Isenberg Professor’s Study Sheds Light on Tax Evasion in Greece

A study by University of Massachusetts Isenberg School of Management finance professor Nikolaos Artavanis of tax evasion in Greece is receiving widespread press coverage, as it is closely related to the ongoing conversations in negotiations over the new bailout plan between Greece and its eurozone partners. On July 15, the Greek Parliament approved new austerity measures, including the significant increase of VAT (value-added tax) rates. Based on his research, Artavanis thinks that these policies may prove counterproductive. “The fiscal impact could be zero or negative because tax evasion will increase,” he told the Associated Press. “They could get less in taxes.”

Artavanis’ misgivings are fueled by his empirical research involving Greece’s restaurant industry. The Isenberg professor looked at tax revenues following an austerity-driven 2011 VAT increase from 13% to 23% in restaurants. First-year revenues of 140 million euros from the plan fell markedly short of anticipated tax income of 1 billion euros. When the government reduced the VAT rate from 23% back to 13% in August of 2013, VAT revenues decreased by 69.8 million euros, less than half the expected decline (160 million euros).

“The rate increase was accompanied by a significant increase in tax evasion; the rate reduction by a significant decrease in sales underreporting,” observed Artavanis. (The latter, he added, also affects direct taxes—explained in his study, “The Effect of VAT Rates on Tax Evasion.”) “These significant differences between predicted and realized values,” emphasized Artavanis, “show that when you fail to consider the impact of VAT increases on tax evasion, your forecasts—based on simple multiplications of new rates on the existing tax base—are doomed to fail.”

 

Artavanis’ study: The Effect of the VAT Rate on Tax Evasion: Evidence from the Restaurant Industry in Greece