In early August, with an exit from the Eurozone looming, Greece secured its third bailout since 2010. Securing the 86 billion euro loan came with a number of stipulations from creditors, including a commitment to cracking down on the rampant tax evasion that plagues the Greek economy.

Contrary to what some may think, Greece’s debt problems are not due to extravagant spending by the government, but to insufficient revenues caused by rampant tax evasion estimated at 20 billion euros per year. While tax evasion has become somewhat of a social norm in Greece, the biggest culprits tend to be the wealthy, self-employed professional classes who significantly underreport their income and stash the undeclared amounts in foreign accounts. (For more, see Understanding the Downfall of Greece's Economy.)

Greece Does Not Have A Spending Problem

While some of the austerity measures that have been imposed on Greece require a reduction in government spending, such as cuts to pensions, excessive spending was never really Greece’s problem. Throughout most of the last decade, Greece’s public expenditures as a percentage of GDP have been below the E.U. average. It was only after GDP drastically declined in the wake of the 2008 global financial crisis that the government expenditure rate increased. But it would still be wrong to characterize Greek spending as excessive since, at 49.3% in 2014, the nation’s government expenditures are sitting right around the eurozone average of 49.1%. (For more, see A Look at Greece’s Messy Fiscal Policy.)

Rather, Greece’s debt problem has more to do with insufficient revenues. But again, not because its tax rates are too low as they are pretty much on on par with tax rates throughout the rest of Europe. With an underground economy estimated to be equal to 30% of GDP, Greece’s problem is its chronic and widespread tax evasion.

Tax Evasion Culprits

Since tourism is a major industry in Greece, accounting for nearly 20% of the country’s GDP, the Greek government proposed recruiting tourists to help crack down on tax evasion. However, the tourism industry is not one of the major culprits when it comes to not paying taxes; rather, the primary industries involved in tax evasion include medicine, law, engineering, education and media.

Professionals in these industries are typically self-employed and thus responsible for declaring their own income. A 2012 study in which researchers from the University of Chicago and Virginia Polytechnic Institute obtained records from one of Greece’s top banks found that, on average, professionals were forking over 82% of their income to service debts. As a general rule, banks do not make loans where debt payments comprise more than 30% of income. Yet, some professionals, such as lawyers and doctors, were shown to be spending more than 100% of their incomes on debt payments. This is not because they were excessively indebted, but because they were underreporting their income by significant amounts.

The study claims that tax evasion by self-employed individuals amounted to 28 billion euros in lost revenues in 2009. In order to hide their undeclared income, many of these wealthy, tax-dodging individuals send their money to foreign accounts in Switzerland, the Cayman Islands and the like. Some experts believe that as much as 80 billion euros belonging to Greece’s wealthy are stashed away in Swiss bank accounts. In order to recover some of this lost revenue, the Greek government proposed a tax amnesty nearly two months ago that would levy a flat 21% tax on assets held in these accounts.

The Bottom Line

Having received a third bailout from creditors, Greece has bought itself some time to get its budget back under control. While the austerity measures may continue to dampen the Greek economy, consequently worsening the revenue situation, Greece still needs to solve the problem of its wealthy tax dodgers. This will not be an easy task as the practice appears to be embedded in the very social fabric of Greece. The third bailout may prove insufficient if the country does not receive significant help in tackling the corruption that has plagued it for decades.

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