Europe’s hopes for fewer Greek tax dodgers

In an election watched closely by the rest of Europe, Greek voters returned Prime Minister Alexis Tsipras to power on Sept. 20. The big issue? Whether Greece will adopt reforms demanded by the European Union in order to receive another bailout and keep the country in the eurozone.  

Tsipras must now implement those reforms – one of which could have prevented the Greek debt crisis that first began five years ago.

Greece’s high debt levels, which sent financial markets into a panic in 2010, have been driven in large part by the country’s high level of tax evasion. Not paying taxes is so socially accepted that the rate of tax noncompliance for Greece is about three times the average in Europe. Much of the economy is “off the books.” One 2013 study for the Bank of Greece found that 2 out of 3 workers declare less than their actual income. The tax code is complex, loopholes have been freely given, and enforcement of tax laws is still weak.

Changing this culture of evasion is the prime minister’s most difficult task, yet it is critical to the eurozone’s future and thus EU unity. Tsipras has promised to produce a budget surplus in 2016, a necessary step to start paying down the nation’s large debt. The big question is whether he will achieve higher tax compliance with carrots or with sticks.

One measure of a country’s social trust and public confidence in government is the willingness of its people to pay taxes, or what economists call “tax morale.” Threatening punishment goes only so far in forcing compliance. Far better is to instill an intrinsic motivation to pay taxes. For Greece, this will mean instituting better fairness in the tax code, a better appreciation of the worth of government services, and a level of enforcement that creates a belief that others are paying up.

One reason for the popularity of Tsipras’s left-wing Syriza party is a perception that it can curb corrupt practices in Greek society, such as bribery of tax collectors. If the government can maintain a clean image, it will motivate more Greeks, many of whom are self-employed, to come out of the shadow economy and declare income.

The future of both Greece and the eurozone now depends on a shift of values in Greek society toward greater trust, honesty, and transparency. Technical improvements in tax collection, such as digitizing tax returns, will help. And stronger enforcement of tax laws is still needed. But Greece’s long history of tax evasion, which led to previous governments lying about the size of budget deficits, must end. The Sept. 20 election was a big step toward Greeks rediscovering why they should pay taxes.