Austerity plans and tax evasion: theory and evidence from Greece

Francesco Pappadà and Yanos Zylberberg

Cahiers de Recherches Economiques du Département d'économie from Université de Lausanne, Faculté des HEC, Département d’économie

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.

Keywords: tax evasion; austerity plans; credit frictions (search for similar items in EconPapers)
JEL-codes: E44 H26 O17 (search for similar items in EconPapers)
Pages: 42 pp.
Date: 2014-01
New Economics Papers: this item is included in nep-iue, nep-mac, nep-pbe and nep-pub
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Austerity Plans and Tax Evasion: Theory and Evidence from Greece (2015)
Working Paper: Austerity plans and tax evasion: theory and evidence from Greece (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:lau:crdeep:14.01

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