Greece’s inefficient tax system – Case of lack of trust between citizens and government

Each time one reads  a paper featuring Greece on systems etc. one can’t miss the comparisons with India.

A superb paper on Greek tax system by University of Athens econs – Georgia Kaplanoglou & Vassilis T. Rapanos.

The paper aims at highlighting a number of shortcomings in the design and enforcement of the tax system in Greece, which have played a key role in the exacerbation of fiscal deficits that led to the current sovereign debt crisis. More precisely, we argue that these shortcomings that result in low tax revenue, relate to the structure of the Greek economy and to the failures of formal institutions (such as poor function of the tax administration and lax tax enforcement). At the same time such failures are rooted in and at the same time reinforce failures of informal institutions, namely low levels of trust to institutions and perceived fairness of the tax system.

 Nice bit. They say lack of formal institutions is not the only answer to Greece (and other economies) tax problems:

The third section attempts to explain the above empirical findings in terms of the longstanding failures of formal institutions. Despite the fact that evidence is sparse and fragmentary, all available indicators point to the fact that the low and unfairly
distributed tax yield is primarily due to the  poor functioning of the tax administration, lax tax enforcement, inefficiency of tax collection and the lack of effective dispute resolution mechanisms. Such failures result in high tax evasion and a thriving
underground economy. 

These findings cannot be interpreted in economic terms alone. The standard view of tax theory is that taxes are a necessary harm whose ‘excess burden’ has to be minimised in order to finance some undefined public expenditures. Standard tax evasion theory treats the decisions of individual taxpayers with regard to their tax payments in a similar way (e.g. Allingham & Sandmo 1972; Yitzhaki 1974). Two issues escape the attention of such models. The first one is that in the real world citizens of democratic political jurisdictions perceive a connection between the taxes they pay and the government services provided to them. In this context, citizens could ‘voluntarily’ pay their taxes if they trust their government to deliver the services it has promised. The second issue is that, even if a citizen trusts her government, the citizen’s behaviour will still be influenced by how she perceives other taxpayers to behave. In other words, tax evasion should be treated not only as a pure economic but also a social phenomenon (Sandmo 2005).

Superb reading..

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