Kathimerini* recently published the conclusions of a recent study by the University of Chicago which estimated the level of undeclared income by independent professionals in Greece at EUR 28 billion in 2009. This estimate was arrived at by comparing the level of debt service paid by a sample of these professionals (e.g. loan payments, credit card payments) to their actual income. Two of the three professors implementing the study were Greek.
Some of the conclusions of the study are the following:
· Borrowers were making monthly debt service payments greater than their monthly declared income;
· Banks were approving loans not on the basis of declared income, but on the amount they believed the independent professional could repay;
· On average, the real income was 1.92 times higher than what was actually declared as tax income.
On this basis, tax evasion via undeclared incomes in Greece was estimated at EUR 28 billion, assuming that salaries employees have no opportunity to evade tax due to taxes being with-held at source. (There are actually many ways salaries employees and their employers avoid tax, but we can leave this for another post).
The study assumes that if this amount had been taxed, the government would have a further EUR 11.2 billion in income.
This problem is very well known: in this blog, I posted four simple means of eliminating this problem in my article A Consultant’s Guide to Tax Auditing. Part 1: How to Identify under-reported Income of March 14, 2010:
Step 1: Request from each bank branch a list of the 1,000 largest personal accounts, in terms of cash flow (deposits and withdrawals), including the name, address, ID number and tax identification number (AFM) of the account holder.
Step 2: Cross-check the volume of incoming cash to total income declared in the annual tax declarations of these same individuals.
Step 3: If a disparity is detected, freeze their bank accounts until the account holders come in to their local tax office to justify the disparity.
Step 4: Tax the difference between income reported and income incurred at the prevailing tax rate, with the tax to be paid in 12-24 months installments, and the bank account freeze lifted only once this agreement has been signed, and the first payment has been made.
This relatively simple method removes the needs to visits to specific professions, and removes the risk that the members of the Hellenic Tax Authority “adjust” the results of the audit in exchange for bribes.
This is a data-based check, so it can be done quickly, and cannot be changed through the forgery of historical data.
This is also important, because it sends a clear signal to banks that they cannot continue to facilitate large-scale money-laundering and under-reporting of income. The role of even state banks in this area is endemic, and must be stopped.
While some steps in this direction have been taken, there has not been a systematic approach to it. SDOE, the tax police, has made efforts at finding and taxing the most egregious offenders, but it is not at all clear how effective this attempt has been both in terms of coverage as well as actual resources collected.
Implementing the systematic approach described above for bank accounts over the past 5 years would quickly and decisively reveal both under-reported income as well as actual financial resources.
* Thanks to Lefteris Stavroloulos for bringing this article to my attention.
© Philip Ammerman, 2012