1: “Greece needs a simple tax system” – How is the current system failing? Is it predominantly an issue of changing the rates or one of compliance?
One of Greece’s favorite pastimes is inventing ways for tax avoidance. Why is it that Greeks are so repelled by the fair contribution of proportionate taxation attributable to their economic activity? I will list a number of the more important reasons for brevity’s sake which will provide a compelling explanation to this phenomenon:
1- The perception, borne out by reality, that government is corrupt and most of the taxes collected will not go towards a socially responsible cause but to serve the interests of politicians and the rest of the public bureaucracy.
2- The tax system has over the years been constructed in such an unprofessional and short sighted fashion that it has become a maze, as each year’s tax brigade passes bills to extinguish each specific year’s fires without an overall strategy geared to predetermined objectives. This has meant that investors, corporates, households are in a constant state of uncertainty as the tax system is altered to capture some inadvertent shortfall. In such an environment tax payers are always on the defensive in anticipation of the unexpected.
3- The system in its current form is incentivized in favor of tax avoidance. On a household level it’s based on the method of inferred income as a means of assessing tax liability over and above annually declared income What this effectively means is that the government taxes households on the aggregate of their lifestyle activities and holdings if this is above the earned declared income. If this sounds more complicated its because it is. If I live in an apartment of a certain size I will be taxed on the inferred income for choosing to live in that apartment irrespective of whether I earn this income or not. The same principle applies to owning a car, having a cleaning lady in your household employ, having a pool in your house (this may be justified but is this a way to run the finances of a country?) or would you believe paying for a mortgage and this system works progressively to higher incomes dependent on the degree of your aggregated lavish lifestyle; the list goes on. It is one way you may say of capturing the tax evaders but it’s not an equitable system, it is an indirect blackmail on the tax payer and of course assumes that Greek society in its entirety is crooked thus driving it to self-fulfillment. Let me expand a little on the mortgage payment so that you can get a perspective of how unjust this is. Assuming you have decided to invest your hard earned savings by buying a property in Greece and that you would need a mortgage for that purpose. Not only can’t you not offset your interest expense against your income (but to a very small %tge, 10% if it’s your first property) but the total monthly mortgage payment is considered inferred income. In other words the tax authorities assume that if you have money to pay for this mortgage you must also have the commensurate income and you will be taxed on it. Imagine now that you lose your job and you have no means of paying for your mortgage (This is what has been happening in the private sector in Greece. Close to one million jobs have been lost) not only are you in a dire economic situation but you are required to pay income tax on non-existent income. To make a long story shorter if ever the word labyrinth was a Greek invention it applies aptly to the current Greek tax system
4- Finally let me just touch upon the property market as its downturn has contributed to a large extent to the Greek economic depression.
Because tax authorities have been unable and unwilling to find a system that would work efficiently they decided to overtax the property market to such an extent as to literally kill the market and anything associated with it. Purchase tax for a property built prior to 2006 together with ancillary costs, lawyers’, notary’s fees etc. amounts to a range between 11-12% of the contract price. For properties built after 2006 the tax paid is VAT currently at 23% plus fees. If you own a property you pay an annual wealth tax on the objective value of your property close to 1per mille. Moreover, the one off payment or levy payable on Electricity bills which is now expected to remain for a second year is an additional amount ranging, depending on location and thus value of the property, between 3-16 euros a square meter. The system therefore penalizes the prudent saver who may also be unemployed and unable to pay these sums. Finally, rental income is taxed at the 45% level without any allowance for offsetable expenses.
All this taxation has caused a collapse in demand for properties and has brought one of the largest engines of growth in Greece to a standstill. It has also been suicidal for the government as it has killed off the value of a market it relies upon to sell some of its prized property possessions.
For argument’s sake let me suggest a solution. A low enough tax rate (say a maximum of 5%) on property, fixed for a duration of at least 15 years secured by constitutional law will for example provide enough incentive to declare the true value of property transactions without recourse to Objective values ( the Official values set by the government on which all transactions are based and taxed. Initially set at low levels but now surpass market values). This will revitalize the property market, substantially increase private investment in property and related sectors, reduce unwarranted corrupt tax bureaucracy and thus the deficit. A growth oriented policy made in Greece.
2: “Greece needs to promote foreign direct investment” – At a time when the economy is contracting sharply, how can the country hope to attract international capital? Would it involve redefining the timeframe of the troika’s austerity demands?
Firstly let me tackle both your questions and then expand on my suggestion. Reversing the economy’s decline should be part of the overall strategy of this government. I do not aspire to the notion that there cannot be any foreign direct investment because the economy is contracting. On the contrary it is in times of austerity that values decline and investors are able to pick up assets attractively, provided of course the government undertakes policy measures which over time create the basis for sustainable growth. The argument so often used by most opposition parties that this would be a fire sale of government assets is fallible as those processes can easily incorporate participation on the upside earnings and or sale price that may result from the running of the privatized company. It is true to say furthermore, that there is active, keen interest in the candidate companies for privatization even in today’s economic climate of profound uncertainty.
There is no doubt in anyone’s mind that the world’s best second home property locations can be found in Greece. Whether those are on popular island retreats or on forgotten coves amidst the pines of the Peloponnese or some other magical exploit, Greece’s wealth is waiting to be shared.
If the government therefore, embarks on a privatization program with enough incentives to attract both foreign direct investment but also capital for private investment this contraction can quickly swing to growth.
The Troika asks for a reduction in the deficit to manageable levels. What does this mean? It means that this government must immediately cut government spending to bring about such a result. This may imply increased redundancies in state run companies something which should have been carried out from the very beginning. Instead the government at the time, to protect the public sector and its votes, chose to raise taxes across the board, cut salaries and pensions thereby feeding austerity without solving the underlying problem. Greece turned a deficit into an austerity problem by refusing to cut government fat and I may add is even today cornering itself by vociferously protecting the employment of public sector employees at the expense of the battle worn private sector employee. Not only is this bad economics but more importantly unethical.
On the merits of privatizations I think my argument is self-evident but if you so wish I can expand on a separate blog.
Summarizing though privatizations:
a- Lower government deficit and thus market interest rates and increase market confidence.
b- Inject much wanted liquidity into the system.
c- Increase tax receipts as companies are run more efficiently and
d- Reduce embedded corrupt practices probably the biggest obstacle to unleashing private initiative in Greece.
3: “Greece has to reduce or shut down redundant public companies” – What effect would this have on unemployment? Public sector reform may be necessary but without a growing private sector could it simply compound the problem?
In Greece there is an enormous amount of corruption stemming from the inability to implement any of the laws that have been legislated by parliament. This is a matter to discuss in my next assertion and Greece’s most pressing problem but what is relevant under this section is that public companies and or institutions are the breeding ground for such corruption. Whether those are Hospitals, Utilities, Universities, Planning authorities, Tax offices, Municipalities, take your pick. The explanation for this is clear without recourse to regulation or punishment these masterful conjurers manage their powerful positions by enriching themselves and their families. A recent revelation of a court employee with 9 million euros on deposit and many properties in her name resulted in her being dismissed from her position. There has so far been no announcement for seizure of her assets or an inquiry into the matter. If this is the response to the enrichment of a junior court employee the mind boggles on the magnitude and response to senior level employees.
My point therefore is that the public sector is colluding to resist shrinkage for obvious reasons and many of these bodies provide nothing tangible, if anything many of them produce headwinds on the ever declining and value creating private sector. Ask any Greek citizen about his day to day engagement with a public employee. This is particularly true for entities set up for the sole purpose of securing the dedicated votes of their faithful flock.
I submit therefore that contrary to Keynesian dogma, in Greece’s case the Public Sector is one of the roots of Greece’s problem and must be contained to provide room for more productive forces to take hold and more importantly to cut the deficit.
With this said there are Public companies which for strategic and other purposes must remain public and there are public employees who have been doing an admirably efficient job unscathed by the tempting voices of the sirens. These people must be rewarded adequately commensurate with their public service.
In answer to your question therefore, we have so far seen an increase in private sector unemployment, now running close to 1 million, because successive Greek governments demanded, for reasons outlined above, the preservation of the employment of the public sector. There will clearly be an increase in unemployment with the reduction in public employment but if incentives for private investment are introduced on a permanent basis and the government embarks in an extroversion trip this will rapidly be erased by the dynamics of private enterprise.
Greece’s legal system must be simplified, protected and enforced” – Do you have any particular areas in mind that require simplification? Are there any particular groups who have avoided scrutiny by the legal system to date?
I do not profess to know the workings of Greece’s legal system; all I know is that it reflects the epitome of bureaucratic practices under one roof. From the time it takes for cases to be heard in court or rescheduled, to the processes involved all require patience and perseverance by all involved.
I believe Greece’s problems stem from the unwillingness by the system to enforce the law and when it does it is so cumbersome and longwinded that the end result does not necessarily justify the effort. For democracy to work efficiently and effectively the justice system must endorse and uphold its values. It is the knowledge that corruption will remain unpunished which breeds corruption in every level of everyday living.