Taxing Times

In January 2015, a curious thing happened in Greece. The tax take, which had beeen holding steady for months, dropped by between 25 and 40 percent. In other countries, the explanation for a sudden drop in revenue would most likely be something to do with the cyclical nature of tax payments or a post-Christmas slump in consumer spending, but in Greece two other factors were at work, both connected to the fact that January was election season in Greece. The first was that there was a widespread expectation that radical leftists Syriza, running on an anti-austerity platform, would win the election and abolish several unpopular taxes. In this case it would be foolish to pay a levy that might not subsequently exist. Secondly, in a peculiarly Greek tradition, there is an unspoken rule that tax enforcement is effectively suspended during election campaigns. In a cynical attempt to garner support, the governments of the day effectively let tax evaders off the hook while seeking to retain power.

There Greek financial crisis is the subject of conflicted narratives. For Syriza and the left, Greece’s woes are the result of a political elite that was willing to sell the electorate down the river in exchange for short term gains. For Europe, it was the result of a profligate state that should have been cognizant of its liabilities, and an electorate that was quite happy to go along with this. Both points have their merits. But both are dwarfed by another factor: the sheer scale of Greece’s tax woes.

Nobody knows the true amount of recoverable revenue Greece misses out on. A study in 2012 (2), based on declared incomes of self-employed professionals versus their effective borrowing power as an indicator of true income, estimated that this section of the Greek economy (self-employment constitutes 30% of the Greek workforce) failed to declare €28bn in 2009, resulting in tax losses of €11bn. VAT evasion adds another €9bn to that figure. With a black market equivalent to a quarter of the economy, it is probably fair to say that Greece loses approximately 30% of its potential tax revenue, double the figure for most Northern European countries. In other words, if Greece got its tax take in line with the rest of the eurozone, it likely would never have needed a bailout in the first place.

Greece’s tax problems don’t have a single source. Rather, they are a combination of historical, social, political, economic and legal causes. The effects go beyond loss of revenue. And the problem isn’t going to go away anytime soon.

All states tolerate tax evasion. At its lowest levels, the payoff in terms of recovered revenue simply doesn’t justify the amount of resources required for enforcement. At the top, capital is notoriously mobile, and tends to exist in a semi-legal grey economy where there is a recognition that clamping down on mobile assets might result in said assets moving elsewhere. Greece’s problem is that tax evasion pervades society. It is a high-volume, low-intensity business, with millions of offenders who individually don’t do much damage but whose collective effect is devastating.

At the very lowest level, structurally high unemployment rates, which have been badly exacerbated by the financial crisis, as well as cuts to unemployment benefits and pensions, have led to large numbers of Greeks working informally for cash, thereby depriving the exchequer of income tax.

Further up the ladder, small family-owned businesses, notably restaurants and tavernas aimed at the tourist market, have been evading VAT for decades. Again, the economic collapse has worsened an existing problem. Perhaps half of all VAT goes uncollected.

Self-employed professionals have historically been the worst offenders for income tax evasion, with doctors being particularly bad offenders, each failing to declare an average of €30,000 per annum. A huge proportion of Greece’s solicitors, engineers, and doctors claim their income is below the €25,000 threshold necessary to pay tax. A proposed 2010 law requiring mandatory audits for anyone in these professions declaring an income of less than €20,000 failed to gain sufficient support to become law.

Those at the top of the pile have both more taxes to avoid and more resources to avoid them. Nobody knows how much Greek money is salted away in tax havens. Estimates range from the billions to the hundreds of billions. Much of this, despite repeated offers of amnesty, is beyond recovery. Luxury taxes are perhaps more enforceable, though again evasion is flagrant. In 2010 a study of satellite photos revealed that, rather than Athens having 324 private swimming pools, as was claimed by tax returns, it in fact had 16,974.

Part of the reason is cultural. Greeks do not want to pay taxes. While this is true of any country, many Greeks fail to accept the tradeoff between paying taxes and a functioning state. In addition, the widespread nature of tax evasion means that there is a perception that everyone else is doing it to an equal or worse degree. The current economic circumstances mean that many Greeks are evading taxes out of (perceived) necessity, in the belief that their own individual contribution is personally vital to themselves but only a drop in the ocean for the government. Multiply that across the population and there is a tragedy of the commons situation spread over a country.

The economy itself also provides favourable conditions for tax evasion. 30% of Greece’s population are self-employed, and their incomes are self-declared. Many businesses are family-owned. Only a minority of employees work for larger companies with centralised payment structures where tax compliance can be easily enforced. In short, the tax agency is swamped with potential evaders and cannot hope to audit a proportion sufficient to deter would-be evaders.

This is of course aggravated by the relative ineffectiveness of the Greek civil service. In the boom years the civil service operated on a clientelist basis, and bribes were a quasi-accepted practice. There is even a word for it “Fakelaki”, referring to a payment made to a government official in exchange for special treatment. When larger tax evaders are uncovered the penalty may well be significantly reduced in exchange for a bung. Even if legal proceedings are taken against evaders, Greece’s legal system moves at a glacial pace. Greece ranks 155th in the world for ease of contract enforcement, behind such places as Nigeria, Haiti and Bolivia. The situation is not helped by the complexity of the taxation system, though steps have been taken to simplify this.

Finally, of course, there is political interference. Haris Theoharis, the former head of the tax agency turned centrist politician, recounted that on numerous occasions he was advised by the government to discontinue investigation into tax evaders. Having been appointed to the post in 2013 specifically to get tough on tax evasion, his entire staff was replaced twice over alleged corruption, and his tactics (calling out tax delinquents on social media was a popular one) led to the New Democracy government forcing him out within a year.

Tax evasion is more than just a matter of damage to a government’s balance sheet. Fears of a government clampdown have led rich Greeks to offshore as much as possible of their assets, and while this may be good for Switzerland, it takes liquidity out of the Greek financial system, as well as discouraging domestic investment for fear of being noticed.

Greece’s tax system also stimulates another major problem with the Greek economy: poor worker productivity. Given the scale of tax evasion, attention is logically focused on getting the bigger offenders, as this offers the best possible returns. This is an indirect subsidy to small businesses, as they are less likely to be investigated for tax fraud. Larger companies tend to have better output per worker, thanks to economies of scale such as eliminating needless duplication and better purchasing leverage. The upshot of this is that in many sections of the economy potential synergies simply don’t happen, and worker productivity is kept to a lower level than would otherwise be possible.

In a strange turn of events, Syriza might be better placed than the mainstream parties to tackle Greece’s tax problem. Not being part of the same establishment politics that the two traditional ruling parties are (the last PASOK Prime Minister, George Papandreou, was both the son and grandson of previous PM’s), they might be better placed to tackle some of the problems with politically connected individuals escaping justice. But the unfortunate reality is that any attempt to bring Greece’s tax compliance rate in line with that of other developed countries would increase effective tax rates by 20%, and no government could survive that. Much as they may rail against tax evasion, Greeks are quite happy to partake.

Greece has recently received a sharp lesson about the dangers of trusting those who promise easy answers to difficult problems. There are no easy answers to the tax situation. Even simple steps, such as streamlining the legal system, involve tackling deep-seated vested interests. And when the culture, economy, and political class are all against you, it’s always going to be an uphill struggle.

By gregbowler

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