Structural considerations for a prosperous Greece
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Greece's taxing challenges
As September came to a close, millions of Greek taxpayers scrambled to meet the deadline to pay the second instalment of personal income tax and the first payment obligation of the single property tax (ENFIA). While the past month was critical for the Syriza-led government in terms of achieving its full-year fiscal objectives, for numerous private households and businesses it was a struggle to honour their rising tax burden.
But October will not provide any respite, as hard-hit taxpayers must confront an additional increase in the special consumption tax on heating oil ahead of the winter season. A further hike in motor tax for 2017 awaits Greek citizens in December. If that weren’t difficult enough to bear, the New Year will start with another escalation in the special consumption tax on motor fuel.
Under the staggering weight of such rising tax obligations, it cannot come as a surprise that many Greek citizens and businesses are willing, but effectively unable, to meet their payment obligations. While the ENFIA and VAT collection rates reached 83 percent and 81 percent last year, respectively, the collection rate for personal income tax only stood at 63.8 percent in 2015 (according to General Secretariat for Public Revenue data).
Moreover, every month since the start of 2016, the volume of unpaid taxes has increased. The latest available data for August 2016 recorded an expansion in tax arrears by 1.3 billion euros. The total amount of outstanding taxes reached an unprecedented 91.6 billion euros. This mountain of unpaid taxes is roughly equivalent to 55 percent of Greece’s GDP in 2015.
The World Economic Forum (WEF), which organises the annual Davos Forum in Switzerland, also publishes a global competitiveness report. The 2016–17 edition ranks Greece in 86th place out of 138 countries. This ranking corresponds to a drop of five places for Greece compared to the 2015–16 report. The key reasons for this downgrade were listed as the imposition of capital controls in mid-2015 as well as the continued implementation of fiscal austerity measures, mainly via higher tax rates on private households and corporate businesses. Most strikingly, the new WEF report ranked Greece in 136th place – third from the bottom – as regards tax incentives for the promotion of domestic and foreign investment.
Excessive taxation is a burden on private households and an impediment to attracting investments. But it has become the default option of past and current governments during the three macro-economic adjustment programmes with the quartet of international creditors. The draft budget for 2017, which was submitted to parliament this week, continues on this policy trajectory unabated. The higher taxes on coffee, beer, fixed-line telephony, subscription TV and cigarettes (including electronic) all converge in the aim to increase annual revenue for the government coffers. The draft budget stipulates additional taxation for private households and businesses totalling 2.5 billion euros in 2017. The Syriza-led government is seeking to outperform the creditors’ milestone by achieving a primary surplus of “close” to two percent of GDP. The third programme mandates a lower target, namely 1.75 percent.
The avalanche of new taxes are policy decisions by the government and passed by parliament. The ENFIA was introduced in September 2011 as an emergency tax. Syriza campaigned in favour of abolishing the tax, only to embrace it after taking office. VAT has been increased on four occasions since 2010. It now stands at 24 percent. In the midst of a continuous recession, the corporation tax rate was hiked from 26 percent to 29 percent last year. According to the OECD, Greece was the only country in the EU that raised the tax rate on corporations in 2015. The corporate tax rate has changed seven times in the past decade. This frequency makes any predictability of taxation almost impossible for companies and auditors. The recurring changes in business taxes has led some Greek companies such as Fage International, Coca-Cola HBC and Viohalco to relocate their headquarters abroad.
But it would be misleading to place sole responsibility for this tax avalanche hitting Greek citizens and businesses on the doorstep of the political authorities in Athens. Many of these increases, irrespective of the government in office, have been mandated – some observers even argue that they are dictated – by Greece’s international creditors. One should not forget that the increase in the corporation tax rate was an integral part of the demands formulated by the quartet of creditors during the arduous negotiations for the conclusion of the third programme in mid-2015.
Such taxing challenges for citizens and corporate entities should not obscure two other characteristics of Greece’s skewed tax policies during the past six years. Repeatedly increasing and expanding tax rates to product and service categories creates disincentives to invest and work in the formal economy. For one, the aforementioned volume of rising unpaid taxes is also a reflection of various individuals and businesses strategically defaulting on their payment obligations. Put otherwise, the proliferation of instalment and deferral schemes introduced by different governments in the course of the past six years are treated by many beneficiaries as de facto tax forgiveness or a backdoor tax amnesty. The inability to enforce such schemes led the IMF this past month tocall on the government and the other members of the quartet to refrain from adopting or endorsing further instalment arrangements.
The other characteristic that needs to be addressed is the dichotomy between Greece becoming a country of excessively high tax rates with a diminishing contributor base and, simultaneously, continuing to grant generous tax exemptions to citizens, professional groups and public institutions. After much acrimony with the creditors and opposition from domestic rent seekers, the tax-free threshold for citizens was reduced to 8,636 euros this year. But even this level makes it possible for more than half of taxpayers to avoid exceeding the threshold, in particular farmers, fixed-term contract employees and many liberal professionals; the latter taking accounting liberties in order to avoid paying due taxes. They are essentially freeriding on the back of their overburdened compatriots.
But there are also other legal tax privileges that do not resonate well with a frustrated community of taxpaying citizens who are deprived of the means to circumvent, delay or dodge obligations. Greece is not the only country in the EU that permits generous tax exemptions for the shipping industry. Equally, the extensive use of deferred tax assets (DTA) by Greek banks is not unique in the eurozone. Or consider the arduous road navigated by domestic authorities to tax undeclared income that has been transferred abroad. The Swiss authorities have a long record of fruitless deliberations with their Greek counterparts on the subject matter.
These examples of current tax loopholes are only the tip of the iceberg. But what the three examples have in common is the sheer scale of their utilisation, where no government in Greece – be it on the left or right of the political spectrum – is prepared to call these practices into question and willing to do something about them. Instead, past and current governments, with the support of or under pressure from its international creditors, have chosen to rebalance the fiscal architecture by introducing an ever growing list of new taxes and levies.
But the authors of these policies should beware of two issues. The political backlash from angry taxpayers may just be an election away. Moreover, rising taxes based on a declining pool of tax contributors is a recipe for the system’s medium-term implosion. To date, no country in the eurozone has been able to achieve an economic recovery after seven years of recession on the back of such excessive taxation. Calls for pushing the reset button to fix Greece’s unbalanced tax system are urgent.
Are we to guess that the uber criminal Troika is not the main cause of this murderous taxation? And that any sane Greek government is self-imposing heavy taxation regimes just for the fun of it?