September 24, 2015 8:19 am

When Greece pushed up consumption taxes this summer in a bid to raise government revenues, struggling restaurant owners saw it as a crippling blow. But the increase also came under fire for fuelling the tax dodging that is often described as Greek’s “national sport”.

Greece has one of the largest shadow economies in Europe, but it is not alone in facing difficulties trying to stamp out evasion at the same time as raising taxes.

This month, the EU said that governments were missing out on €168bn of VAT revenues after failing to improve collection in 2013. Pierre Moscovici, the economic commissioner, urged governments to step up the fight against evasion.

“This remains a burning issue,” he said.

Estimating the total cost of tax-dodging is notoriously difficult

But new research from Friedrich Schneider, a professor at Austria’s Linz University, has put the EU’s annual tax losses from the shadow economy at €454bn or 8.6 per cent of tax revenues overall. The tax losses range from 4.5 per cent of total receipts in Austria to 18.8 per cent in Bulgaria.

Roughly a third of the losses are from under-reporting by businesses that handle a large proportion of cash. Undeclared work — from cleaning to construction — accounts for the rest.

In developing countries the scale of the informal economy is even higher and accounts for most jobs outside agriculture, according to the Organisation for Economic Co-operation and Development. The International Monetary Fund pins the blame on corruption and excessive regulation but notes the informal economy can have a positive role as “the nursery of future economic growth”.

The economic crisis has provided a powerful impetus to combat the shadow economy, according to Andreas Pratz, partner in the financial services practice of AT Kearney. He says governments have introduced more than a hundred crackdowns on undeclared work in recent years. But their success depends heavily on enforcement and Mr Pratz advises governments to consider using carrots as well as sticks.

Another popular measure involves offering lottery prizes based on sales-tax receipts — an idea that has been adopted in Portugal, Brazil, Argentina, Colombia, Puerto Rico, Taiwan and Slovakia.

Curbs on cash transactions are becoming more prevalent. France this month became the latest government to tighten its rules in a bid to crack down on the anonymity that fuels crime, terrorism and tax evasion. Governments with a low penetration of bank cards can also offer incentives to encourage a switch away from cash. Colombia and Argentina are among those that introduced reduced rates of VAT for sales made with credit cards.

The move away from cash is most noticeable in Nordic countries, such as Sweden where cash in use has dropped by a fifth. Elsewhere, there has been a rapid growth of bank notes that the Bank of England partly attributes to hoarding by tax evaders.

“Cash is not likely to die out any time soon”, it says.

Experts say governments can reap big rewards from luring workers and businesses out of the shadows but they have no prospect of stamping out evasion altogether.

Said Prof Schneider: “One could crack down 20 to 30 per cent on shadow economy with clever policies but not more.”