How Tax Evasion Is Complicating Greek Rescue Efforts

Tax dodging in Greece is so rampant that the Bank of Greece estimates the country could be losing as much as five billion euros a year. While that's a far cry from the €54 billion needed for 2010, it could result in much harsher cuts as the country tries to get out from under its crushing debts.

That lost tax money would have nullified the need for Greece's planned 10-year bond issue, which is expected to raise up to €5 billion, or a set of new austerity measures to cut €2.5 billion, which the government will discuss this week with European Union and International Monetary Fund officials.

Despite decent annual economic growth, Greece was receiving less in tax revenue than its EU peers. As Bloomberg reported last week:

Greece's revenue from income tax was 4.7 percent of GDP in 2007, compared with an EU average of 8 percent, EU statistics show. Tax revenue fell by 2.5 percentage points of GDP between 2000 and 2007 to a euro region-low of 32 percent even as economic growth averaged 4.1 percent a year.

Greece's tax collectors seem unperturbed by their underperformance: They went on strike last week to protest the government's austerity measures.

Anecdotes suggest that the evasion may be even worse. An anonymous Greek banker wrote in a blogged-about note:

On the official statistics alone, we are comfortably in the world's top 40 for per capita GDP. But that's peanuts. Lest we forget, that's our declared income. Don't quote me on this apocryphal statistic, but I'm reliably informed that exactly six Greeks declared more than a million EUR in income last time anybody counted. And exactly 85 declared more than half a million. So we're probably a bit better than top 40.

Either that, or this trading floor alone has more rich people than Greece. Hell, our new recruits for this season alone could probably do it. If you have any doubts about Greek wealth, check out on Bloomberg the balance sheet of the National Bank of Greece, Eurobank, Alphabank and Piraeus bank, the top four. The four of them alone command EUR 164 billion in deposits! Slightly misleading, since they all have operations in the Balkans, but that's almost one GDP, lying in deposits!!! More to the point, how many Greeks do you know who keep their money in Greece? That's merely our spending money, it's a small fraction of our savings and assets.

The anonymous banker also notes that since much of Greece's debt is in foreign hands, a default could be more painful for the world at large -- especially EU counterparts like Italy who are also facing massive deficits -- than for Greeks who have untaxed funds stashed away in foreign denominations.

More immediately, the government's longstanding failure to collect taxes may make it harder for Prime Minister George Papandreou to meet the key EU demand of significant spending cuts. Budget cuts are a hard pill to swallow, while another remedy exists. Again, Bloomberg:

"What distinguishes Greece from the rest of the pack is the extent of tax evasion," said Michael Massourakis, chief economist at Athens-based Alpha Bank, the country's third biggest-lender, in a Feb. 5 telephone interview. "If you don't attack tax evasion you don't have the moral authority to cut spending."

Would stronger collection efforts in the past have prevented the current widespread strikes over new budget cuts? Probably not. But, it would make the argument for austerity more palatable. Of course, increased tax enforcement in the past would have constituted a political hit.

The tax issue won't just impact the political will of the Greek public, it could also make an outside bailout difficult. Whoever saves Greece from its debt crisis will be rescuing a government, not necessarily its people or businesses. As the anonymous banker put it: "Greek companies will be just fine, basically. It's the government that is the joke here, not the country!"