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Austerity plans and tax evasion : theory and evidence from Greece

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  • Francesco Pappadà
  • Yanos Zylberberg

Abstract

The austerity plans implemented in Greece in 2010 have yielded lower than expected increases in tax receipts. We argue that this has been the result of the arbitrage that firms face when choosing to declare their activity. A tax hike has a direct effect on the degree of tax evasion, and an indirect one through credit markets. A tax increase tightens the credit constraints of firms and depresses even further their incentives to be transparent. Using a dataset of about 30'000 Greek firms per year over the period 2002-2011, we provide evidence that firms adjust their declared profitability, and this adjustment depends on the tax burden and their need for credit. We then calibrate our model and show that leakages due to tax evasion are quite high : a 21% increase in tax rates only delivers a 7% increase in tax receipts. The response of transparency generates an additional investment slack which is the result of a contracting demand for credit by small and medium size firms induced by tax evasion.

Suggested Citation

  • Francesco Pappadà & Yanos Zylberberg, 2014. "Austerity plans and tax evasion : theory and evidence from Greece," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 14.01, Université de Lausanne, Faculté des HEC, DEEP.
  • Handle: RePEc:lau:crdeep:14.01
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    References listed on IDEAS

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    1. repec:nbr:nberch:13342 is not listed on IDEAS
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    Cited by:

    1. Afonso, Sérgio, 2016. "A More Precise Approach to Fiscal Consolidation and Sustainability," MPRA Paper 69072, University Library of Munich, Germany.
    2. Pappa, Evi & Sajedi, Rana & Vella, Eugenia, 2015. "Fiscal consolidation with tax evasion and corruption," Journal of International Economics, Elsevier, pages 56-75.
    3. Antonis Adam & Thomas Moutos, 2017. "The Modality of Fiscal Consolidation and Current Account Adjustment," CESifo Economic Studies, CESifo, vol. 63(2), pages 162-181.
    4. Grigorakis, Nikolaos & Floros, Christos & Tsangari, Haritini & Tsoukatos, Evangelos, 2016. "Out of pocket payments and social health insurance for private hospital care: Evidence from Greece," Health Policy, Elsevier, vol. 120(8), pages 948-959.
    5. M. Bussière & L. Ferrara & M. Juillard & D. Siena, 2017. "Can Fiscal Budget-Neutral Reforms Stimulate Growth? Model-Based Results," Working papers 625, Banque de France.
    6. Sebastian Gechert & Ansgar Rannenberg, 2015. "The Costs of Greece's Fiscal Consolidation," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 84(3), pages 47-59.

    More about this item

    Keywords

    tax evasion; austerity plans; credit frictions;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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