Austerity Plans and Tax Evasion: Theory and Evidence from Greece

50 Pages Posted: 11 Apr 2015

See all articles by Francesco Pappadà

Francesco Pappadà

Banque de France; Paris School of Economics (PSE)

Yanos Zylberberg

University of Bristol

Date Written: April 2015

Abstract

The unprecedented tax hikes implemented in Greece in 2010 generated a much lower than expected increase in tax revenues. In this paper, we document a new stylized fact explaining this gap: the strong increase of tax evasion. We then analyze the response of the economy to tax hikes in a stylized model where firms adjust the share of their declared activity. We calibrate the model to firm-level balance sheet data for Greece and quantify the response of tax evasion to the 2010 fiscal adjustment. One third of the tax increase is lost because small and medium size firms expand their share of non-declared activity. In turn, this lowers their borrowing capacity and contributes to non-negligible output losses.

Keywords: tax evasion, austerity plans, credit frictions

JEL Classification: E02, E62, H26

Suggested Citation

Pappadà, Francesco and Zylberberg, Yanos, Austerity Plans and Tax Evasion: Theory and Evidence from Greece (April 2015). Banque de France Working Paper No. 546, Available at SSRN: https://ssrn.com/abstract=2593028 or http://dx.doi.org/10.2139/ssrn.2593028

Francesco Pappadà (Contact Author)

Banque de France ( email )

Paris
France

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

Yanos Zylberberg

University of Bristol ( email )

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