Getting Greeks to Pay Taxes Is Tsipras Biggest Test at Home

As Greek Prime Minister Alexis Tsipras goes into a Battle of the Titans with German Chancellor Angela Merkel, he may find he has as big a fight closer to home: taking on rich tax-evaders.

People like Angeliki Katsarolia, a waitress at the Julia café lounge bar in the rundown neighborhood of Omonia in Athens, want to see him cast his net wide. Gesturing to a receipt for coffee curled up in a small glass on a recent afternoon, one of the few signs of success in five years of attempts to get Greeks to pay taxes, she said she’s doing her bit.

“I pay my taxes straight from my wages,” said Katsarolia, 38, who gave up working in luxury hotels where her employers avoided paying her. “I can’t accept that big employers aren’t taxed. They have to pay their taxes too.”

The age-old problem of getting more Greeks to pay their taxes adds pressure on Tsipras, who’s trying to convince Merkel and other euro-area partners he can put his fiscal house in order while raising wages and reinstating government workers. He wants his official creditors to ease the austerity demands that have helped wipe out a quarter of gross domestic product since the start of the crisis.

His election pledge to snag Greeks who under-pay or don’t pay their taxes is key both to his rise to power and to his staying there. Germany, the largest holder of Greek debt among euro-area countries and vital to any compromise that will keep Greece in the euro, remains skeptical.

German Offer

German Finance Minister Wolfgang Schaeuble, meeting his Greek counterpart Yanis Varoufakis in Berlin last week, said he repeated his offer to send 500 German tax officials to Greece to tackle the problem, an offer that has not yet been taken up.

“We can well understand and support it that the wealthy in Greece must also contribute, that the tax base gets broadened and the efficiency of tax administration is improved, that corruption is fought energetically,” Schaeuble said.

Greek wage-earners and pensioners have suffered punishing taxes to plug a yawning budget deficit revealed in 2009 in five years of an overhaul of Greek taxes that the International Monetary Fund, one of Greece’s lenders, said could have been more fairly distributed.

Just a day after Tsipras’s election on Jan. 25, figures from the finance ministry showed that revenue for the government last year amounted to 51.4 billion euros ($58.2 billion), lower than a 55.3 billion target, in part due to a 1.4 billion-euro shortfall in tax revenue.

‘Great Struggle’

“The great struggle is the struggle against tax evasion, which is the real reason our country reached the brink,” Tsipras said in parliament on Feb. 8. “The new government guarantees that in this country justice will be served.”

The fragile political environment and Tsipras’s promises to lighten the burden may have had an impact.

Tax evasion increases by an average 0.2 percent of annual GDP around Greek election periods, as the bureaucracy that relies on control by politicians slows and tax collectors perform fewer audits, according to a study published in 2011 by Spyros Skouras and Nicos Christodoulakis. The study looked at 13 elections between 1974 and 2009.

Tsipras himself acknowledged that phenomenon in parliament when, while promising to do away with an unpopular property tax this year and replace it with a tax on large property holdings, he urged Greeks to pay their final installments of the existing property tax, promising it would be the last.

‘Wishful Thinking’

“It sounds more like wishful thinking than a clear plan,” said Athanasios Vamvakidis, head of G-10 foreign exchange strategy at Bank of America Merrill Lynch. “The tax reform is a key for the program and previous governments have failed to deliver. Committing to it could help the new government gain substantial credibility.”

Fixing the Greek tax system to make it more efficient and fair has had mixed success since Greece revealed a 2009 budget deficit four times as large as that allowed for members of the euro area, in part as tax revenue fell ahead of elections.

Tax evasion was estimated at 30 billion euros annually, according to a study by the Federation of Greek Industries, an employer group, exacerbated by the high number of self-employed professionals ranging from doctors to plumbers.

Tax Inspections

In November that year, then Finance Minister George Papaconstantinou said a survey of 150 doctors’ offices in the upscale central Athens district of Kolonaki showed that more than half declared annual incomes of less than 30,000 euros and about 30 of them declared income of less than 10,000 euros.

In return for pledges of what would become 240 billion euros in loans from euro area partners and the IMF, Greece clamped down by fining those not issuing receipts, revising the tax scale and abolishing tax breaks.

Stores, restaurants and other businesses are required to carry a sign in Greek and English, saying customers don’t have to pay if they aren’t provided with a receipt.

Tax inspectors fanned out across Greek islands to audit tourism companies and used Google Inc. mapping to discover undeclared swimming pools.

The drive meant that Greece was among five EU countries that reported the highest increases in tax revenue as a percentage of GDP in 2011 to 2012, according to a Eurostat report in June last year. Yet the tax burden of Greece remains below the EU average, the report said.

Adequate Program

Tsipras has vowed to track down wealthy Greeks and plans to lighten the burden on the middle class by reviving a tax-free threshold of 12,000 euros.

Also on the cards: compiling a register of assets owned by each Greek and audits on those with significant deposits including the so-called Lagarde list of 2,062 Greeks with deposits at a branch of HSBC Holdings Plc in Geneva.

Tsipras named Panagiotis Nikoloudis, a Supreme Court official who formerly headed the Greek anti-money laundering authority, as minister of state for combating corruption. Nikoloudis told parliament on Feb. 10 that the state could extract 2.5 billion euros of the 7 billion euros in taxes unpaid in 3,500 cases uncovered since 2012.

“They don’t have to rediscover the wheel,” said Vamvakidis. “The current program already includes what needs to be done.”

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