Effective tax system, effective public expenditure are both key to growth
Taxation on capital and profits in Greece is among the lowest of the OECD member-countries, the deputy chief of the organization says
Fabrizia Lapecorella, deputy secretary-general of the Organization for Economic Co-operation and Development, has indirectly identified three main weaknesses in Greece’s fiscal policy: the need to reduce the tax wedge in the labor market – that is the gap between the salary employers pay and the actual amount workers take home – and increase taxation on capital; to broaden the tax base and reduce tax rates; and to change the direction of government spending toward investments and education.
Speaking to Kathimerini, she recognizes the fiscal complications of Greece’s 10-year debt crisis, as well as the fact that very small enterprises represent almost half of total employment in Greece, and recommends a number of international practices to achieve fiscal balance. Lapecorella is also positive about the new taxation framework for the self-employed, as well as for the system of prefilling tax returns for salary earners and pensioners.
OECD representatives will participate in the 9th Delphi Economic Forum from April 10-13.
High tax evasion is considered one of the weaknesses of the Greek economy that contributed to the fiscal derailment in the previous decade. What tools does the OECD suggest Greece use to correct this problem?
Reducing tax evasion is a fight that requires a sustained effort on the part of the tax administration, and it combines both tax administration and tax policy reform. Beyond that, governments should seriously consider implementing comprehensive policy packages that help build a culture of tax compliance and strengthen tax morale, the citizens’ attitude to comply with their tax obligations not for fear of controls but for full adherence to social norms.
There are several ways in which tax evasion can be reduced. One approach to increase the effectiveness of tax controls is by using third-party information to prefill income tax returns that are verified by taxpayers rather than only depending on taxpayers who self-declare their income. The use of electronic cash registers that automatically register transactions and share the information with the tax administration has also been very effective across the EU in reducing VAT compliance gaps. It is essential that tax administrations use all sources of information they have available and cross-check different tax returns; information on VAT returns can be used to verify income tax returns, and the other way around.
Tax administrations often have limited resources to audit businesses and individuals; they should rely on risk-based auditing methods to target taxpayers that have a poor tax-paying record or where the risks of noncompliance are highest.
Tax policy can also play a pivotal role in combating tax evasion. Tax rules can be designed in a way that induces the correct reporting of income. One such measure is linking the benefit of a tax allowance or a tax credit to the traceable payment of the eligible expenses. Tax systems can also include rules such as mandatory electronic invoicing or mandatory use of electronic cash registers, that make noncompliance difficult. There may be many more examples and our Forum on Tax Administration has extensively discussed “compliance by design,” producing very useful policy guidance.
International tax evasion has been for a long time the most difficult to tackle. Today, the progress made on global tax transparency with the automatic exchange of financial account information between tax administrations has significantly reduced the space available for wealthy individuals to hide their income offshore. The implementation of the OECD standards on the Exchange of Information on Request (EOIR) and the Automatic Exchange of Information (AEOI) at the global level represents a step change in the fight against international tax evasion.
The Greek authorities have taken significant steps to tackle tax evasion. To improve tax compliance, the Greek Recovery and Resilience Plan includes specific measures for the modernization and digitalization of the tax administration, including tax collection and incentives to increase electronic transactions. The digitalization of tax audits and controls could, when combined with the planned acceleration of VAT refunds, improve tax collection. Finally, the recently announced measures to reduce underreporting of the incomes of the self-employed are another step in the right direction.
‘As fiscal space becomes available, Greece could consider shifting its spending mix toward public investment and education, on which it spends a lower share relative to its GDP compared to the OECD average’
Do you agree with the view that the composition of the tax base in Greece de facto limits the possibilities to fight tax evasion? I am referring to the fact that Greece has the highest percentage of small enterprises and self-employed professionals in Europe. In what ways can a country effectively collect taxes from that sector of the economy?
Greece has indeed a larger share of very small firms and self-employed people, which is partly explained by its large service sector, with tourism the most important economic industry. Micro-enterprises, including the self-employed and firms with up to nine employees, accounted for almost half of total employment in Greece in 2022; and the self-employed alone account for close to 30% of total employment. Tax evasion among those firms can be widespread, as recently pointed out by the Greek finance minister.
That being said, the economic structure of a country does not limit the possibilities to limit tax evasion. Greece is not the only country where the self-employed and micro and small enterprises constitute a large share of the economy. The effective administration of the tax system, combined with effective tax policy design, can go a long way toward limiting the risks and incentives for tax evasion. The ongoing efforts of the Greek authorities, including the development of digital technologies for tax monitoring and auditing and measuring to better assess the incomes of the self-employed are important and welcome. Equally important will be reforms to improve the business environment and offer better opportunities for small firms and the self-employed to increase the size of their business.
In Greece there is a lot of talk about tax collection and less about government spending. Could it be that the principle of an effective and fair tax policy is the rational and eventually growth-oriented structure of government expenditures?
An effective tax system and effective public expenditure are both key to supporting growth. The OECD evidence shows that the spending-revenue mix influences the overall prosperity of an economy and the distribution of income across households.
A balanced tax system can better support economic growth. In Greece, for example, the tax wedge in labor – that is the gap between the salary employers pay and the actual amount workers take home – is larger than in most OECD countries, due to high labor income taxes and social security contributions. A high tax wedge may discourage workers from taking up formal employment and raises labor costs for firms that want to invest to grow, hire and train more workers. By contrast, in Greece, taxes on capital and profits are among the lowest compared to other OECD countries.
Past OECD Economic Surveys have recommended taxing income from all sources more equally, by raising taxes on capital income to reduce the burden on low and middle-income earners. It also recommends raising the required revenue by broadening the tax base rather than by raising tax rates. Combating tax evasion is crucial to broaden the tax base and avoid the imposition of very high taxes on those who cannot avoid them.
How spending is allocated also clearly matters. Spending funds for areas that support sustainable and inclusive growth raises revenues, and so creates space to lower tax rates. In Greece, public investment has been lagging over the past decade, while some key social spending such as education and health have also declined as a share of GDP. The current fiscal space to reallocate spending is limited. This is mostly due to Greece’s high debt burden and the high share of spending on pensions and public wages – spending commitments which cannot be changed easily. As fiscal space becomes available, Greece could consider shifting its spending mix toward public investment and education, on which it spends a lower share relative to its GDP compared to the OECD average.
Greece, like many other OECD countries, already employs a range of tools to improve spending efficiency, such as performance budgeting and spending reviews. In principle, these tools can very well support the review of programs to ensure that they achieve their stated aims more effectively, or identify and discontinue programs that do not work, and so offer better-quality public services while creating new fiscal space. In practice, experience from OECD countries shows that the effective use of these tools poses a number of challenges, including political economy challenges.
Would you say that the progress in the sector of government revenues should be translated into tax rate reductions in Greece?
To raise the revenue required to balance government budgets in the context of large tax evasion and a high informal economy, governments tend to levy higher rates on the taxpayers that do correctly self-assess and pay their tax liabilities. Broadening tax bases by bringing more taxpayers within the tax net may then indeed create an opportunity to lower the tax rates.
However, Greece’s spending needs are high after a period of low investment during its decade-long economic crisis, not to mention the looming challenges from high levels of public debt, climate change and an aging population. Against this backdrop, in its 2023 Economic Survey, the OECD recommends that any changes to the tax system should not reduce overall revenues.
