The debate over reducing VAT resurfaces regularly as a measure to ease cost-of-living pressures. Yet policymakers view the fiscal cost of such cuts as exceptionally high. International experience also shows that VAT reductions do not always fully translate into lower final consumer prices.
A System Shaped by Tax Evasion
Today’s tax structure reflects decades of widespread tax evasion, which gradually shifted the burden toward indirect taxes—levies applied at the point of consumption, such as VAT and excise duties. These are easier for the state to collect than direct taxes like income or corporate tax. As a result, Greece relies more heavily on consumption taxation than most other European Union countries—a dynamic that places a disproportionate burden on households, especially those with low and middle incomes.
Greece vs. the EU Average
According to the latest official data from the European Commission (2024), indirect taxes in Greece accounted for 17.1% of GDP. For every €1 raised through direct taxation, the state collected €1.51 in indirect taxes—an indirect-to-direct tax ratio of 1.51. By contrast, across the EU as a whole, indirect taxes represented 12.9% of GDP, while direct taxes stood at 13.5%, yielding a ratio of just 0.96. In other words, EU governments collectively raise more revenue from direct taxes than from consumption-based levies.
Contrast With Major Economies
The disparity is even starker when compared to large European economies: Germany (0.80), Italy (0.90), Spain (0.88), the Netherlands (0.75), Belgium (0.69), and Denmark (0.44). Even in Denmark—where overall tax burdens are among the highest in Europe—the reliance on indirect taxation remains comparatively low. Only a few countries, such as Portugal (1.42), show similarly high dependence on indirect taxes—but within a different income context.
Income Levels and Purchasing Power
In Greece, this pattern is compounded by relatively low household incomes compared to the EU average, according to Eurostat. At the same time, Greek VAT rates remain among the highest in the EU, while workers’ purchasing power is significantly weaker—intensifying pressure on everyday budgets.
Low- and middle-income households spend most of their disposable income on inelastic necessities—food, housing, energy, and transport—all of which carry embedded indirect taxes. Higher-income households, by contrast, have greater capacity to save, meaning they bear less relative tax burden through consumption.
Fiscal Stability and Inflation Dynamics
Heavy reliance on indirect taxation also has a fiscal dimension: consumption taxes provide stable, predictable, and easily collectible revenue, with far lower leakage from evasion than income taxation. That helps explain why recent reforms have focused primarily on cutting direct taxes, while changes to VAT remain limited.
This dynamic becomes even more pronounced during periods of high inflation. As prices rise, VAT revenues automatically increase—even though citizens’ real purchasing power does not. Thus, rising prices translate directly into higher government receipts, without corresponding gains in living standards.