Wednesday, October 18, 2017

Greek Black Market Spurred by High Tax Rates

By: Lindsey Curnutte
Produced & edited by: Trianna Connolly

About 21 percent of Greece’s GDP is going unaccounted for, according to a recent study from the Institute for Applied Economic Research, at the University of Tübingen (IAW).

Greece has the highest percentage of unaccounted for GDP according to 2017 study.
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This means nearly one in five euro notes changing hands in Greece are not taxed, making its shadow economy, also known as the black market, the most established among developed OECD (Organization for Economic Cooperation and Development) countries.

“The size of the shadow economy and the levels of corruption in Greece have been and still are particularly high with respect to other developed OECD countries,” the IAW study reads. “Moreover, the political dimensions of the Greek crisis… suggest a correlation between the size of the shadow economy and the levels of corruption.”

Greece is struggling to recover from a nearly decade long economic crisis. The IAW study may legitimize some experts’ opinion that austerity and high tax rates are not the solution to the government’s debt issue.

“Greece appears to have suffered a slump overwhelmingly because of the austerity,” Paul Krugman, a Nobel Prize-winning economist, said in 2015. “Surely there’s no grounds for dismissing this impact as a mere fraction of the problem.”

Why Greeks Avoid Paying Taxes
The Greek practice of evading taxes may be more common that American’s might expect. Kathimerini, a Greek newspaper, reported that government data show thousands of taxpayers finding loopholes to avoid declaring theirincomes to tax authorities.

“It is very common in Greece to not pay taxes, there is even a political movement against paying them,” said Josephine Lazaridou, a 25-year-old lab technician from Kalava, Greece. “I think one of the main reasons, especially for business men, is that we have a really high value added tax on some products. So some people, in order to stay in business, have to claim less.”

Greece has one of the European Union’s highest value added taxes (VAT), which can be up to 23 percent on industries like wine and gambling. Hungary tops the list with a 27 percent standard VAT rate.

Wine on the Black Market
Some say high VAT rates have led to an expanded black market for wine. Yiannis Vogiatzis, a wine merchant in northern Greece, told Kathimerini that experts estimate 65 percent of wine consumed in Greece is produced and sold illegally.

Winemakers blame this developing black market on the controversial VAT placed on wine starting in 2015.

“The excise tax has ultimately acted as a punishment for those who want to do business legally,” Vogaitzis, also president of The National Interprofessional Organization of Vine and Wine of Greece, said.

The excise tax, which was sought to be a replacement for a failed value added tax on private schooling, was expected to bring 65 million euro in revenue per annum. As of June 2016, the wine tax collected 4 million euro, a fraction of the expected number.

Theodore Georgopoulos, director of The Greek Wine Federation, said winemakers face severe problems due to the excise tax. Wineries are required to pay 10,000 to 20,000 euro upfront for the tax, even for wine they had not yet sold.

“And bigger wineries have to organize tax warehouses,” Georgopoulos said. “They were asked to organize them in a week or so.”

A vineyard located in Greece.
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Because of the high cost of compliance, over half of winemakers have turned to participating in a “highly organized” black market in wine, said George Skouras, president of the Greek Wine Association, and a winemaker in Nemea, Greece’s biggest wine-producing region.

“They have built tanks underground so they can’t be spotted by inspectors and have people scouring the countryside to buy grapes illegally, without invoices, off the books,” Skouras told Kathimerini in 2016.

Georgopoulos blames the hastily enacted regulation and poor enforcement for the expansion of the black market for wine.

“From the very beginning, The Greek Wine Federation was against the excise duty,” Georgopoulos said. “We reckon the need for contributing to the recovery of the Greek economy. However, the way the whole operation was planified... we knew this could not work.”

The Black Market and Tax Fraud 
The InternationalMonetary Fund (IMF) reported that black markets thrive in countries like Greece that have high tax rates, expansive regulations, and weak, corrupt governments.

“A heavily regulated economy combined with weak and discretionary administration of the law provides especially fertile ground for shadow activities. These are also the conditions under which corruption flourishes,” the IMF report reads.

IMF recommends implementing lower tax rates and few regulations in order to achieve greater compliance.

“Our findings emphasize the importance of the rule of law in curbing both corruption and associated shadow economic activity.”

While the IMF report found simple solutions to limiting tax evasion, many Greeks like Georgopoulos have pessimistic views on the government’s ability to curb a tax-dodging culture in Greece.

“Tax fraud is like sin,” Georgopoulos said. “Once you taste it, it is very difficult to go back. It is an ethical matter as well as a matter of habit.”

Some estimates put the amount of taxes evaded to be at 11 to 16 billion euro annually, reaching 6 to 9 percent of Greece’s GDP.

“My godfather does not pay his taxes because he is against it generally,” Lazaridou said. “He is angry with this economical situation that we are going through and refuses to give more and more without a future prospect for him and his family.”

With this being said, relief may be on the way for Greek winemakers and drinkers. Evangelos Apostolou, minister for Agricultural Development and Food, announced plans to abolish the excise tax that brought less than desired financial results by the end of the year.

“It is the only way that can stabilize the country's path towards a period of positive prospects after the crisis and the deep recession that it experienced in the past years when about 25% of its GDP disappeared," Apostolou said at an August wine festival in Nemea, Greece.

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