December 18, 2014

Morse Honored for Research on Greek Tax Evasion

Adair Morse

Assistant Professor Adair Morse received the 2013 Best Empirical Finance Paper Award at the Western Finance Association Meeting for an article on Greek income tax evasion that attracted significant media coverage and helped shape tax policy.

The award was presented by Wharton Research Data Services, a research platform and tool for corporate, academic, and government institutions. Morse shared the award with her co-authors, Margarita Tsoutsoura of the University of Chicago Booth School of Business and Nikolaos Artavanis of the University of Massachusetts, Amherst.

"Their work has received unprecedented media coverage and has already ushered in significant changes in the Greek tax policy," Wharton Research Data Services wrote in announcing the award, which was presented at the Western Finance Association conference in June.

The trio's widely cited paper, “Tax Evasion Across Industries: Soft Credit Evidence From Greece,” examined Greek income tax evasion, banking, and credit. Morse and her co-authors found that wide-scale tax evasion in Greece accounts for at least $28 billion Euros in unreported taxable income – just among the self-employed. Using bank data on household borrowing from 2003 to 2010, they found that highly paid, highly educated professionals are at the forefront of tax evasion in Greece, including doctors, engineers, private tutors, financial services agents, accountants, and lawyers.

The researchers reviewed credit applications for consumer credit products at one of the ten large Greek banks from 2003 to 2010. They studied situations in which borrowers requested more money than they received from the bank. In these situations, Morse used the bank decision on the appropriate credit level to understand how much income the bank must have perceived individuals to have to back up the bank’s estimate of true income (versus taxed income). The authors termed such lending “soft credit” since the information about true income is soft information. The researchers infused this new insight with the observation that Greek banks have learned to adapt to an economy where income is often hidden to remain competitive.

The team's research was presented in Greece in September 2012 and already the Greek government is making policy changes in response to it. The Greek government has decided to eliminate tax-free income and is shifting to a model in which professionals carry some of the burden of proof of not having hidden income.

Beyond this direct impact, the researchers hope their work broadens both policy and academic perspectives on how institutions and businesses adapt to tax evasion endemic to occupations or sectors, and how countrywide economic outcomes can be sensitive to these adaptations.

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