The crisis and tax evasion in Greece What are the distributional implications?

1. The crisis and tax evasion in GreeceWhat are the distributional implications? Manos Matsaganis, ChrysaLeventi & Maria Flevotomou 2nd Microsimulation Research Workshop Bucharest, 11 October 2012

2. the paper • introduction • methodology and data • results - discussion • conclusion 1 / 22

3. the paper • introduction • methodology and data • results - discussion • conclusion 2 / 22

4. introduction • The current Greek crisis and the country’s fiscal consolidation effort have elevated tax evasion to one of the most crucial policy issues of our times • Tax evasion hinders the fiscal efficiency of tax policies • most recent estimate of Greece’s informal economy: 24% of GDP (Schneider 2012) • Tax evasion creates horizontal inequality, leads to unfair social outcomes and distorts the intended distributional effect of the tax system 3 / 22

5. aim of paper • to estimate non-compliance patterns of income under-reporting in Greece • by comparing the incomes reported in a large sample of tax returns in 2007 (incomes earned in 2006) with those observed in the EU-SILC survey of that year • redo the exercise for incomes earned in 2010 • to estimate the distributional implications of personal income tax evasion in the general population • by using EUROMOD 4 / 22

6. the paper • introduction • methodology and data • results - discussion • conclusion 5/ 22

7. empirical research • Two main approaches 1. Macroeconomic approach: use of macroeconomic indicators 2. Microeconomic approach:use of microeconomic data • expenditure based method • discrepancy method: comparing two alternative and independent measurements of the same variable • comparing income declared to tax authorities to income declared to household income surveys • crucial assumption: individuals reveal their income to survey interviewers more truthfully than they do when filing their tax return 6 / 22

8. discrepancy method: studies 7/ 22

9. our dataset 1. A large panel data sample of income tax returns filed in 2007-2011 (incomes earned in 2006-2010) • 301,577 tax filers in 196,742 tax units (4.3% of tax filers in 2007) 2. EU-SILC 2007 (incomes earned in 2006) • 14,759 individuals in 5,643 households • EU-SILC 2011 (2010 incomes) has not yet been released. Solution: • uprate EU-SILC 2007 (2006 incomes) to 2010 • on the basis of estimates provided by the Bank of Greece, EL.STAT. improvement\ 8/ 22

10. methodology [1] 1. Create comparable reference populations • both datasets were reduced to: • people reporting annual income from wages/pensions above €6,000 • people reporting annual farming/self-employment income above €3,000 (i.e. restrictive set of rules for filing a tax return) 2. Create comparable income variables • gross incomes minus social insurance contributions 9/ 22

11. methodology [2] 3. Allocate the reference population into 16 categories defined as combinations of 4 macro-regions and 4 income sources: • Focusing on income sources allows us to account for individuals earning income from multiple sources (‘moonlighting’) improvement\ 10 / 22

12. methodology [3] 4. Create adjustment factors: ai,j= ỸRi,j/ ỸTi,j where: ỸRi,j= average income from source j by people in region i in tax returns ỸTi,j= average income from source j by people in region i in EU-SILC 5. Use these factors for the estimation of a ‘synthetic’ (i.e. adjusted for under-reporting) EU-SILC income distribution • introduction of a zero-mean random term around the estimated rates of income under-reporting by category 6. Use EUROMOD to calculate tax liability and disposable income based on the original and the ‘synthetic’ EU-SILC income distributions improvement\ 11 / 22

13. the paper • introduction • methodology and data • results - discussion • conclusion 12 / 22

14. results [1] • Under-reporting by income source and region (%) 13 / 22

15. results [2] 14 / 22

16. results [3] • Income - tax variables (2006) Note: mean incomes/taxes are non-equivalised annual personal incomes/taxes in €. They are constructed excluding those earning zero or negative incomes/ paying zero tax. Actual total income tax receipts in 2006 were €8,318 million. The share of positive income earners paying non zero tax is 40.3% under full compliance and 34.4% under tax evasion. 15 / 22

17. results [4] • Poverty and inequality (2006) Note: poverty and inequality indices are computed on the basis of equivalised household disposable income (HDI). The poverty line is set at 60% of median equivalised HDI. 16 / 22

18. results [5] • Personal income tax progressivity (2006) Note: tax progressivity indices are computed on the basis of equivalised HDI. In the absence of any re-ranking of individuals pre and post-tax, the two indices are proportional. 17 / 22

19. discussion • Income under-reporting: • varies widely by income source and region • is biggest at the two ends of the income distribution (U shape) • concentration of pensioners and wage earners in the middle of the distribution • reduces personal income tax revenues by 27.8% • 14.6% fewer persons paying on average 15.2% less tax • Tax evasion causes a slight increase in relative poverty but a significant increase in income inequality • It severely reduces the progressivity of the tax system 18 / 22

20. the paper • introduction • methodology and data • results - discussion • conclusion 19 / 22

21. reasons for caution • measurement & sampling errors • bias from the exclusion of people not filing a tax return • income uprating imperfect • assumption that people reveal their true income in EU-SILC 20 / 22

22. policy implications • fight against tax evasion • both fiscally important and politically crucial • refinement of audit targeting and audit coverage • policy making in the field of taxation should consider tax evasion’s distortionary effects in the intended progressivity of personal income tax 21 / 22

23. further research • add more dimensions in the construction of adjustment factors • perform sensitivity analysis • re-estimate 2010 under-reporting factors when EU-SILC 2011 becomes available 22 / 22