A recent IMF report sheds light on why Greece remains "addicted" to indirect taxation — and why, seven years after the end of the bailout programs, successive governments have resisted lowering VAT rates on essential goods and services.
The report, titled "Efficiency Aspects of the Value Added Tax," describes VAT as a fiscal "superweapon" for raising revenue but warns that its overuse — especially when used as a substitute for monetary policy or to fund social goals — risks deepening social inequality.
During the bailout years, when Greece and other eurozone countries faced severe fiscal constraints and deep recession, VAT became not just a revenue tool but a mechanism of economic adjustment. Lacking the option of monetary devaluation to restore competitiveness, governments turned to what became known as "fiscal devaluation."
The logic was simple: hike VAT rates to discourage consumption — especially of imports — while cutting employers' social security contributions to reduce labor costs. The aim was to mimic the effects of a currency devaluation: exports would become cheaper abroad, imports more expensive, and the trade balance would improve.
In theory, the scheme had merits. Lower payroll contributions eased pressure on businesses, making their goods and services more competitive. At the same time, higher VAT disproportionately hit imported goods, encouraging a shift toward domestic products.
But the downsides soon became clear. The relief from reduced payroll costs was short-lived and insufficient to sustain the labor market. As companies adjusted prices and wages came under pressure, the initial competitiveness boost faded. Exports failed to grow as expected, while imports — covering essential goods Greece could not replace with domestic output — remained high.
What stayed was VAT: permanently burdening consumption. As an indirect tax levied uniformly regardless of income, VAT weighs far more heavily on low- and middle-income households, which spend most of their budgets on food, energy, and basic necessities — all subject to VAT. On paper, the reform was "fiscally neutral." In practice, it shifted the tax burden onto consumers, locking them into higher prices.
Even after exiting bailout supervision in 2018, Greece continues to rely disproportionately on indirect taxes — VAT, excise duties, and consumer levies — compared with eurozone peers. Indirect taxes amount to roughly four percentage points of GDP above the eurozone average.
This reliance offers governments fiscal security: unlike income taxes, prone to evasion and dependent on declarations, VAT is collected automatically at the point of sale. This guarantees stable revenue to meet budgetary targets and service debt. But the social cost is steep. Indirect taxes are inherently regressive: they hit the poor hardest, as they spend a larger share of their income on VAT-laden essentials.
The result is a tax system that continues to strain households' purchasing power and deepen inequality — a legacy of the bailout years that still shapes Greece's economic reality.
Yet, as the country heads into the Thessaloniki International Fair — the traditional stage for major policy announcements — the government shows no signs of reversing course. The painful inheritance of the Memoranda, it seems, is here to stay.
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