Working Paper: NBER ID: w21552
Authors: Nikolaos Artavanis; Adair Morse; Margarita Tsoutsoura
Abstract: We document that in semiformal economies, banks lend to tax-evading individuals based on the bank's assessment of the individual's true income. This observation leads to a novel approach to estimate tax evasion. We use microdata on household credit from a Greek bank, and replicate the bank underwriting model to infer the banks estimate of individuals' true income. We estimate that 43%-45% of self-employed income goes unreported and thus untaxed. For 2009, this implies 28.2 billion euros of unreported income, implying foregone tax revenues of over 11 billion euros or 30% of the deficit. Our method innovation allows for estimating the industry distribution of tax evasion in settings where uncovering the incidence of hidden cash transactions is difficult using other methods. Primary tax-evading industries are professional services — medicine, law, engineering, education, and media. We conclude with evidence that contemplates the importance of institutions, paper trail and political willpower for the persistence of tax evasion.
Keywords: Tax evasion; Soft credit; Greece; Self-employment; Bank lending
JEL Codes: G21; H26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| banks assess true income (G21) | banks lend to tax-evading individuals (H26) |
| reported income (E25) | true income (E25) |
| industry characteristics (L81) | tax evasion rates (H26) |
| self-employed income goes unreported (J46) | foregone tax revenues (H26) |