Magazine

Did Greeks fail to pay 89.5% of taxes?

  • 11 July 2015
  • From the section Magazine
Man with euro notes

There are many reasons why Greece finds itself in a precarious financial position, one of which is its poor record at collecting tax. But is it really true that in 2010 the government collected only 10% of the tax it was due, asks David Rhodes.

A graphic published by the Washington Post on Sunday suggested that 89.5% of the country's tax receipts remained uncollected in 2010.

In Germany the corresponding figure was just 2.3%, the newspaper's Wonkblog reported.

This left many social media users claiming that the root cause of Greece's problems is that the vast majority of its taxpayers that year simply didn't pay their taxes.

But that is a mistake.

The widely misinterpreted figure of 89.5% comes from an OECD report (see table 6.16) which actually relates to historic tax debts - not tax that Greece was due to collect from its citizens in 2010.

The reason the figure is so big, according to tax blogger Richard Murphy, has to do with the way the Greeks have been keeping their accounts.

"Sensible tax authorities take a view on this issue every year and say, 'We'll write off a proportion of our tax debts that we know we are never going to recover.' Greece, though, is recording this extraordinary large number because they haven't bothered to write off their old debts.

"This is an accounting anomaly."

Greece does indeed have a "massive" tax collection problem, Murphy says, but it certainly hasn't been failing to collect 89.5% of taxes owed in any one year.

Image caption Greece cut VAT on restaurant meals in August 2013

So how much tax did the Greeks collect in 2010?

In fact, no reliable figure seems to be available - at least, not as a proportion of the overall amount of tax that should have been collected.

What we do know is that, according to the OECD, in 2010 the Greek government collected 70.3bn euros ($93.1bn), or 34% of the country's total gross domestic product (GDP) - slightly below the EU average of 38.5%.

Tax collected in 2010
Country Percentage of GDP
Italy 41.7
Germany 38.3
UK 35.5
Greece 34.0
Source: Eurostat

In part this is because Greece has a large "shadow economy" - earning money without paying income tax, or perhaps avoiding paying VAT.

You might assume that businesses in the construction industry or tourism might be the main culprits when it comes to tax evasion, but a report published earlier this year by a group of US academics found that the primary tax-evading industries in Greece included medicine, law, engineering, and the media.

A study quoted by the IMF suggests that between 1999 and 2010 the shadow economy in Greece made up 27% of the country's GDP - compared to an average of 20.2% in other rich countries.

That means that nearly one in four euros that potentially could be taxed in the country's economy simply weren't declared to the authorities, and the Greek government missed out on approximately 28bn euros ($31bn) of additional revenue each year.

But Richard Murphy, who has studied the size of the shadow economy in Europe, says Greece is not as bad as some of its neighbours.

"Greece has a problem but Bulgaria, and Romania are worst. Italy is up there alongside it. But it is an issue which has clearly contributed to the current Greek crisis," he says.

Shadow economy in 2009 (estimate)
Country Percentage of GDP
Greece 27.5
Italy 27.0
Germany 16.0
UK 12.5
Source: Tax Research UK

There is also evidence to suggest that the Greeks aren't very good at collecting taxes even outside the shadow economy.

In 2011, an OECD survey ranked Greece as one of the worst rich countries in the world at collecting VAT receipts and social security payments.

When the OECD had tried to do similar surveys between 2005 and 2009 they found that the data was simply "missing".

As part of any deal that will see Greece remain inside the Eurozone its international creditors are demanding that the Syriza government enacts a range of tax reforms.

This includes simplifying the VAT system, closing tax loopholes and creating an independent tax collection agency free from government interference.

But Greece's creditors have made similar demands before.

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