Sunday, 31 October 2010


Dear readers, I must apologise for the radio silence. I have been extremely busy since my failed play-by-play of the Hellenic Observatory’s Fiscal Management Conference. Now that I finally have a bit of time, I am happy to announce that details of the event (including all presentations) are now online.

However, by far the best was an explosive presentation by one Dr Vassilis Manessiotis of the Bank of Greece. I have previously been unable to find his presentation but it is now available here.

This presentation was made even more timely by the recent revelation that the IMF has written to our Government expressing alarm about our failure to meet our tax revenue targets. Plainly, our frequent claim that missing the revenue target is not a problem as we can compensate by cutting expenditures even deeper than originally planned is pure madness. However, the IMF should have been more vocal when it mattered – this is after all a pre-election period and we all know what happens during Greek pre-election periods.

Anyway, back to our story.

Dr Manessiotis explained that, as with all developing nations (yup!), tax administration in Greece is tax policy. How we get the money in is at least as important as the nominal rate of tax or the choice of direct or indirect taxes (see here for a detailed academic discussion). He explained, for instance, that VAT took 20 years to introduce in Greece (late 60s to late 80s), as administrative failures forced policymakers to delay its introduction 4 times.

In the context of very poor tax administration and high rates of evasion or avoidance, Manessiotis said, the Laffer curve simply doesn’t work – lower rates of tax simply lead to lower revenues and that is that. The hard-to-catch populations are of course the self-employed and small businesses as I have discussed here.

An interesting aside – the European Commission compiles a database of financial statistics for the small business sectors of all member states, which can be found here. Both in 2007 and 2008, the micro-enterprise sector in Greece appears to have made losses every year once an imputed wage for their self-employed directors is taken into account. In fact they lost 23 cents for every 1 Euro of value they create. Yet despite this, their share of Greek GDP continues to rise. How is this possible? Come on. Guess.

Back to our story though: Dr. Manessiotis explained that Greece’s tax evasion and avoidance is mostly of a low level of sophistication, not the financial wizardry that one might find perpetrated in the City of London. It starts with simple failures to issue receipts and maintain accounts. Something which will no doubt be exacerbated by the European Commission’s recent proposals (endorsed with some changes by Parliament) to exempt micro-companies from publishing their accounts. At any rate, tax audits are perceived (correctly) to be very rare and any findings are only actioned after a substantial time lag – some years to be more precise. Overall, Greek officials believe that ca. 30-35% of all potential tax revenue is lost to avoidance and evasion. Academics have worked out that these serve to increase inequality and poverty, thus inflating our social transfers budget and creating incentives for further fiscal expansion.

Greece has 286  tax offices (listed here), an enormous per capita figure by OECD standards, created in the past two decades for clientelist reasons (see similar stories on regional investment and universities). In the 1980s, 1990s and after 2007, large numbers of civil servants were moved into tax offices from other parts of the civil service without the necessary skills or training. Manessiotis does not explain how this worked but happily I do know as there as some such civil servants in my own family, transferred in the 80s from the civil service to their local tax office – you see, the geographical dispersion of tax offices was a great parking system for civil servants wanting to work near their families. 

The actual set-up of tax administration is an invitation to corruption – not only do tax officers have ‘unbelievable’ levels of discretion, they can only be disciplined by a committee of their own colleagues and the Greek Finance Minister must personally approve any transfer of a tax officer. The problem of corruption is acknowledged by the Inspector General of Public Administration and has deteriorated substantially in the past 10 years. It does not help that in Greece the quality of tax services by civil servants is extremely low; citizens are generally expected to know the law in minute detail and there is little to no support forthcoming when they inevitably do not. Thus they are entirely at the tax officer’s mercy in most cases.

Greece has no tax dispute resolution mechanism involving mediation – every contested case goes to the Tax Courts, which are currently facing a backlog of 150,000 cases worth a total of EUR30bn (ZOMFG). The average case takes 7-10 years to resolve. Taxpayers are technically required to pay 25% of the tax due in order to appeal in the first place, but the courts have the option of waiving this sum, which they exercise about 90% of the time (and, one is tempted to think, not without earning a bit of commission).

Finally, Greece has a long history of tax amnesties – 10 in the past 32 years, with the most recent taking place this year. A total of EUR17.5bn was written off in this manner between 2000-2008. Tax amnesties are by now built into the expectations of Greek taxpayers and their tax advisers (mostly notaries and accountants), encouraging a cavalier attitude to the law, which at any rate changes every month or so.

Greek Governments instroduced 104 major pieces of tax legislation between 1986-1995 alone plus a number of ‘emergency’ levies on businesses. As a result, the tax system is teeming with exceptions and ad-hoc provisions. The obvious implication is that tax information systems are rudimentary and non-integrated and in fact certain pieces of legislation have their own dedicated information systems that are impossible to reconcile with any other tax information. Amazingly, where tax systems have been computerised, the effect has been to simply digitise what was once a manual process – with no saving in time or effort at all and certainly no additional functionality. In fact the amount of paperwork has often increased as a result. Amazingly, tax officers cannot use what information systems they do have to consider a particular taxpayer’s tax history (no such functionality exists in the system), nor can they check their historical record of violations and/or errors. In many cases, taxpayers are required to submit their latest tax return themselves in order to fill in the gaps.

A law for the overhaul of tax administration was to be submitted in October but was sadly delayed ahead, one cannot help but thinking, of our crucial municipal and prefectural elections.

Overall, the cost of collecting taxes in Greece is 1.6% of the amount levied, twice what it is in Canada. In personal income tax, this ratio rises to 2.4%, which is 4 times the US level. This does not include the costs borne by citizens, who must collect all receipts on pain of losing half of their tax allowance.

The IMF knows all of this, and of course this knowledge cuts both ways, as per the Vayanos et al critique discussed here. One way of seeing all of this is to say that Greece has enormous potential that is being squandered by administrative failure – the Government/IMF line. If we could fix this, Greece’s public finances would be sustainable. Another way of seeing it, however, is that we simply do not have the time to overcome all of this massive failure while in the throes of a debt-fuelled death spiral. Greece has a poor record of institutional reform, which at any rate is a very tricky business.

Unless of course we suspend the electoral cycle, which I guess I would not be happy with.


  1. Well done on your work guys... commendable analysis... so glad I found you. Eleni

  2. Many thanks Eleni... very kind words.

  3. Thank you for sharing! This article is really helpful and informative.

  4. Thank you for sharing your insights. It is very informative and helpful. I might use this as inspiration for my projects. Keep it up! I’m looking forward to your updates.

    Tax Professional


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