Europe

If Poland Can Fix Tax Fraud, So Can Greece

Improved tax collection means Poland relies less on debt. Greece should take note.

Poland's government is rolling in it.

The idea that Greece can reduce its need for debt relief if it learns to collect taxes better is hardly a popular one. But another country with a big gap between expected and actually collected tax revenues, Poland, is showing how a determined government can tap this huge resource to great effect.

A European Union study published in September, 2016, showed Poland and Greece with very similar gaps in value added tax collection: In 2014, Poland collected 24 percent less VAT than was due according to the rules in effect, and Greece took in some 28 percent less. That gap was about twice the European Union average. In European countries, the VAT, similar to the U.S. sales tax, is one of the biggest sources of government revenue. Poland's shortfall was some 9.3 billion euros ($10.4 billion) in 2014, Greece's 4.9 billion, which amounts to 2 percent of economic output in each country.

Coincidentally, Greece's European creditors expect Greece to maintain a primary fiscal surplus of 2 percent of gross domestic product from 2023 to 2060 -- longer than any country in post-World War II history. It's seen as an unrealistic assumption and a reason why Greece needs debt reduction. 

No country has managed completely to erase the VAT gap, but it reaches only 1.2 percent of expected revenue in Sweden, less than 4 percent in Luxembourg and 8 percent in Slovenia. So, theoretically, Greece could almost fulfill the creditors' tough fiscal demands by closing the gap to those levels.

It's often pointed out that Greeks can't afford to pay taxes diligently. They've been taxed to the hilt -- the recent reform package, which helped the country win the 8.5 billion euro debt tranche this month, broadens the tax base again. But, according to an International Monetary Fund report published earlier this year, Greeks already owe 94.2 billion euros to the government. "Taxpayers under economic strains may have perceived the downside risks of tax evasion (penalties) to be smaller than the potential upside gains (avoiding bankruptcy)," the report said.

VAT, however, is easier to collect than other taxes because it's a consumption tax. Unless a transaction occurs in the shadow economy, it's paid by the end consumer as part of the purchase price. Collecting VAT well is often a matter of political will for governments: The more corrupt and clientelist a political system is, the more widespread VAT scams are. 

Poland has had a major problem with scams allowing businesses to claim back VAT payments from the government, often revolving around fake export claims. Early this year, Polish Finance Minister Mateusz Morawiecki said the country's stellar economic growth -- more than 3 percent a year even when Poland's neighbors were in crisis -- should be restated because it was inflated by the fake export schemes. In 2015, for example, growth was actually 1.9 percent rather than 3.6 percent, he noted. 

In 2016 and 2017, Poland took a series of steps to close VAT loopholes. It had little choice: the governing Law and Justice Party, a populist political force, had promised big payments to families with more than one child, and the only other source of funding for it was more foreign debt. The government made big borrowing plans but also, in 2016 and 2017, enacted a legislative package to boost VAT collection, limiting refunds, introducing steep fines for cheating on the tax and toughening control in the fuel sector, where a lot of the scams were taking place. 

The government has also stepped up efforts to collect corporate income tax, while lowering it for start-ups this year, and reformed tax administration. 

The results, according to the Polish finance ministry, have been spectacular. The government expected to run a deficit of 59 billion zlotys ($15.5 billion) this year, but in the first four months of the year, it was only 900 million zlotys short. Poland is scaling back debt issuance plans for the rest of the year. And it hasn't even started cutting back on the extensive use of reduced VAT rates, to which the EU has long pointed as a potential area of improvement. 

Meanwhile, economic growth is expected to reach 3.7 percent this year, according to the Bloomberg consensus forecast. The better tax collection isn't resulting in less economic activity, and the growth number is likely to be more reflective of reality than previous years' data.

Greece's Western European creditors aren't fans of the Polish nationalist government. But they should take a closer look at the effective measures against tax avoidance and evasion that this government has taken. Greece needs some of the Polish medicine before current plans for resolving its debt problem are deemed unrealistic. Too much of its economy -- about a quarter of output, by some estimates -- is still in the shadow to make far-reaching decisions about relief on the basis of the available economic data.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Leonid Bershidsky at lbershidsky@bloomberg.net

    To contact the editor responsible for this story:
    Therese Raphael at traphael4@bloomberg.net

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