The previous governments in Greece, composed by ND and PASOK, mainly imposed unbearable taxes on citizens, while leaving the country at the mercy of tax evasion and the black economy. The above fact was also depicted in the interim report of the Governor of the Bank of Greece, Giannis Stournaras, where it is being written that 15 billion euros could have been saved in the kitty of the Greek state, if black economy and tax evasion had been fought against, instead of past governments’ choice to increase taxes in order to achieve the primary surplus financial goals.
The reference period is 2010-15 and the basic assumption is that Greece entered the memoranda with the amount of the sum of the black economy and tax evasion (together) reaching 25% of the GDP.
As indicated, if tax evasion and shadow economy had been dealt with effectively and there was no tax increase instead, the result would be a recession of less than seven percentage points of the GDP. With the shadow economy at 25% of the GDP, each increase in the tax revenue by one unit grips 2.8% of the Gross Domestic Product for 1.5% if there was no shadow economy.
Moreover, the tax increase by one percentage point of GDP leads to a shift of production and employment from the official to the informal economy by 1.3 and 1.4 percentage points, respectively. As a result, tax revenues are reduced and higher increases in tax rates are required to reach the budgetary target.
This creates a vicious cycle of (constant) tax rate increase and of the underground economy, leading to a further shrinking of official production.
In addition, to increase income tax revenue by one percentage point of the GDP, a hike in the tax rate is required by two percentage points when there is no gray economy, against an increase of three percentage points when there is an underground economy.
Greece is one of the countries of the European Union (EU) with the highest rates of black economy. Indicatively, it is estimated that the gray economy in Greece, in the period 2003-2015, averaged 25% of the GDP, compared with 19% on average in the euro area and 20% across the EU…/IBNA