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Πέμπτη, 21 Ιανουαρίου, 2021
Αρχική English Edition Are tax cuts enough to resuscitate the economy?

Are tax cuts enough to resuscitate the economy?


By Konstantinos Likas,

Of all the various issues in Greece and also globally, taxation is always on the agenda. In Greece, especially, taxation levels are the highest in the region of Balkans -regarding some types of taxes, in fact, Greece ranks among the highest in Europe- while public services are underfinanced and social benefits are meagre. Greece is called upon to finance a series of ever more expensive needs while the Greek economy, due to the recession (or rather, depression) under which it has been living for well over a decade (in spite of meagre growth from 2017 until 2019), is facing severe challenges.

The original article of the author was written prior to the COVID-19 pandemic. This article cannot therefore constitute a mere translation of one of his articles, since the COVID-19 pandemic couldn’t have come at a worse time for Greece. This is because, just as the Greek economy was, as per the Ministry of Finance, expected to grow at 2.8% in 2020, the lockdown imposed to combat COVID-19 led to a collapse in GDP of 15.1% on Q2 2020, and Q3 2020 – where Greece normally registers its highest GDP growth rates due to its dependence on tourism – is not expected to do any better. Tourism has collapsed due to the pandemic and with it, public revenues as well. The state is already in a fiscal deficit and it is only going to get worse.

This comes on top of several other pressing concerns. Greece has one of the lowest birth rates in Europe with a brain drain to match; as 500,000 Greeks, mostly educated, mostly young and skilled, emigrated abroad, the workforce has shrinked amid rising cohorts of pensioners. This will inevitably create gaps in production, public revenue, and will threaten to render the pension system unsustainable over the next decades.

The shrinking demographics and the deeper recession also pose a threat to all public services. The most affected service is that of the Hellenic Armed Forces. Already facing manpower shortages, the economic collapse also threatens the Armed Forces’ modernization and shrinking cohorts, meaning fewer recruits, will render existing force structures unsustainable. At the same time, the shrinking economy adds pressure on the National Health System – already stretched thin due to COVID-19 and the education system is buckling under the strain of shrinking budgets. Universities are de facto financed by the tuition fees they charge for their master’s programmes. Basically, all public services are facing aging cohorts and personnel shortages -the average age of Greek Special Forces operators is 40 years old, the average age of Greek teachers is 60 years old- and any new hires are mostly on temporary contracts with no chance of tenure. The NHS is particularly strained by a lack of doctors and nurses, but hiring -even amid a pandemic- is scant.

Without taking other factors into consideration, namely unemployment (the highest in the EU by far), poverty, social exclusion -the utter marginalization of refugees from the Greek economy notwithstanding- we can conclude that the state needs more and more funds to cover the ever increasing demands placed upon it, but it is also tasked with collecting these funds from an ever shrinking labour force -many parts of which rendered useless by an economy decimated by a financial crisis, three memoranda, taxation saldos plus austerity, and now a global pandemic- both now and in the future. So how can the state milk a comatose cow that is quite simply on life support (which in our case is the EU)?

Through ever increasing taxation? That is, the preferred method of choice of past governments post-2008, which on the surface -until reaching a threshold- guarantees liquidity for the state coffers and its financial obligations, but also threatens its economy mid-term if they are not rescinded promptly. In autumn of 2019, real-estate tax (ENFIA) revenues collapsed. This alone indicates the chilling phenomena of both the decimation of internal demand and the exodus of Greek businesses to neighbouring countries, mostly Bulgaria. It also indicates that it has served its purpose, albeit at a high price. Since the Greek government was not prepared to reform the civil service drastically and impose radical spending cuts and tax cuts to stimulate the economy, something had to give in our negotiations with our creditors.

The result is that Greek tax rates are now the highest in the Balkans; corporate tax rates begin at 29% – only 0.9% lower than that of Germany’s -, income tax begins at 22%, self-employed persons are taxed at 22% from the first euro and 23% after €50,000 p.a., and VAT stands at 23%. These are by far the highest in the Balkans, before we consider other forms of taxation, such as prepaid tax obligations for the next fiscal year imposed on businesses (businesses in Greece must pay 100% of the income tax of the next fiscal year in the current year, alongside the tax amount due for the current year, effectively resulting in double taxation), mobile telephony taxation (with 4 rates) and other taxes. Little wonder, that Bulgaria and Cyprus, but also Romania, Turkey, and Albania, have hosted Greek businesses that abandoned ship.

Hence, if we want to stimulate our economy -especially after the COVID-19 pandemic- we need to identify other solutions than tax hikes. Especially with  an economic collapse on the horizon and ballooning unemployment, Greece needs to cut taxes. This is why the current government was voted into power by a landslide, actually. Tax cuts were on the top of the agenda for the government -an agenda which has been turned upside down by a pandemic. But, as mentioned above, our corporate taxes alone (29% in Greece, 20% in Albania and Turkey, 10% in Bulgaria, 12% in Cyprus) indicate that something needs to change.

This measure, however, is not free of cost. Not at all. The country is bound by memoranda to maintain primary surpluses -even though these requirements have been waived for 2020 and 2021- and as such our window to reduce taxes or eliminate ludicrous tax regulations is limited. Short-term, tax cuts will always hurt state coffers because the economy will need to adjust to these tax cuts. This is the reason why the 100% tax prepayment requirement for businesses cannot be fully abolished and why the Greek government can merely reduce the rate, and not abolish it wholesale. This is because tax cuts are a necessary, but not a sufficient, measure to put the economy on a healing trajectory -a trajectory which is desperately sought after by a people that has been living in a depressionary economy for a decade and will suffer even more after this pandemic.

As such, for those who do not merely crave for small steps forward, but rather want something more radical, there is a more difficult and less costly alternative. This can be discerned easily, just by reading -even superficially- Greek tax laws. In Greece, VAT regulations are typically studied in special books over 1,400 pages long, income taxes in books of 1,600 pages (this encompasses both personal and corporate income taxes), and ENFIA -a single tax of its own-  requires 182 pages by itself. This is not to account for other taxation types, such as circulation tax, stamp duty, mobile telephony tax (which has 4 progressive rates, depending on the amount charged) etc. This means that not only do we have the highest rates in the Balkans, but also one of the most complicated and overregulated regulatory frameworks, which makes the Greek tax system resemble a minefield for economic agents.

All that needs to be simplified.

Simplification has many benefits. Firstly, the complexity itself of our tax system costs money. Among monetary expenses, labour hours for the identification of the correct tax regulation or loophole (with the opportunity cost that comes with it), the employment of highly-specialised accountants and lawyers (who could have specialized in other, more productive domains and are not inexpensive), in order to exploit and correctly demand the application of favourable regulations. To visualize the effects on the economy, let’s consider the following: imagine, if every citizen or business could simply file income taxes (which in Greece are forms E1 for income taxes from labour, E2 for income from real estate, and E3 for income from entrepreneurial activity) in one very simple, easy to understand statement (not three, as is the case actually) and from the comfort of their own home, online. The costs in compliance alone due to the time and expenses saved filing taxes would benefit not only private citizens, but primarily our heavily battered businesses.

Secondly, bureaucracy should be reduced. No simplification of tax rates can be undertaken without an overhaul of existing regulations. This implies the abolition of exemptions and the reduction in required certificates for the application per se. Fewer documents required alongside tax forms, in tandem with a digitalized process, would yield further reductions in compliance costs and opportunity cost of time – especially in Greece, which is ranked as one of the worst countries in Europe to do business in. These benefits would then flow into the real economy. Given the problems Greece faces, these benefits cannot be quantified. However, the logic behind this speaks for itself.

But if that is the case, why have few governments, if any, resort to a simplification of our tax code? Simplification of taxes generally implies a substantial political cost. This is because the state, on the one hand, wants to incentivise specific investments and economic activities and therefore adjust its tax code to attract specific investments. However, on the other hand, political personnel tend to favour specific economic interests that back their political campaigns by encompassing tax regulations that favour those interests in return, the result being their partial or even utter exemption from taxation. This is an issue that, of course, bedevils many western countries too. In the USA and Germany, it is entirely possible for the richest individuals and/or businesses to be charged with lower tax rates (Amazon, for example, pays very little tax – if at all) than the majority of workers or SMEs.

And this is where the debate enters its epic climax. Tax evasion. In Greece, in particular, this is a sensitive subject. Tax evasion may as well be a crime against the country, possibly tantamount to treason, but when the state, instead of making tax evasion regulations stricter and enforcing compliance, merely increases tax rates without enforcing them properly, thereby treating businesses and – especially in Greece – self-employed individuals as criminals and potential, almost by default, tax evaders, it merely incentivises them to evade taxes. And so the cycle repeats itself.

Tax evasion in Greece is a severe issue and can only be combated by reducing tax rates and simplifying the tax code. However, there is a very important prerequisite. Besides a more thorough enforcement of tax regulations and an escalation in the penalties imposed on tax evaders, there needs to be a paradigm shift in our society. We cannot demand better education, a well-funded NHS, better roads, thorough policing, a strong military, and better public transportation, when tax evasion is being “rationalized”, tolerated, or even congratulated by segments of our society. Even further, when self-employed businessmen and businesswomen in Greece see themselves as “heroes” evading taxes, without public scrutiny, tax cuts will only be partially effective, if not outright damaging to our coffers. This is the real reason why our creditors refuse many of our proposed tax rates outright; they know that, if we cut taxes, tax evaders will prefer to pay 0 taxes than reduced taxes, so the state will earn less. That is confirmed by incidents during summer last year, whereby tax raids on popular beachbars/nightclubs (such as Nammos, in Mykonos) where tax evasion has been verified but the penalty was only a forced closure for… 48 hours.

And this is where the state needs to get tougher. The Greek state needs to understand – and impress upon the tax evaders – that not only is it unfair to the actual taxpayers that they be bled to financial death while the tax evaders get away with paying nothing scot-free, but that it is high treason in itself. Reporting military secrets to our adversaries is one act of high treason. An other one is how we treat not paying our dues so that we can support our state in its ever demanding tasks as such. 48-hour forced closures on tax-evading nightclubs won’t cut it. Besides the Independent Public Revenues Authority’s (AADE) further reinforcement with more tax agents, we need harsher penalties for tax evasion – such as suspension of commercial licences, entrepreneur blacklists for serial offenders, and felony-grade imprisonment (which exceeds 1 year in prison). Even confiscation of private property should be taken into consideration. Alas, these are unpopular measures and these are guaranteed ways to lose votes. However, if we truly want a welfare state, this is a necessary step. Otherwise, the Greek state will be forced to carry on with austerity and bleed the Greek economy – or what’s left of it, anyway – to death.

Hence, a single measure alone won’t be enough. A combination of all three measures is called for. We need to lift the burden for many of our citizens and businesses – when Albania has zeroed income tax for small businesses with a turnover lower than 14,000,000 leke and also zeroed the VAT for small businesses with a turnover lower than 10,000,000 leke, the Greek state must verify both temporary and permanent tax cuts. We need to simplify our tax code, so as to make our system understandable, accessible to most citizens, and force more people to pay tax than otherwise. Furthermore, we also need to crack down on tax evasion, since many economic units will forever attempt to evade taxes. To this end, we need to stigmatise tax evasion in our society and enforce as harsh penalties as possible. The combination of all 3 facets together is the only magical solution to our economic malaise. It is also a challenge for governments to implement. So the question is: who has the guts for it?


 

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Konstantinos Likas
Born in Piraeus, Greece in 1995, Konstantinos Likas has studied Maritime Studies at the University of Piraeus, Applied Economics and Finance at the Athens University of Economics and Business, and Finance at the Frankfurt School of Finance and Management. He is a scholar of the DAAD and the German Bundestag. He authors over international economic and monetary policies, defence issues, as well as politics in Albania, Germany, Japan, and Greece. He speaks Greek, English, German, French, Turkish, and Albanian and programs in Python, R, SQL, and PowerBI.