Shadow economy and tax evasion. The Achilles heel of Greek economy. Determinants, effects and policy proposals

Author:Georgios L. Vousinas
Position:National Technical University of Athens, Athens, Greece
Pages:386-404
SUMMARY

Purpose This paper aims to bring into surface two major socioeconomic problems of Greece, tax evasion and shadow economy. Design/methodology/approach It examines the determinants and the factors that led to the formation and expansion of tax evasion and subsequently of black economy. Empirical data and related research are used to provide a clearer view of the existing situation. ... (see full summary)

 
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Shadow economy and tax evasion.
The Achilles heel of Greek
economy. Determinants, eects
and policy proposals
Georgios L. Vousinas
National Technical University of Athens, Athens, Greece
Abstract
Purpose This paper aims to bringinto surface two major socioeconomic problems of Greece,tax evasion
and shadow economy.
Design/methodology/approach It examinesthe determinants and the factors that led to the formation
and expansion of tax evasion and subsequently of black economy. Empirical data and related research are
used to providea clearer view of the existing situation.
Findings Tax evasion and shadow economyare proved to remain two of the most severe problems that
torture Greek economy.The factors that contribute the most to the formation of these phenomena are the lack
of tax awareness,the tax burden, the structure of the tax system, the role of the state, the level of approvement
of public authority, self-employment, unemployment and the level of organization of the economy. Except
from the negative characteristics, positive ones arealso identied, and certain policies are suggested so as to
combat tax evasionand black economy.
Originality/value The paper highlights two major issues that constitute the deadly weakness of the
Greek economy, providing a holistic view of the current situation, identifying the roots of the problem and
suggestingspecic measures.
Keywords Financial crisis, Tax evasion, Shadow economy, Greek sovereign debt crisis
Paper type Research paper
1. Introduction
The shadow economy (also known by many other names such as black, grey, informal,
etc.) is a common feature of countries all over the world and to a lowe r or greater degree
exists in all societies. Its effects on socioeconomic development can be signicant and far-
reaching, as scarce resources are wasted or used inefciently, desirable regulations are
circumvented and undermined, national statistics become inaccurate and incomplete and
public nances deteriorate to the breakdown of public policy. Of course, the presence of
an underground sector is simply a reection of individualsincentives to conceal their
economic activities, either because these activities would be less rewarding if practiced in
the formal sector or else because the activities are illegal to start with. A common practice
in this direction is the phenomenon of tax evasion which is the illegal evasion of taxes by
individuals, corporations and trusts, an activity closely associated with the informal
economy. Although shadow economy and tax evasion are often considered to be
identical, the two terms are different but are very closely related. Schneider and Buehn
(2012a,2012b) argue that even though the size of the shadow economy and tax evasion
JEL classication H26, O17
JMLC
20,4
386
Journalof Money Laundering
Control
Vol.20 No. 4, 2017
pp. 386-404
© Emerald Publishing Limited
1368-5201
DOI 10.1108/JMLC-11-2016-0047
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1368-5201.htm
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 aficts the research community is the
fact that measuring the black economy is extremely difcult 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 gure 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 gure, 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 renance 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
oftheGreekone(thebiggestone).Inlessdeveloped 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
(percentageof GDP)
Shadow
economy and
tax evasion
387

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