By Georges Siotis
Associate Professor of Economics
Universidad Carlos III de Madrid and CEPR
Former member of the TFGR
VAT is the Greek State's most important source of revenue. From 2000 to 2012 it amounted, on average, to 7.15% of GDP and the total amount collected in 2013 stood at €12.6 billion, higher than any other source of income. The European Commission has estimated that the VAT gap (the difference between receipts that should accrue to the State and actual ones) is one of the highest in the EU and has ranged around 4% of GDP over the period 2011-2013. There has been a steady deterioration in collection over the last 15 years: currently, about a third of VAT due is uncollected.
In response, the Greek government has tried to increase revenue through hikes in tax rates. However, past “parametric” adjustments in rates have never delivered substantial additional revenue. Yet, Greek governments keep on resorting to rate increases as a last resort, having raised that standard VAT rate between 2009 and 2016 on numerous occasions. In each of these instances, creditors seemed happy to go along.
Only measures that will broaden the tax base, increasing the efficiency of the tax administration and improving overall tax compliance, can help to reduce tax revenues shortfalls. Currently, high hopes are associated with the penetration of e-money. There are, however, no sound economic foundations underpinning these expectations. The push for promoting e-transactions starts with anecdotal evidence, linking the use e-payments and tax evasion. Negative correlations are then used as “proof” that the adoption of electronic payment methods will reduce tax evasion. This is a clear example of mixing up association and causality. Second, it is argued that since there is a record behind e-transactions, Greek authorities will be able to identify evaders and punish them. This presupposes the existence of an effective tax administration capable of processing this vast amount of data, when the historical track-record of the Greek tax administration clearly indicates the opposite. Third, the spread of e-money will have little impact if it only affects infra-marginal transactions: if e-money is used for purchases on which VAT is already charged (e.g., sales in supermarkets), nothing will change in terms of collection. Incentives need to be given for VAT payment for transactions in pockets of tax evasion (e.g. horeca, liberal professions). The need to give incentives at the margin is also a tenet of sound economic thinking. Last, the idea of subjecting e-transactions to a reduced VAT rate would lead to additional revenue shortfalls and is probably incompatible with EU law.
There are, however, simple and cost effective ways to close the VAT gap. A simple technology to boost VAT collection (christened “@podeixi”) has been developed (and patented in 2010) in a public research center (Demokritos). The idea: When purchasing goods and services, each customer should demand and receive a receipt. Each receipt mandatorily contains some basic information (time purchase, the amount paid and the trader’s tax identification number. This basic information can be electronically sent (via mobile telephony or the internet), using a predetermined format, to a dedicated database. This receipt-specific information will be encoded, without any further human intervention. A secured server then runs random draws at specified time intervals; with the winning receipt(s) receiving a prize. In addition, tax authorities would have at their disposal, in real time, a random sample of transactions that would dissuade traders from using "monkey" VAT numbers and cash registers.
Such lottery schemes have been put in place - already for decades- in Taiwan (in force since 1951), mainland China and Brazil. The Peoples' Republic of China introduced a pilot scheme in 1998 and proceeded with national roll-out in 2010. It is estimated that the Chinese version of the scheme generated increases in VAT revenues of 17% (Wan 2010). There are three Eurozone countries with similar schemes; Malta, Slovakia and Portugal. In all cases, the experience has been successful. Fundamentally, these schemes have worked because they are incentive compatible and do not to rely on coercion and control mechanisms.
One appealing feature of ‘@podeixi’ is that it does not rely on a heavy up-front investment in infrastructure, but on readily available technology with low administrative cost. This scheme could easily be tested at short notice on some popular tourist destinations, minimizing the risks for public purse. It has been estimated that a pilot (including hardware, promotion, and prizes) could be a carried out for less than 1.8 million €. Its limited costs means that the balance of risks is favourable (limited downside, enormous upside if successful). This cost effective, incentive compatible option should be considered by Greek authorities.
*This article is part of a feature regarding the Greek crisis, within the context of a cooperation between "Naftemporiki" and "DIW Berlin". It is based on the research "The Greek crisis: A Greek tragedy?" and expresses the personal opinion of the author.
