Greece and VAT evasion.

There are a few topics that, sadly, never go out of vogue in Greece. Perhaps the most prevalent of them all is tax evasion. Every government that has been in office till now has promised to crack down on it but none has done so/managed to do so (take your pick). 

In this post I would like to take a look at VAT evasion. 

Many reasons are cited regarding what drives VAT evasion but I am not going to go into these here. One that is not cited often enough in literature though is the extent that credit cards/debit cards are used for payments. The reason is quite simple; out of pocket transactions leave collecting and paying VAT to the discretion of the seller (bar an efficient collection system) while when using some kind of card this is done automatically by the bank. 

Data for cards’ usage are hard to come by. The World Bank database has some for the 2004 – 2009 period. Data regarding the VAT gap are equally hard to find. Luckily a report commissioned by the EU (“Study to quantify and analyse the VAT Gap in the EU-27 Member States”) contains some for most EU countries.

I would prefer some more up to date data but I think that these too reveal quite a few trends. 

source: "Study to quantify and analyse the VAT Gap in the EU-27 Member States", World Bank, own calculations

The trend is unmistakable. A few take-aways:

• ·         After reaching some threshold, increased card usage does not seem to achieve much as far as the reduction of the VAT gap is concerned. This is positive, since the distance Greece (the red dot in the scatter plot) has to cover is reduced.

• ·         In the scatter plot one can discern some cases (outliers) where reduced card usage does not equal a larger VAT gap. This means that a efficient tax-collection mechanism bypasses the need for card usage. This is positive as well since it increases policy choices for Greece (if one could call an efficient tax-collection mechanism a policy choice that is). 

One further point that one cannot help but notice is that since the onset of the crisis, VAT gaps have risen in all but three of the countries featured in the report.

A further one would be that Greece recorded the 4^th highest VAT gap (among the countries featured in the report). But my guess is that shouldn’t come as a surprise to no one living in our beloved Greece. Not really.

source: "Study to quantify and analyse the VAT Gap in the EU-27 Member States", own calculations

On top of the points made above, we should mention that for the 2008 – 2009 period, the VAT gaps rose along with payments-with-the-use-of-cards. Whether this reinforces the point that cards’ usage is no panacea or can be blamed on some technical issue (deductions etc.) I honestly do not know.

The advantage when starting from a very low base is that potential could border on enormous. The problem is why this potential was not tapped until now and whether there will come a time that there will be the willingness to do so. 

Does the Greek retail sales spike imply a household consumption uptick ?

Greek retail sales’ figures for November came out this week and after a long time (namely since the 1^st quarter of 2010) the volume index’s sign was positive. What are the repercussions of that for household final consumption expenditure?

I made a rather simple, or simplistic if you prefer, calculation using the retail sales volume index. As far as I know, ELSTAT does not publish quarterly series for retail sales, so I computed the quarterly figures using the monthly ones. My next thought was that it would be interesting to plot my freshly-computed quarterly retail sales figures against ELSTAT’s quarterly Household & NPISH final consumption expenditure. Here’s the end-product.

source: ELSTAT, own calculations

Retail sales are more volatile than household & NPISH final consumption expenditure, both on the downside and on the upside and sometimes lead consumption. Hence the fact that retail sales slipped into positive territory in November 2013, making the Q4*(comprising just of October and November, mind you) figure turn positive too, does not mean that household final consumption expenditure will turn positive. What it could mean though is that the 4^th quarter of 2013 could see the lowest contraction in household final consumption in a long time.

The obvious question is if that is a blip or does it signal the bottoming of retail sales (at least in volume terms)? We’ve been there before with the manufacturing production index where a spat of positive readings in late 2012- early 2013 proved to be nothing other than a head-fake. Frankly, the situation in Greece is very fluid right now making the quest for concrete conclusions nigh on impossible, so the only thing we can do is wait and see (and maybe keep our fingers crossed in the process)…