuals. This can be done in the following two ways:
(1) households like freelancers by declaring lower income than the real one; and
(2) companies by transferring part of their profits to depreciation accounts, research
expenses, etc.
On the other hand, if the taxation system consists mostly of indirect taxes, the trend for tax
evasion is smaller because the tax control is more effective, the related taxed units are fewer,
and they are also obliged to keep accounting books from which taxation can be accrued like
value-added tax (VAT). Of course, this is a general rule that does not apply in the unique
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9. case of Greece. This is justified by the fact that while indirect taxes are more important than
the direct in Greek taxation system, tax evasion is very high due to the existence of an
ineffective control mechanism and high levels of corruption.
4.5 The degree of market and business organization
When the economy is organized in such a way that a significant proportion of transactions
take place in kind, for example, the possibility of tax evasion will be greater compared with
an economy where all transactions are made with money. Moreover, if companies operating
in one country are numerous but small, the evasion potential is large because the accounting
of these enterprises is low; thus, monitoring by the tax authorities becomes difficult or even
impossible. In contrast, in countries where companies are fewer and larger their monitoring
by tax authorities is easier.
4.6 The level of development and organization of the economy
In well-organized economies, transactions between taxpaying units are easily recorded, and
tax authorities have available more reliable stuff, e.g. transaction documents etc., so as to
properly perform their work. Therefore, they can relatively easily reduce the tendency of
taxpayers for tax evasion.
4.7 The structure of the national income
The structure of the national income is very important to the extent of tax evasion. This is
especially true for evasion of income tax because there are incomes where tax evasion is
necessarily limited if not impossible, while in other cases, its inhibition is difficult. In the
first case are the incomes from salaries and pensions. In the second is the income from the
exercise of agricultural activities and business.
5. Size of Greek shadow economy in comparison with other Organization for
Economic Co-operation and Development countries
According to recent estimates by Schneider (2013), prolonged economic crisis in Greece
and Spain has somehow reduced the phenomenon of the underground economy, and more
specifically, the recession in the formal economy in both countries is so strong and also
reductions in the income of citizens so great, having vertically further decrease even the
demand for the activities of the shadow work (e.g. house-keepers etc.). As a result, the
informal sector in both countries is declined substantially: while in Greece, in 2013, it
accounted for 23.6 per cent of GDP, compared to 24 per cent in the past year, 25.1 per cent
in the pre-crisis 2007 and 28.2 per cent in 2003, while in Spain, it estimated to have fallen
to 18.6 per cent of GDP, from 19.2 per cent in 2012 and 22.2 per cent in 2003. Meanwhile,
the fight against tax evasion in Greece has begun, to some extent, to pay off. More
specifically, the amount of tax evasion related to indirect taxes and self-employment in
Greece decreased to 4 per cent of GDP in 2010 from 5.6 per cent in 2009. In the years to
follow, 2012 and 2013, the shadow economy has decreased in most of the 38 countries of
the OECD, compared with 2008. However, contrary to other countries, the reason of the
reduction in Greece was the prolonged economic crisis. With the official economy either
recovering or growing rapidly, people have less incentive to develop further activities in
the shadow economy. In the following table, the average relative impact of the main
determinants of the underground economy of 38 OECD countries, for the decade 2000-
2010, is presented (Table I).
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12. Concerning the most critical factors which matter the most to the creation of the informal
economy in 38 OECD countries for the period 1999 to 2010, indirect taxation ranks first
(average 29.4 per cent) and self-employment second (22.2 per cent), while in Greece the figure
is reversed. Specifically, in Greece self-employment plays by far the most crucial role in the
size and growth of the shadow economy (37.6 per cent), followed by indirect taxation (21.8
per cent). Both in the 38 countries and Greece, unemployment ranks third in the list of
factors with the greatest impact on the size and growth of the shadow economy, with a share
“contribution” of 16.9 per cent (at 38) and 18 per cent, respectively (due to the fact that lack of
work often incites the unemployed in illicit economic activity to ensure their living). Overall,
in 2012, Greece ranked ninth among the 27 EU Member States, in terms of the black
economy (24 per cent of GDP), significantly exceeding the EU average (18.4 per cent), as seen
in the next Figure 2.
In the first place is Bulgaria where the shadow economy represents 31.9 per cent of
GDP, followed by Romania (29.1 per cent), Lithuania (28, 5 per cent), Estonia (28.2
per cent), Latvia (26, 1 per cent) and Cyprus (25.6 per cent). Reversing the list, the less
shadow economy in the EU-27 has Austria (only 7.6 per cent), followed by Luxembourg
(8, 2 per cent), The Netherlands (9.5 per cent) and the UK (10.1 per cent). The size of the
shadow economy in Greece as of 2012 was estimated at e60bn of which; however, only
Figure 2.
Size of the shadow
economy of EU-27 in
2012 (percentage of
GDP)
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13. e20bn were recorded to the official GDP as derived from partially legitimate activities,
while the remaining e40bn came from illegal activities.
6. Effects of the black economy and tax evasion on Greek economy
6.1 Negative effects
Having identified the causes of the black economy and the factors that contribute to
the systematic increase of tax evasion, at this point, we are going to refer to their
direct negative impact on Greek economy. The main effects are summarized to the
following:
The principle of fair distribution of the tax burden is violated.
The existence of high level of tax evasion does not allow the collection of the
required revenues for the satisfactory and proper functioning of the public sector.
Fiscal policy bodies are unable to use the tax system effectively in favor of the
economic development of the country, because the effectiveness of the statutory
exemptions which are granted as incentives to promote this objective is
weakening.
Serious social injustices are caused and an unequal redistribution of income is
developed, from the moral taxpayers to the tax evaders. Because evasion belongs
mainly to the higher economic classes, this redistribution of national income is not
desired by the society as wealth differences become even more bigger.
The state may face cash flow problems as it happens in Greece nowadays. This has
led to an increase in taxes, to state borrowing and to a reduction in government
spending (e.g. education, health, etc.). This condition can also cause chronic budget
deficit, continuous use of borrowings and accumulation of sovereign debt, with all
the known catastrophic consequences in the economy.
In Greece, the problem of non-payment of taxes has taken great dimensions and the
consequences became even more intense as the economic crisis deepens in the country.
According to a recent survey of the Economic Chamber of Greece on “Measurement of Tax
Consciousness”, it was found out that:
eight of ten respondents believe that tax evaders are doing so because “there is little
chance of detection” by tax control authorities;
one of five are prepared to take the risk of hiding their income, even if aware that it
is possible to be identified by the tax authorities;
almost one in two respondents believe that “if you want to conceal income from the
tax authorities, you can carry out”;
one in ten admit to having attempted to cheat the tax authorities regarding their real
income;
eight of ten consider it their moral obligation to declare their real income; and
one in two citizens consider that in a highly corrupted state, tax evasion is a
reasonable reaction.
Conclusively, the failure to arrest tax evaders and the extent of corruption are critical factors
in determining the fiscal behavior of citizens and the effectiveness of tax revenue collection
by the state.
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14. 6.2 Positive consequences
As explained before, black economy and tax evasion have severe negative consequences on
the Greek economy being one of the main reasons for the ongoing fiscal and financial crisis
that plagues the country. But on the other hand, there are also several positive effects which
are mainly connected to employment and income creation. First, the informal sector of the
economy often functions as a life vest for businesses, as it enhances their competitiveness. In
the formal economy, increasing labor costs and the rise of tax burden create very often
problems of competitiveness both in the international and in the internal market and
encourage companies to the underground side of the economy to avoid government barriers
and gain competitive advantage.
Another positive effect is the fact that black economy helps in creating new job
positions by absorbing workforce. If it was not for the shadow economy many people
which find employment in the informal sector would be unemployed. Of course, there are
also negative consequences for workers in the informal sector such as the lack of
insurance. Moreover, the higher the level of the shadow economy, the greater the
difference among the formal and informal economy. The informal economy has resulted
in the exemption of certain individuals, while on the other side, increases the tax burden
of those people employed in the formal economy. Taking for granted that persons
employed by the informal sector are usually low-income people one might say that
shadow economy helps improve the disposable income distribution and therefore
increases the social welfare. Finally, it is estimated that approximately 66 per cent of the
informal economy revenues are returned immediately in the formal economy by
increasing consumption of households, mainly for durable goods and services, thereby
contributing to economic growth and tax revenues. The informal sector may also help in
creating markets, fostering entrepreneurship and what is very important for Greece,
changing the legal, social and economic factors which are necessary so as to achieve the
desired development.
All of the above provide a positive image of the shadow economy that may lead
someone to the conclusion that there should not be great effort to crack it down,
especially in times of recession and rising unemployment. But any benefits of the black
economy are uncertain and always extremely short. Furthermore, informal activities
undermine long-term planning and the implementation of strategies aimed at developing
the economy on sound bases. For this reason, it is more than necessary the existence and
implementation of a long and rigorous policy to combat the grey economy.
7. Measures for combating tax evasion and shadow economy
7.1 Measures for tax evasion
The ability of tax authorities to tackle satisfactorily the trend of taxpayers for tax evasion
depends on the degree of organization of tax consulting services, the quality of tax
accounting institutions, the system used for the assessment and collection of taxes, the
structure of the tax system and finally the degree of accounting organization of economic
units. It is obvious that if taxpayers feel that the state is able to detect tax evasion, the
tendency for such action would be limited and vice versa.
But it is common knowledge that tax evasion has deep roots in the Greek economy and
cannot be easily eliminated. Therefore, certain measures are proposed to deal with this
major problem. They are as follows.
7.1.1 Regular checks on persons and companies. These checks should be performed
based on the profile of tax evaders and randomly. The control based on the profile will focus
mainly on individuals and companies which have higher chances of tax evasion. On the
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15. other hand, checks on persons and businesses that do not fit the above profile will be
checked randomly. Thus, tax evasion levels will be monitored continuously so as
appropriate measures to be undertaken.
7.1.2 Automatic cross-check of receipts and related documents. To strengthen the role of
receipts in the improvement of tax revenues collection, it can be examined the possibility to
increase the tax credit for certain expenditure, even if it is done at the expense of tax
revenues. That way, there will be a shift in the mentality of taxpayers and will now be
considered obvious the issuing of receipts for any kind of service.
The European Union, to address this phenomenon and protect member states,
established in 1993 the VIES system, where firms are monitored making intra-
community trade for the proper return of VAT. In every located case, the way each
invoice is paid off is checked, i.e. if there is a bank document for the collection or payment.
When no such documents exist and the company claims that the transaction was made in
cash and without the mediation of a bank, then the case will be considered suspicious and
will be investigated in depth.
7.1.3 Professional accounts. On January 1, 2011, it has been decided that all transactions
between any enterprise and the payrolls should be made mandatory through commercial
bank accounts. This measure, of course, has not been yet implemented, but huge efforts are
made to achieve this goal.
7.1.4 Electronic invoicing and signature certification. In conjunction with the business
accounts, another measure which moves in the right direction is electronic invoicing and
certification of electronic signatures, where the application will be made among businesses
and between businesses and public.
7.1.5 Re-organization of tax services. In this sector, the establishment of a specific service
is required, which will control individuals with large incomes, using data and information
collected from different areas. The mission of this specialized service would be investigation,
methodology, control and detection of tax evasion in areas of illegal trade as well as its
confrontation, in cooperation with other bodies.
7.1.6 Education. The area of education should be reconfigured in all its stages, from
primary level up to university. It is appropriate to teach students, from the beginning of
their learning activity, the correct moral principles, about how they should behave in the
future, as potential entrepreneurs or employees so as to have increased tax consciousness, in
all areas of the economy.
7.1.7 Active citizens. Every citizen ought to become active, but at the same time, the
legislation of the country needs to be amended and the public administration to be
upgraded.
7.1.8 Simplification of legislation. This measure aims to provide a simplified legislation
to be understood by all citizens, regardless of age, educational level, etc. At the same time,
the technical support by the related information systems, such as TAXIS, must be
reinforced so as to place constant controls and crossings of tax information to better serve
the fight against tax evasion.
7.1.9 Amplification of transparency. There must also be correct and effective
management and distribution of taxes paid by the citizens in the state and targeted
fiscal policy to reduce government spending. Achieving this will enable the reduction of
tax evasion, a fact which will enhance the trust of citizens to the state. Citizens, by
paying taxes corresponding to each one and seeing that the money paid to the state, are
properly exploited, covering crucial public needs such as health, education, etc., then
and only then shall taxpayers trust the state, as they see the society in which they live,
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16. to thrive. It is therefore a more than important incentive for citizens to pay to the state
what it owns and in this way, tax evasion to be avoided.
7.2 Measures for shadow economy
From time to time, several measures have been proposed by the Greek Governments to
find appropriate ways to deal with the phenomenon of the informal economy. Some of
these propositions are in place, but even more are “frozen”, without ever to be able to be
applied. The most significant of these measures as well as new ones are summarized
below:
7.2.1 Incentives for voluntary compliance. Tax authorities around the world adopt
increasingly in recent years, various strategies which aim to the consolidation and adoption
of fiscal conscience by taxpayers. In these strategies, the continuous increase of voluntary
compliance by taxpayers to the tax authorities is also provided. In this way, a gradual
reduction of the cost of the tax audit will be achieved, and also violations and irregularities
that have been committed will be revealed by the taxpayers themselves.
7.2.2 Regulations for young entrepreneurs. One of the most important measures is the
tax authority to pay special attention to creating a climate of mutual trust with taxpayers
and especially with young entrepreneurs who are new comers on the market. Experience
shows that the special treatment of new traders through education and specific guidance
creates a degree of benefits, as for example increased voluntary compliance with the rules
of the tax authorities.
7.2.3 Incentives for disclosure of violating behavior concerning tax issues. There should
be certain incentives to taxpayers to disclose cases for which there should be elements that
have actually taken place, as that in these cases, the taxpayers will be exempt from fines and
other kind of penalties.
7.2.4 Expenditures discounts of the tax payers’ income. In this sector what is required is
whatever legitimate deductions or exemptions are provided by law for the taxpayers, not to
be hidden, but to be given so as to allow taxpayers and state to build a mutual trust.
7.2.5 Fair tax burden. It is necessary to develop a fair taxation system and the tax
burden to meet and be consistent with the real conditions of the economy.
7.2.6 Control mechanisms and frequent checks. A measure that would be quite effective
is the strengthening of the control mechanisms and the performing of frequent checks by the
relevant departments for better addressing of the problem.
7.2.7 Education. As for tax evasion, so for the underground economy, education is of
great importance, where there could be tax courses at all levels of education. For those
interested in expanding their knowledge of the taxation, it would be very useful to attend
related courses such as financial accounting, etc.
7.2.8 Legislation simplification. Simplification of legislation should be a priority, so as to
enable companies to know in a clear way, what are their tax obligations to avoid unpleasant
situations.
7.2.9 Improvement of productivity. There is an urgent need to increase the productivity
of the entire public sector, of the tax assessment authorities not only to improve the methods
of organization and administration but also to improve quality.
7.2.10 Registration of foreigners-immigrants. There should be strict registration of
foreigners, as it is generally accepted that the largest proportion of workers employed
without insurance are immigrants. This is because it is profitable for entrepreneurs, as
they offer relatively low wages which do not correspond to the work that can be
performed by employees, or in hours that can work in the business. On the other hand,
from this situation foreign immigrants also benefit because they can work without a
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17. residence permit, having secured a small income to enable them to cover the essentials
(e.g. housing, food, clothing, etc.). In this sector, therefore, companies must become more
sensitive, so as not to resort to illegal employment of foreigners, but to oppose, thus
preventing a large part of the informal economy. Motivation and support from the state is
crucial in this direction, especially nowadays that the migration flows from Syria have
become a scourge and threaten the whole socioeconomic structure of Greece.
8. Conclusion
Tax evasion is a serious cause for large public deficits by provoking lack of financial
sources, thus making the state unable to cover its costs. This leads the government to
increased external and internal borrowing. The first means less independence and
freedom of economic and other options for the country and also an increase in
government debt due to higher interest rates of foreign borrowing. The second is an
increase in interest rates to attract private capital to meet the public deficit, but this
deteriorates the circulation of money in the market and captures large private funds,
resulting in the reduction of private investments, which is absolutely necessary for the
development of economy. The overall result is economic stagnation and loss of
competitiveness, a critical and long-lasting drawback of the Greek economy. Even
more, tax evasion means creating disparities among citizens, as some professions can
evade taxes and some not, which not only creates inequality of the burden on taxpayers
but also taxes become onerous for non-tax evaders because of government revenue lag,
which is usually covered by the burden of those who already pay taxes. Another
negative consequence of tax evasion is that companies are discouraged from new
investments and risk taking so as to increase their profitability, as this can be
accomplished on a much easier way through not payment of taxes. Tax evasion means
wasting resources in unproductive activities, as it creates high transaction costs for tax
evaders. It also entails high administration and transaction costs for the government, as
it has to establish and maintain an effective control mechanism that is essential for
purposes of mitigation of tax evasion. On the other hand, the underground economy,
whose main part and cause is tax evasion, means that many private incomes remain
outside official statistics and calculations as, for example, GDP are not properly
reflected to the real economic situation. Therefore, the governments do not have an
accurate picture of the situation and are likely to take wrong decisions in relation to the
economy and the creation of revenues, thereby imposing additional burdens on
consistent and law-abiding taxpayers. Even more if we take into account that the
activities of tax evaders are paid in cash, tax evasion reduces the elasticity of cash
demand to changes in public interest rates which means more difficulties in
implementing monetary policy. Finally, measures which should be implemented to
reduce the black economy in Greece and increase the growth rate are mainly related to
consistent and fair tax practices. It is also considered important to reduce the existing
restrictions on product and labor markets (overregulation) in order the access to the
formal economy to be easier and more attractive, while placing regular checks and
sanctions where necessary to achieve compliance with tax authorities. It is the only way
to start diminishing corruption of public servants and citizens, too. Last but not least,
related inquires must be performed so as to identify why Greek citizens evade taxes and
what they would like to receive as goods and services in exchange for preferring the
formal economy. It would also be useful to consider what is it for which citizens would
be willing to comply to establish an honest relationship with the state.
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18. In conclusion, the measures to tackle tax evasion and the underground economy in
Greece are almost identical to the measures for addressing the effects of the debt crisis
which still plagues the country. As research on the topic of the informal economy remains
difficult and relatively limited, due to lack of sufficient and integrated data, economic
research should go even deeper in this crucial issue. Greece, a relatively developed economy
with high percentage of shadow economy and tax evasion, provides a fruitful ground for
study as proven by the present analysis.
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Corresponding author
Georgios L. Vousinas can be contacted at: vousinas@yahoo.com
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