Running Away from the Greek Taxman
It has been painfully apparent for some time now that European Union efforts to shepherd Greece through troubled times on a path to recovery are not sufficient. Nor will further financial aid to a country doing little more than paying lip service to economic change lead to recovery. It is frustrating to note that results could be easily attained by application of a little common sense.
Sadly, the hard left government of Alexis Tsipras has not been too forthcoming in accommodating the EU’s demands for reform. From Defense Minister Panos Kammenos, who threatened in March to unleash a “wave of millions of economic migrants” and jihadists on Europe unless the Eurozone backs down on austerity demands, to former Finance Minister Yanis Varoufakis’ reckless antics, the embattled country has wasted too much time playing the blame game instead of reigning in its finances.
It’s no surprise that Greece’s recent efforts to overhaul the pension system are seen as little more than an exercise in public relations, but they are a step in the right direction and an indication to the European Union that the government is heeding calls for reform and taking some responsibility for its own future.
However, reforming the pension system is only the tip of the iceberg on Greece’s laundry list of reforms and vastly depends on Athens’ capacity to collect taxes.
As a starting point, attention should be paid to pundits calling for a hard look at the manner in which the Orthodox Church – an entity thought to be worth in excess of €1 billion – is being taxed; or more precisely, not taxed. The church – the second largest landowner in Greece – and its monasteries are exempt from the unpopular property tax announced in September of last year. Complicating matters further is the fact that tax officials tread softly when dealing with the powerful Orthodox Church. Lawmakers are loath to upset the conclave as priests hold sway over public opinion, and imprudent taxation could be tantamount to shooting themselves in the foot come the next elections. Further hindering a proper assessment of church income is the fact that the accounting practices of the church do not lend themselves to a great deal of scrutiny.
Another area of concern, which for ‘inexplicable’ reasons has escaped the reach of the Greek state, is rampant tax evasion, currently estimated to amount to about 27 percent of the country’s GDP. A great deal of it – some 4 billion euros – is currently deposited in Swiss banks by the country’s richest citizens. As for ordinary citizens, a large proportion of individual income is earned in the shadow economy – usually in the form of cash payments to the self-employed, making it difficult to tax. Estimates are that an additional $31 billion in taxes could be collected by cracking down on the shadow economy. Those employed in the fields of medicine, engineering, education, and media are said to be responsible for a large portion of the shortfall in income tax collected.
The reasons for the reluctance to pay a fair share of taxes are many and varied, but economists speculate that a good deal of it stems from what they term “low tax morale” – people do not feel particularly obligated to pay taxes. Whatever the reason, the potential income recovery from full tax audits should be sufficient to galvanize tax officials into action, especially when one considers the words of Adair Morse, a professor with the University of Chicago’s Booth School of Business, who said, when speaking of the tax situation in Greece, “For every dollar that is reported, 80 cents is not.”
To its credit, the Greek government is being schooled in dealing with tax evasion by the Germans through a recently signed agreement. Indeed, 50 Greek tax officials will travel to North Rhine-Westphalia (Germany’s richest state) for training. However, unless the government gives a clear signal to its tax collectors to crack down on offshore accounts, the classes are just another way of kicking the can down the road.
Thirdly, eliminating government meddling from the private sector will clearly help to alleviate corruption. Potential investors were rightly scared off after the government announced plans to essentially nationalize several privately owned shipyards and merge them under a common unit – a move that could lead to costly lawsuits and reverse gains made from recent privatization deals. Earlier in December 2015, Greece pulled off its biggest privatization to date, ceding management of fourteen regional airports to a German company for $1.3 billion and in January it is expected to award ownership of its main port, Piraeus, to Cosco, a Chinese shipping company in exchange for $370 million.
When it met with the Troika on January 18th, the Greek negotiating team should have presented a strategy to tax the Greek Orthodox Church, accelerate efforts to stamp out tax evasion and a detailed outline for its privatization scheme. Instead, talks broke down as the government put forward just the pension plan, without outlining ways in which tax collection would be increased and budget revenues bolstered.