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High rates of tax evasion contributed to Greek debt

For today's post, we're looking beyond the borders of California and even the United States. We will talk about Greece and its tax troubles. By now, everyone has heard of the country's gargantuan debt that has put the very existence of the EU in peril. We are all familiar with news of austerity measures, new elections and high unemployment in Greece, which are regular subjects in the press.

But what precipitated this financial turmoil? While there are many factors that have contributed to the European debt crisis over the short and the long term, a team of economists suggests that an immediate cause may have lain in the Greek government's effectiveness in collecting taxes. According to these economists, tax evasion among Greek citizens contributed mightily to their government's revenue deficit.

By comparing the income that Greek banks said that people earned--a dependable number--to what people reported to the government, the economists discovered that Greeks of all income levels underreport their earnings. In fact, their data revealed that the government would have to multiply a person's reported earnings by 1.92 on average to get their actual earnings. Half of the country's deficit for 2008 can be traced to tax evasion.

Of course, tax evasion is a problem all governments must face. It would be interesting to know what a similar study would say about tax evasion in the United States. One thing we can be sure of, however, is the aggressiveness of the Internal Revenue Service in pursuing those it believes have not properly paid their taxes. But some taxpayers who are the subject of a tax audit or have been accused of tax evasion do have options to diminish, eliminate and contest alleged tax debts.

Source: The Washington Post, "How Greek tax evasion helped sink the global economy," Brad Plumer, July 9, 2012.

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