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    Tax Evasion Happens In Socialist Countries Too
    By News Staff | December 18th 2012 11:28 AM | Print | E-mail | Track Comments

    While the overall population of Greece benefits from government services and doesn't want those to change, the people who pay the most also evade the most, says a paper.  If their estimates are accurate, at a tax rate of 40 percent the 28 billion Euros in unreported taxable income could be responsible for up to one-third of Greece's deficit in 2009 or almost 50 percent of the deficit in 2008, according to bank data on household borrowing, which finds that highly paid, highly educated professionals are at the forefront of tax evasion in Greece: doctors, engineers, accountants and lawyers. 

    Mandating equality is difficult. 

    Their data consist of credit applications for consumer credit products at one of the ten large Greek banks from 2003 to 2010. The authors looked at situations where the bank determines the credit level, like refinance loans, new credit cards and a sample of loans in which borrowers requested more money than they received. They used the bank decision on the appropriate credit level to understand how much income the bank must perceive individuals to have to back out the bank's estimate of true income. They call that lending "soft credit" since the information about true income would be soft information. 

    If the numbers don't match what they believe a bank should expect in the way of income, the authors determined those people were cheating on their taxes.

    After declaring that any discrepancy in a bank decision must be due to rich people cheating on their taxes, they then generalized how such dramatic tax evasion could exist. They say the tax cheats tend to work in occupations that are least likely to leave a verifiable "paper trail" for tax collectors, though how they could then prove income to a bank is unclear.   Greece has regulations requiring all businesses to issue receipts for transactions so it may track business taxes due. If a business doesn't comply, the customer can walk away without paying. 

    They assert that the majority of Greek Parliament members' professions correlate with the largest tax evaders. "Industry associations are strong.  Parliament members face enormous loyalty pressure," suggests  Adair Morse, a visiting assistant professor of finance at UC Berkeley and co-author of the paper "Tax Evasion Across Industries: Soft Credit Evidence from Greece". 

    "The goal of the paper is to use our rich bank data to provide a country-representative estimate of tax evasion in aggregate and by occupation, and to offer analysis relating to factors that allow the tax evasion to persist. But we were also very aware that understanding who is paying taxes and who is not is important to the people of Greece. One might ponder how it can be a good thing that the higher-income professions 'tax evade' a higher proportion of this income." 

    Morse hopes the study's findings will encourage Greek policymakers to create incentives for more accurate income reporting such as paper trial mandates or occupation licenses for tax evading industries - how mandates and licenses are incentives are unclear to anyone not in economics, though it would explain most Greek finances.