One of the most common scolds directed at the insolvent Greeks is that their government should become better at collecting taxes. I wonder if that is likely to be any more effective than shouting at an out-of-shape 50-year-old to “get better at running a marathon.”
Heritage Foundation says that currently Greece collects 34 percent of GDP as tax revenue (compare to 44 percent for Sweden, which we can assume is close to the maximum achievable). Why not assume that is as much as can be collected and design a government around that? Singapore shows that it is possible to run an excellent government with 14.4 percent of GDP.
The Greeks supposedly are accustomed to evading taxes? The country could rely primarily on a VAT, which is difficult to dodge (hence its popularity in Europe). Greece could lower its corporate tax rate from 26 percent (much lower than the U.S. (about 40 percent including state taxes)) to 10 percent (compare to 12.5 percent in Ireland), thus encouraging companies to locate in Greece. Greece could just get rid of the taxes that people cheat on, such as personal income tax, and replace them with payroll taxes and property taxes.
Once the government figures out how much it can get residents to hand over reliably, the government can then size itself accordingly (presumably stiffing the Europeans who were dumb enough to extend hundreds of billions of dollars in credit).
In other words, instead of starting from “We need to run all of these programs and spend all of this money,” why not start from “Given that anyone money and people can quickly emigrate to elsewhere in the EU, how much money can we sustainably collect in taxes?”
Maybe VAT is hard to dodge in European countries, but counties that experienced autocracy or real socialism have something called ‘black market’, where goods (both capital and retail) and services are sold and bought without any government oversight. Given that Greek citizens are not going to be buying new BMWs at official dealerships anytime soon and unwillingness of Greek police to arrest Greek citizens (shown during recent unrest), VAT may not be as effective as thought.
You are proposing a perfectly rational way to size government. The problem is getting from here to there. Just cutting government didn’t work for Greece (at least not in the current monetary environment).
There are two possible scenarios here – either the Greeks remain inside the EU and the Euro, in which case they have to conform to “European norms” which pretty much precludes a Singapore type solution, or else they leave it, which also precludes Singapore because the Greeks are not Chinese. No matter how the government restructures both the tax scheme and the pension and government employment scheme, the twain will never meet because Greeks view cheating their government as a birthright. The difference can either be made up by the Germans, who seem to be getting sick of this role, or the government can just print up additional drachmas to fill in the gap (with the added advantage to the government that this will cause inflation, thus reducing their outstanding debts. The latter was always the preferred solution before the Greeks lied their way into the EU.
Companies are not going to relocate to Greece in any case. First of all, Greek wage levels are still higher than nearby Balkan countries even though productivity and the educational system are not much better. Second, even if the wage levels are the same, Greek workers are represented by militant Communist unions, are not that eager to do an honest day’s work for an honest day’s pay, etc. No Greek thinks of a job on an assembly line as a worthwhile career – no opportunity for graft, not showing up for work, cheating on your taxes, being your own boss, taking long siestas, etc. It’s just not compatible with the Greek way of life.
Even if you could get a qualified workforce, Greece is a “Permit Raj” kind of place. The system of land titles is very poor so it is hard to even buy a large tract of land for a factory or store and be sure that you have clear title to it. You would need to get all sorts of permits to build which might be hard to get, especially if you are entering an industry where there is already a Greek player. For example, only pharmacies in Greece are allowed to sell over the counter medicines, so if you want to open a Wal-Mart, you can forget the health and beauty aid section.
A lot of the stuff that you mention was supposed to have been addressed in the last couple of restructurings that Greece went thru, but the government wasn’t able to accomplish many of them. As you can see from the recent vote, Greeks, even with 25% unemployment, do not favor “austerity”. One of the things that I learned in my (one) political science course is that electorates do not have to obey the laws of economics and are free to have contradictory wishes (and by pandering to such wishes you can often get elected). There is nothing that stops a voter from voting for lower taxes AND higher spending.
Hi Phil, your suggestions make a lot of sense but I fear the devil is in the detail.
VAT is difficult to dodge in he US and in Sweden but in Greece (where I worked for around four months) cash is the usual way of paying. Restaurants, taxis and most small shops are hardly willing to give you a receipt.
Most pensioners don’t have a bank account! For me it’s hard to imagine not having a bank account.
I don’t know how it works when you buy a car or a boat.
Property tax seems not to work in Greece. AFAIK Greece is the only European country without a government branch to keep track of “who owns which house”. Some years ago the EU administration asked to establish such a government function but the 150 million euro investment from Brussels vanished without trace.
Designing a government to run on a lover percentage of the GDP is unlikely to work as there are too many interest groups protecting their benefits. For example the public servants (probably not so different from the US).
As for foreign companies moving to Greece due to lower corporate tax rates: The work culture I experienced is not in favor for that. Nice people, usually pretty helpful but the productivity was really low. Poland looks much more attractive in that way.
This is essentially the definition of the 1998 Stability and Growth Pact, which required EU governments to keep their annual budget deficits below 3%, and their debt as a percentage of GDP under 60%. You can argue about whether it was tried and found wanting, or difficult and not tried.
The EU also standardized the collection of VAT (executed by the member countries’ Governments, but calculated and charged in the same way everywhere) in the 1970s, and most countries have been steadily shifting their tax burdens towards VAT since then.
The reason corporate taxes in Europe are much lower than the US is that, in a relatively level playing field, most countries are competing for the favors of multinationals. But multinationals have become far too effective at limiting the amount of corporate taxes they pay at all.
@Izzie: The problem with your narrative about Greece is that it also describes Italy rather well. Both countries, before the Euro, had a vicious cycle of high wage demands and high inflation (which ultimately punishes thrifty pensioners and rewards those who are already wealthy). To a lesser degree, this was true for France.
Two countries that would economically dominate the European Union if they got their act together in the same way Germany has. In both countries, internal politics have made them choose economic underperfomance time and time again.
The reason why the Greek bailout bothers the European left (which, in turn, is why the media waves seem to reach the United States) is that it’s clear that the way the Eurozone is managed commits the EU to a fiscally conservative agenda; indeed one that is quite a bit more stringent than countries with their own currency generally impose upon themselves.
Depending on where you stand, the ability of conservative politicians to play up long-standing national resentments and stereotypes to make the citizens of European countries perceive the other country’s deficits as something that comes out of their pockets, is either brilliant, or destructive and dangerous.
Michiel – I don’t see that as a “problem” with my narrative. You are exactly right that Italy is not much different than Greece. The Greek trainwreck just came earlier. The situation in Italy is not much more sustainable either. For whatever reason, the sh*t has just not hit the fan there yet. Yet.
The reason German politicians have been able to say that the Greek deficits are paid for by Germans is because it’s true.
Yes, it’s true that making the Euro (which is essentially the Deutsche Mark by another name) your currency is supposed to commit you to a sound money policy. The whole point of joining was that this was supposed to give you the fiscal discipline that your domestic politics otherwise lacked. No one forced anyone to join the Euro – several EU countries elected not to. But what you can’t (or shouldn’t be able to) do is join the Euro but continue acting as if you hadn’t.
German exporters liked the Euro because it enabled Greeks (and Italians, etc.) to buy Mercedes and BMWs that they could never have afforded if they had to convert millions of their old phony baloney drachmas and lira into real money. For Athens to buy a fancy subway from Siemens, etc. So a lot (but no means all) of the benefits ended up in German hands – corporate profits, bank fees, etc. But the Greeks got plenty too – just as the borrowers in the US got to live (for a while) in houses that they could never afford. But this was a case (we have seen it here too with mortgages) of privatizing the profits and socializing the losses.