An equitable GREEK property tax

The debate is ongoing about what would constitute a fair property tax in Greece given its current Macro and Microeconomic reality so it would be useful to add my own suggestions to the debate in the hope that some may be discussed.

Firstly the government has clearly got its causality wrong. Its starts with the premise that it needs to fund a certain gap in its budget, then works a tax policy around this number to ensure that it is reached without regard and analysis on the long term consequences of its tax policy actions. This method can be characterised by short sightedness and has devastating consequences on valuations as has recently been witnessed by the government's insane proposals.

The right approach would be, we need to fund this deficit so lets tackle each potential source of tax revenue and see what tax can be imposed based on the evaluation of the prospects for the long term growth of this revenue source. In this case property.

So lets focus on two important choices. 1- We need to raise money from the property market to fund the governments deficit and 2-We need to do it without major disruptions to the market, to be effective, raise as much money as possible and structured in such a way as to allow for the continued long term growth of the market. Sounds like an impossible task but it isnt.  

Taxing property on artificial valuations set by the government to trap tax evasion when the property market was booming is out of whack with current reality. It is unconstitutional as owners are taxed on unrealistic valuations, on some occasions two to three times higher than their market value, principles which are not commensurate with the basic workings of a free democratic society. A second problem is that this tax is imposed on ownership without regard on the asset holder's ability to pay. A household's property investment may represent a very high proportion of its savings which is the current reality and is thus forced to sell it to meet these enormous tax obligations in a collapsing market, the result of this heavy taxation which leads to confiscation individual bankruptcy and a dead end. This is self defeating and it only serves the appetite of the lurking vulture funds.

The first and foremost consideration and should be a basic principle of taxation is to tax what generates revenue this way you ensure:

1- Collection. The owner has the ability to pay the tax because he has received revenue from it .This includes rental income as well as revenue from the sale of the property. There are two types of taxes here, tax on rental income and tax on capital gains from the sale of the property.

2- Valuations are not affected. Since ownership is not taxed there is no pressure to sell the asset to generate revenue and values remain to a large part unaffected which means property owners have then the choice to sell, hold or buy in a healthy market. In fact if capital gains tax is imposed on short term ownership progressively more so that property buyers who buy to live are subject to much lower capital gains than a short term speculators, only in it for short term gains, the tax is fair and clearly non disruptive.

There is this theory in Greece that since a large proportion of black money has gone to buy property we must tax ownership and especially the expensive properties at high rates on an annual basis to catch this laundered money.

The problem with this proposal is that its flawed with devastating consequences on valuations and highly  disruptive for all households as Greeks have one of the highest proportion of home ownership already discussed in my previous blog http://www.rgdanon.blogspot.gr/2013/11/mr-stournaras-and-bad-economics.html . One of the big negatives from this tax is its recurrence. Property valuations are based on Net Present Value considerations (for those familiar) which implies that values are adversely affected. from its continuity.

May I remind readers that the PASOK government had originally  introduced this tax with the premise that it would be temporary, a one off occurrence. The result, an enforcement of a backlog of four annual property taxes during this summer period and the reintroduction of the tax on an annual basis from 2014 onwards.

What is even more suicidal is that this unbearable tax raid on Greek households is forced upon them during a fourth year of collapsing GDP and catastrophic unemployment. It is no surprise therefore that this policy leads with mathematical precision to depression.

Whats more this tax veil is not conducive to international investment in the property market an important consideration as the government looks to international investors for its growth agenda. The government may structure favourable tax treatment on a case by case basis with investors but investors will ultimately want to sell units from their investment to generate their profit which will be subject to these punitive government imposed taxes.

To summarise a revenue based tax together with a finite one off property holding tax would be a desirable mix for revenue generation. The effect?  the property market will return to normalcy, transactions will explode as the purchase tax is also reduced to 3% as suggested.  International property investment will surge and the government will increase its tax earnings from the increased transaction volumes well beyond its expectations bridging its deficit gap.

Oh and one more point in case it is not obvious from above. Objective values must be returned to current market values and all taxes must be based on these new government set objective values.


Mr Stournaras and bad economics revisited

In an article in the newspaper Sunday Vima today Stournaras tries to justify his property tax saying there is a lot of negative reaction by the wealthy to the tax and it is time for them to pay. It states the government is explicitly targeting the rich and this is why they have called it a left tax. He furthermore states that  he will fight to impose it.

In my previous article I contend that Stournaras is dangerous for Greece's health because he adamantly believes in bad REVENGEFULL economics which he has erroneously been taught but which sells to his populist political audience without recourse to the real economics see my 2nd blogspot below.

But what he fails to say is that he is trying to protect big government and his own privileged position see my blog below without any remorse about the crumbling personal finances of Greek households and the destruction of wealth around him. It appears that for him his job protection  as well as those of his colleagues is more important than the well being of his country.

As far as his contention that it is the rich which are being hit by his property tax, it is propaganda that sells well to the public, however he seems to be living in fantasy land and has not realised that many flats in most underprivileged neighbourhoods are selling below distressed prices in some cases for less than 5000 euros to pay for his property taxes. Look around you Mr Stournaras is this the rich class you are destroying?

In my book an Economics Minister has the power to destroy or rebuild a country this Economics Minister  remains dangerous for Greeks's well being see my two blogs below.


The case for less Government (in Greece)

Its standard textbook stuff that during a recession it is inconceivable to reduce the government deficit as this withdraws government stimulus from the economy and leads to a deeper recession. So many countries tend to increase government spending and thus expand an existing deficit during recessionary times and it is hoped this will be reversed during the boom cycle as tax receipts increase and the deficit is automatically reduced eliminating any increase that was thereby created.

Now lets take by way of an example the US and its reaction to the great recession. The government deficit ballooned as the government decided to bailout its banking system which incidentally was to a large extent responsible for the great recession. To avoid world Armageddon the government together with the Fed embarked in an infinite addition of liquidity by stepping in and buying all distressed assets. This the US could do whilst running an existing large deficit and debt because of two reasons.1-The technical reason- It had its own currency and the Fed could expand its money supply theoretically without limit and the government could issue as much debt as it wished as long as the market had the appetite for it and it did 2- The practical reason- The market was not adversely affected by its actions namely a-A potential rise in interest rates if the market perceived an irresponsible Fed and government driving inflation and inflationary expectations to the roof  b- A collapsing dollar as the market lost confidence in the stability of the US economy and c- The ability by the US government to finance its expanded deficit, in other words will there be the required demand to absorb this new issuance without adverse consequences? The answer to all these questions was a resounding yes. The Government and Fed successfully financed their increased balance sheets without driving rates higher, on the contrary rates fell as the economy experienced a liquidity trap, the financial system was saved, the economy stabilised and it is currently on a slow growth tragectory, restructuring but on a much healthier footing.

Time to visit Greece. Like the rest of the world Greece experienced the great recession but during an inevitable hangover following the more than 7 years of partying. The result an overhang which amounted to a deficit of 15% and a debt of  150% of GDP. To make matters worse it had lost its independence in terms of having its own currency for it chose to embrace the euro stability and the government was soon faced with the inability to borrow in international markets to finace its unsustainable deficit. Greece had then two options either default and exit the euro very much along the route taken by Iceland or resort to a rescue engineered by the Troika and it chose the latter. It was then forced to shrink its deficit to a euro wide acceptable level and reduce its debt by a combination of haircuts, privatisations and restructuring. The problem with this recipe is that it goes contrary to economic dogma as outlined above. This shrinkage in the deficit would throw Greece into a worse recessionary trend with adverse effects on both the deficit itself but also steepen its negative growth trajectory and it did. Clearly there was no alternative Greece had outstretched its finances and had to realign itself with the rules like other more prudent members of the economic club it had chosen to be a party of. But did it at least follow the right recipe? This is where, I believe, the mix of policy ingredients was mistakenly chosen. The government decided to cut government spending to some degree, reducing wages and salaries in the public sector but not enough, embarking in a tax raid out of all proportions particularly with respect to the sensitive property sector to fill the void. But since the government had its hands tied and it had to shrink the deficit why did it decide to tax as opposed to cut government spending? It was clearly a political decision unable or unwilling to confront the government employee rage and the self inflicting wounds that would have resulted from the redundancies created in the public sector. Purely put the civil servants were opposed to the loss of their own privileges associated with their positions so they chose the road of least resistance with the help of their well entrenched propaganda. The problem with taxation as a tool to reduce the deficit is that 1- It is deeply recessionary whichever part of the economy it is imposed upon whether capital, income or profits 2- It is a major disincentive for new investment whether local or international and thus future growth is impaired in an already highly recessionary environment.The importance of investment cannot be overemphasized for it is this that is the driving engine for long term growth and finally  3- It increases tax evasion as already outstretched businesses and households try to make ends meet. So in part it is self defeating.

So what is the alternative? A policy aimed at reducing more aggressively government spending and laying off public sector employees and the redundant institutions established by the ruling paties to earn them votes but which serve no productive purpose may seem a difficult approach but it has enormous benefits. Instead of increasing taxes the government, because of a decline in spending,  is now in a position to start reducing taxes particularly if focused in areas where Greece has its comparative advantages, tourism, agriculture, shipping, etc thus providing incentives for PRIVATE capital to replace the shrinking government sector. The magnitude of this private investment can be extraordinary and can exceed in many multiples any loss in deficit spending with highly expansionary effects for the Economy. Thus private investment is mobilised from 1- domestic sources being money transfered abroad in search of security from taxes and bankruptcy and 2- international sources as Greece becomes an investment destination for international investors. It also allocates factors of production, in this case public employees much more efficiently. They leave their generally acknowledged unproductive public jobs and train to become semi skilled or skilled workers and be absorbed by the expanding private sector. This way they now serve a productive private enterprise and thus allocate their labour much more efficiently. It also improves individual freedom as power is decentralised and the freedom to create is enhanced.

Clearly therefore if Greek Politicians want their country to prosper they should stop serving their narrow minded self interests and look at the country's long term prospects.   


Mr Stournaras and bad Economics.

I have been compelled to write this blog having watched a couple of days ago an interview by Stournaras Greece's economics minister on television and his attempts at explaining his economic policies to the Greeks.

In particular, a number of his comments such as " The property tax is the fairest tax on the Greeks" and comparisons with the UK to the tune of " The property tax is much higher in the UK than Greece".

I will attempt at explaining how wrong he is on both counts. I will confine myself to his comments on the  property tax only because I believe it has in itself been responsible for much of the current destruction of wealth in the Greek economy and the annihilation of the middle class in total contrast to his assertion and hopefully prove that Mr Stournaras is single handedly responsible for Greece's current malaise. In short Stournaras is bad for Greece's health particularly because he fervently believes in his own fallacy.

We all know by now that Greece had been partying in the new millennium with borrowed money and anyone with the absolute minimum knowledge of basic economics understands that such profligate behaviour can quickly become unsustainable and it did creating a gigantic debt and as a consequence an inability to service it in a great recessionary environment. The net result insolvency and ultimately bankruptcy. To the rescue the EU and the Troika with their well known recipes.

Now Greeks had always been prudent savers and a substantial part of their life time savings had manifested themselves into property. In fact Greeks have one of the largest percentage of property ownership amongst OECD countries vis a vis its total population. This number is close to 80%. By way of contrast in the UK where house ownership is also popular owner occupancy is 65%. It was estimated and this is very rough that perhaps more than  25% of Greece's GDP is its black economy and that if the government were to crack down on tax evasion it would have solved  a considerable part of its budget gap. Unquestionably with such high percentages of owner occupancy and the black economy it follows that a measurable amount of this money must have gone to buy property in Greece. Now one of the basic pillars of Stournaras tax on property is this, that since a substantial part of the black money must have been invested in property we must tax property ownership to catch this laundered money. When first confronted with this purportedly equitable proposition my reaction was there is some merit behind it, however it has MAJOR disruptive and destructive flaws. First it unjustly taxes the owner who has been a responsible and tax paying citizen,who has bought his property on taxed income and has paid a hefty more than 10% to the government by buying it . Second it has a recurrent element which is highly destructive. The government should be taxing this shadow untaxed money once not annually ad infinitum for then it shrinks the Net Present Value of these assets and thus destroys THE MOST IMPORTANT STOCK OF CAPITAL IN GREECE with its banking and other repercussions.Third, it is  highly unjust as it is a tax on a non income generating asset, in most cases, which maybe the largest if not the total saving of many households. Its effect is the wiping out in property values as potential buyers differ purchases owing to the punitive nature of such a tax and  more importantly driving frugal households to annihilation as they become unable to sell their liability generating asset in a collapsing market to pay their taxes  leading to a dead end and confiscation. In other words Mr Stournaras has created a monster with devastating vicious circle consequences for Greeks's wealth and their well being.  

Returning to the proposition and Mr Stournaras's assertion that the UK's property tax rate is higher than that which may be applicable in Greece here Mr Stournaras is totally misinformed to say the least. There is no tax for owning a property paid to the UK government and there is only a UK council tax paid to the municipalities of each property. This council tax very much depends on the location of the property but is nowhere close to the level of tax proposed by Mr Stournaras not even 1/10 of that level and of course is payable to the council not the central government.

It is about time Mr Stournaras wakes up to the follies of his property tax and revisits his Economic textbooks.


A solution to the inequality of the distribution of corporate profits. A response to Paul Krugman

Solution is to create a corporate model based on the principle that all workers will share in proportion to their input whether manual, intellectual or the likes in the corporate profitability of the company thereby making them minority shareholders. There will need to be a structure whereby successful workers get additional shares of the company and a corporate ladder reflecting such performance. This method aligns the interests of the workers with that of the board and executives, incentivizes all workers as they see the company as if its their own and more importantly distributes profits and wealth more equitably throughout the economy whilst energizing economic activity. Finally it polices profligate boards who on many occasions are totally self serving at the expense of the unsuspecting or helpless shareholders and ultimately workers.


Response to Paul Krugman. Is the Fed premature?

PRK wrote a blog in the New York times on 20.6.13 titled 'A Potentially Tragic Taper ' basically fearing the Fed is perhaps too proactive in anticipating an end to QE. 

I list below my response:

This is so and I couldn’t agree more with your reasoning after all back  in August of 2011 I was trumpeting the need for the Fed & Central banks in general  to abandon the guardianship of inflation fighting and embrace and promote higher inflationary expectations.
(See my first ever blog below)

What we should be focusing on however, is both the yield on longer term treasuries which has moved up considerably over the course of the last few months as the market assesses growth prospects, as well as the yield curve which is showing signs of steepening.

Both these factors, although in the past falsely signaled the return to stronger growth and subsequently collapsed, have now trended at these higher levels implying that market participants are more convinced about the sustainability of growth.

In this respect therefore, you may not be giving the Fed enough of the credit it is due. Time will of course be the judge of this. .


The Relationship between short & long term interest rates


1-      Short term policy rates- These are the rates which are determined by Central Banks and on which all other market rates take their cue. They include such rates as federal funds and discount rate in the US, the bank rate in the UK etc.

2-      Short term market rates-These are market set rates and are closely associated with short term policy rates, such as the infamous LIBOR (An interbank rate), short Guilt rates  in the UK or Treasury bills (T-bills) in the US etc. These usually refer to anything with maturities from 1 month to one year. Depending on the quality of the borrower these rates vary from the most secure T-bills & short Guilts, where both governments are perceived as almost riskless having an independent Central bank and therefore the ability to print ad infinitum and the riskiest junk corporates or peripheral government bills the likes of Greece, Portugal, etc. So the less risky implies they converge closest to the Federal funds rate whilst the riskiest diverge the most. For example if rate expectations are neutral, 1 month T-bill rates will be almost identical to the overnight Federal funds rate whilst I month USD interbank rates will be at a slight premium to Federal funds reflecting the additional risk premium of first class banks.

The key is that the market sets these rates based on the costs of borrowing on the short term policy rates. So for example if the market feels the Fed will be tightening credit by raising the federal funds rate in 2 months’ time then 3 month T-bills will be trading at a rate higher than the overnight federal funds rate to a level closer to where the market thinks rates will be raised by the Fed. The opposite would also occur should the Fed be expected to lower rates in 2 months’ time. In other words the market tends to discount presently rate expectations based on the dynamic forces affecting these rates on a daily basis.

3-      Medium & long term market rates- The market refers to these as yields not rates anymore. It applies to maturities from 2 to 50 years known as notes and bonds. For any instrument whether it’s a Treasury or corporate note or bond  will henceforth be priced by the market by discounting presently the total of interest or coupon payments this instrument will have and thus the price of such instrument will vary on the basis of such discounts. Should short term policy rates therefore go up, ceteris paribus, the market will re-price presently existing T-notes or bonds to reflect these higher interest rates in the future too. In fact the longer the maturity the greater the changes in price for a given yield change. Moreover, long term rate or yield expectations are not only dependent on short rates but more importantly on all market forces which may have an instrumental effect on interest rates in the future. For example if the USD continues to fall in this current economic environment the market may perceive an expansionary effect by the increase in US exports and may thus begin to drive yields higher in expectation of a rise in short term rates in the future. The same would apply if the government embarks in a highly expansionary fiscal policy. These are just two examples but the variants are endless and yields will change by the effect each variable will have on perceived future economic activity.  


So in conclusion, long term rates are clearly associated with short term policy rates but because long rates are market determined they are also independent of them. A case in point would be if for example the Fed decided to raise short rates at this juncture. A likely effect would be a short term spike in long yields as the market feared the start of a longer term trend but may fall to a level lower than prior to such a policy decision as the market judges it premature and growth disruptive.


Thus a market related sustainable higher trending yield and thus yield curve is a sign of expectations of stronger growth as well as higher inflation. The key is for this mix to favor growth.


Wealth Inequality & Growth a response to Paul Krugman

The financial bubble of the last decade created the housing bubble and along with it the financial crisis with its ramifications along all sectors of the economy and the world at large. Specifically in the US,  already overextended consumers had an unprecedented negative wealth effect to contend with both from a reduction in the value of more liquid assets such as stock holdings but more importantly the collapse in the value of their homes to such a level that more than 50% of all mortgage holders were effectively underwater on what constitutes most probably their biggest lifetime investment. In other words, if they were to liquidate at any time and sell their home they would be short on the amount owed to the bank. Interestingly, most (close to 85%) of these negative equity mortgages were being serviced and non delinquent indicating that owners were willing to adhere to mortgage payments on expectation ( I would contend) of an improvement in their home values.

More importantly however, is what this has meant to the underlying level of demand in the economy and what the government should have done to reinvigorate it. Understandably the FED and government gave precedence to the stability of its financial system as its first and foremost priority for without a solvent banking sector the US and the world for that matter would have experienced an apocalyptic depression. All emphasis then on the financial system which was successfully revamped and returned to health with the FED’S dramatic actions including aggressive QE, still with us today. It was hoped that the salvation of the money lending institutions would also have secured the necessary lending to households and businesses to remobilise the economy; to no avail. On the one hand the banks were in no mood to expand their balance sheet in an environment of conservative restructuring and a consumer already underwater and on the other a consumer faced with negative equity in a defensive mode with a focused purpose, to increase the savings rate and deleverage. It is evident that in such a setting unless balance sheet restructuring takes hold final demand will at best be weak.

How was inequality exacerbated from the above phenomenon? Saving stockholders at the expense of debtors clearly transferred wealth from debtors to creditors. The US population was asked to bailout the financial system by dramatically expanding the US’s budget deficit and the FED’S  balance sheet reinvigorating both bond  and stock prices but without a commensurate knock on effect on the weakest and largest part of the population. This has meant that the ultimate driver of demand the consumer did not receive any direct help to a healthier balance sheet. He was left to the unforgiving effects of the market forces of adjustment. In other words, the consumer would only return to his usual habits if any or all of the following could take place & in such a magnitude so as to substantially improve his balance sheet and its prospects: A rise in home values, debt deleveraging and forgiveness with its accompanying increase in the savings rate, world growth that would induce cash rich companies to substantially increase investment and employment to meet this growth in world demand.

Will reversing this inequality by pursuing policies aimed at creating the aforementioned conditions drive demand and ultimately consumption? Without doubt the liquidity effect aptly described by Paul Krugman is likely to play an important catalyst. I would in fact call it a wealth effect for it is households feeling good about returning to positive equity that should induce them to spend part of this windfall. This would in turn provide impetus to the cash rich companies to increase the utilisation of their existing factors of production and perhaps lead them to increased investment. The economic textbooks should then take over through the multiplier momentum.   

The above deals of course with wealth and not income inequality a more complex issue worth discussing in a different blog.


My comment on Frances Coppola's blog "Slaying the inflation monster"

Excellent article.

We have been living in an era of deflation since the 2008 financial crisis with inflation vigilantes worsening the situation from central banks to inflationary hawks by not allowing for the cleansing effects of slightly higher inflation/expectations and a redistribution of income from creditors to debtors. The result, historically low long term yields unable to boost economic growth and employment, economies mired in slow growth and a debt overhang which may take decades to write down to manageable levels if policies remain unaltered. The QE embraced by most central banks of indebted countries does help but should be reinforced without half measures and the threatening fear of higher inflation for it is no more than fear for as long as long term bond yields do not predict otherwise and to my knowledge till very recently, they have been showing the exact opposite.

In fact Central Banks should aspire to create market induced sustainably higher long term yields for its this indicator which should lead us to expect stronger growth.