First Faculty Advisor
Greece; shadow economy; government; tax policy;
This capstone investigates the impact that tax policy has on the shadow economy in Greece. Greece has one of the largest shadow economies in the world and the largest in the European Union, with tax evasion being one of the main drivers. While previous research has provided measures of the shadow economy, none matches the shadow economy estimations with policies, laws, and agencies enacted by the government, specifically over the period in time of 1990-2012. This study contributes to the literature by connecting the policies implemented by the government with the size of the shadow economy in Greece, along with providing a new model based on prior versions of the currency-demand model. The study concludes by considering, a piece of cultural analysis to help explain why the people of Greece are so prone to evade taxes and enter the shadow economy. Research of Dr. Geert Hofstede’s work on cultural dimensions shows that Greeks have high levels of power-distance, collectivism, and uncertainty avoidance, all which can be used to explain why they are susceptible to keep evading taxes.
Using an adaption of the currency demand model, the regression results show that the shadow economy increased with 1) an increase in the amount of people that are self-employed 2) decreases to the middle income tax rate 3) and with increases in the lowest income tax rate. These results suggest that the tax system needs a combination of stronger oversight and penalties because of the extremely high levels of uncertainty avoidance that Greeks possess. The results also show that revenue can be captured by raising the middle income tax rate, and that raising the tax rate on the lowest bracket will tend to force those people into the shadow economy. This study provides useful conclusions on the Greek shadow economy from both an economic perspective and a sociological perspective