Monday, 17 February 2014

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 4th 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. 

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