By: David A. Smith
No sooner had I written People value a government they pay taxes for than confirmation of the thesis was forthcoming, in the form of facts, new to me (which is definitely my oversight), that make Greece’s prospects in the Eurozone even worse than I had previously thought.
We’re readying the tax-evasion leaflets now, sir
Sources used in this post
Economist (February 21, 2015; kelly green font)
Economist (February 16, 2015; brown font)
Back Taxes: Greece lets almost as much tax revenue slip through as it secures
Greece Struggles to Get Citizens to Pay Their Taxes
Tax Collection Is a Top Priority of Reform Plan From Athens
To be more precise, Greece doesn’t get people to pay their taxes; barely half do.
Athens—Of all the challenges Greece has faced in recent years, prodding its citizens to pay their taxes has been one of the most difficult.
At the end of 2014, Greeks owed their government about €76 billion ($86 billion) in unpaid taxes accrued over decades, though mostly since 2009.
The International Monetary Fund and Greece’s other creditors have argued for years that the country’s debt crisis could be largely resolved if the government just cracked down on tax evasion.
‘Cracked down on’ is not equal to ‘collect,’ as the IMF well knows.
It’s simple: just do one impossible thing and all will be well
In fact, there are six home truths, known both to Greece and to the troika, that make such a prescription a pipe dream.
Yeah, yeah, I’ll get up and start working …
As soon as I finish this pipe dream
1. “You [Greece] can’t pay bad debts with bad paper.”
Tax debts in Greece equal about 90% of annual tax revenue, the highest shortfall among industrialized nations, according to the Organization for Economic Cooperation and Development.
So out of whack is that ratio I can’t even find a point of comparison with any other country.
The country’s previous government introduced a controversial new property tax, for example, that led to a sevenfold increase from 2009 levels in collection last year, to €3.5 billion.
In my book, property taxes are good taxes, because they are objectively measurable (based on property value), collectible (because property does not move so it can be legally and financially attached), and can be connected quite visibly to local services. Of course, property tax collections, like so many forms of taxes, depend on the observant herd paying and the system breaks due to compliance-requirement overload when the observant herd stops paying because they believe the taxes are unfair.
But Syriza and other critics assailed the tax as unfair and many Greeks stopped paying it late last year, partly in anticipation that the new government would change it.
My plans are in the toilet now
Though Greece’s rich have often been singled out for not paying their due, the vast majority of tax evasion occurs at the lower end of the income scale, among small and medium-size enterprises, government officials say.
Probably tax evasion is equally distributed throughout the socioeconomic spectrum: the rich because they have the resources to be clever, the poor because they desperately need the money and figure the enforcers won’t chase small sums.
“Most small companies know they will never be audited so they don’t bother to pay taxes,” said a European official sent to help Athens overhaul its tax system. Many companies report they pay their workers the minimum wage, then supplement it under the table to avoid having to pay higher payroll taxes.
Of course – in the small horizon (that is, two-party subset of a multi-party bargain) both employer and employee do better if they agree to defraud the government, leading to the impeccable logic of Catch-22:
“But, Yossarian, suppose everyone felt that way.”
“Then I’d certainly be a damned fool to feel any other way, wouldn’t I?”
“That’s some catch, that Catch-22.” “The best there is.”
2. “You can’t make people ‘buy’ a government they think gives them no value.”
Billions more in taxes are owed on never-reported revenue from Greece’s vast underground economy, which was estimated before the crisis to equal more than a quarter of the country’s gross domestic product.
When a government is rotten, or even when it is widely perceived to be rotten, compliance collapses, and when this happens, the government is increasingly unable to do anything about it because all information is unreliable.
Tax rates in Greece are broadly in line with those elsewhere in Europe. But Greeks have a widespread aversion to paying what they owe the state, an attitude often blamed on cultural and historical forces.
Yes, ‘cultural and historical forces’ are a much nicer pair to blame than either corrupt politicians/ rotten governments or crooked citizens.
During the country’s centuries-long occupation by the Ottomans, avoiding taxes was a sign of patriotism.
A century from now, your great-grandchildren will use this humiliation as justification or their non-payment
When in doubt, blame people who haven’t been involved for over a hundred years; they’re not around to defend themselves.
Today, that distrust is focused on the government, which many Greeks see as corrupt, inefficient and unreliable.
When taxes are theft, only fools pay taxes
“Greeks consider taxes as theft,” said Aristides Hatzis, an associate professor of law and economics at the University of Athens. “Normally taxes are considered the price you have to pay for a just state, but this is not accepted by the Greek mentality.”
If you have no just state, why pay for it?
Some also see grounds for cynicism in the case that opened Wednesday in Athens against former Finance Minister George Papaconstantinou. The 53-year-old faces charges that during his 2009-11 tenure, he illegally removed the names of three relatives from a list of suspected tax evaders. At the hearing Mr. Papaconstantinou denied the charges, for which he faces a life sentence if convicted.
You’re trying to jail me for helping out my relatives?
Naturally, if the chief tax man is himself accused of tax evasion, that’s very bad for taxpayer morale.
Anyone’s software can make a mistake
Alleged corruption among politicians only strengthens Greeks’ conviction that evading taxes in their own everyday lives isn’t a serious crime, and little stigma is attached to getting caught, unlike in other European countries or even the U.S.
[One has to observer that bewildered-Englishman-aside ‘or even the US’ as if tax evasion was a national pastime. – Ed.]
The government’s tax-revenue shortfall in January alone was 23% below its €4.5 billion target for the month.
Last week, the government outlined plans to forgive up to 50% of individuals’ tax arrears, a sign it would make good on its campaign rhetoric.
Wow, that’s a good way to get people to pay their taxes, give them amnesty for half of what they previously didn’t pay.
Yeah, yeah … that’ll work
On the other hand, if I’m so smart, and have no better solutions of my own, why am I making fun of Syriza’s proposal?
Because I can!
The fact is, Syriza is in a box the last side of which was of its own making.
Syriza would risk a popular uprising by the very people who put it into power if it were to back away from those policies and get tough on taxes, political analysts warn. Even within the government’s own ranks, officials say Syriza can’t risk tougher enforcement.
They’re right; Syriza can’t.
I can’t see my way clear out of this
Syriza has already started to reverse some reforms, including privatisations and collective-bargaining rules, antagonising its creditors further.
3. “You can’t even buy your own paper at a discount.”
The market thinks the paper’s bad, but …
Ordinarily, the debt issued by a deadbeat debtor would fall in value, whereupon it would be resold in the secondary market by the original holders, who’ve lost confidence and just want out, to new investors like hedge funds. As I wrote about Jefferson County, Alabama:
Many criticize hedge funds, but here they play a useful role of the kind that is often played by secondary-market buyers.
They bought their paper at discounts, and they bought it from people who really, really wanted to sell it. In terms of resolution dynamics, both events are positives: creditors incapable of thinking unemotionally are removed from the equation because they sell for cash to eliminate their source of pain; and the incoming creditors are working from a lower baseline, so they’re often among the most ready to play Let’s Make a Deal.
The fall of non-performing paper to a market-clearing price is a healthy mechanism that moves toward eventual debt restructuring and emergence from insolvency. But here it can’t happen, for two reasons.
[Continued tomorrow in Part 2.]