Tuesday, 22 March 2011

Why is it tougher to collect VAT in Greece...

A couple of posts back I said that I want to be fair with Greek policymakers and Greece in general. Here comes one such post.

It is a fact that Greek people use credit cards (or revolving credit if you prefer) less than other Europeans or consumers in “western” countries in general, isn’t it? (I wish I could back this with data, but the only data about credit card debt volumes in Greece that I was able to find was for new business and not for outstanding debt) Well, this certainly has some pretty important implications for the Greek government’s ability to collect VAT (Value Added Tax). 

source: Bank of Greece, Central Bank of Ireland, Eurostat/ECB, own calculations

A good way to gauge how much money is floating around in the system is to use currency in circulation (the narrowest monetary aggregate). If you take a look at the chart, you can see that the relevant figure for Greece was 2% (of GDP) higher than in Ireland for the most part of the 00s. 

In periods of elevated inflation, currency in circulation tends to rise, as it does when the banking sector is in stress, something that makes people hold more money in cash if they are not comfortable to leave in in their bank accounts. Of course there are some limitations at this.

To get back to the point of the post, when consumers are paying for their purchases with their credit cards, there is some formal documentation of the transaction, but if they pay with cash, in the case that the seller does not produce a receipt then there is absolutely no trace of it.

Since anecdotal evidence and our every-day experience suggest that a larger part of overall transactions in Greece are paid with cash when compared with other “western” countries, doesn’t that make the task of collecting VAT tougher? I think that it does…

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