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Friday, October 01, 2010

Greek taxing madness

Today's gloomy revelations from Ireland were followed by rather disturbing news from the Greek parliament.

As part of a long-standing tradition to let tax evaders off the hook every three to four years, Greece’s parliament has rushed through a law which will allow the government to collect about €2bn in taxes over two years. Only problem is that the outstanding amount of unpaid taxes in Greece is roughly €35bn, which effectively means that its granting millions of citizens a tax amnesty.

The European Commission and the IMF aren't happy - as it's the first time, since Greece went on the dole, that the country has ignored their recommendations for conditional cuts and reforms.

We're stating the obvious, but this situation is incredibly problematic on so many levels:

Firstly, it's a perfect illustration of how fundamentally unfair the eurozone bailout is. Greece has already tapped some €29 billion from the eurozone rescue fund, effectively transferring liabilities to taxpayers in other countries - not least German ones. And yet it is now letting its own taxpayers get away with not paying in roughly that same amount in taxes. Is this really right?

Secondly, Greece's tax culture is absolute madness (for just how mad, check out this article by Michael Lewis, if you haven't already done so). That the system needs reform is the understatement of the century, but at the same time, how many painful changes (perceived or real) can Greek citizens bear at once without popular opinion completely blowing up? The government can only go against its own people so much - which illustrates the limitations of external, non-elected pressures for reform.

But, at the same time, if Greece doesn't raise taxes, how will it be able to pay off its debts? Revenues to the Greek state increased by only 3.4 per cent in the first eight months of this year against a target of 13.7 per cent, despite two increases in VAT this year and three in excise duties. The Greek government wants to raise money quickly and move on - and says that the new law will do that - but in order to pay off its massive debt, it needs to raise taxes properly. This includes making it less burdensome for people to actually pay the taxes and providing incentives for people not to cheat. Tax amnesties do the exact opposite.

The contradictions between these three points (and we're sure the list can be made much longer) also illustrates the fundamental contradictions within the eurozone itself.

The scary thing is that there's no obvious way out - it's high time to consider an orderly default procedure for struggling eurozone countries.

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