A barrage of new tax measures are contained in the new bill presented to Greece’s Parliament
...diesel fuel tax for farmers going from 66 euros per 1,000 liters to 200 euros/1,000 liters from October 1, 2015, and to 330 euros by October 1, 2016. Farmers’ income tax to be paid in advance will rise from 27.5 percent to 55 percent. Income tax for farmers is set to rise from 13 to 20 percent for 2016 and to 26 percent for 2017.
Freelancers will be subject to a gradual increase from 55 to 75 percent in advanced tax payments for income earned in 2015, increasing to 100 percent in 2016. The 2 percent tax break for single payments on income tax is also being abolished from January 1, 2015.
Private education, previously untaxed, will be taxed at 23 percent, including the tutoring schools (frontistiria) that most Greeks send their children to but excluding preschools.
Greece’s vital shipping industry will also be subject to new tax rises. Among other measures, tonnage tax is to increase by 4 percent annually between 2016 and 2020. A special contribution by foreign cargo carriers will remain in place until 2019."Austerity" has been a contentious and vague word, descending to an all-purpose insult from the pen of Krugman et al.
But on one point I think we can agree. Steep tax increases, especially steep increases in marginal tax rates on people likely to work, save, invest, start new businesses, and hire others, are an especially bad idea right now. The only hope to pay back debt is growth, and this sort of thing just kills growth. Part of growth is also keeping smart young Greeks in the country, which they are leaving in droves.
Sure, I look at the margins, incentives, and "supply," while Keynesians look at taxes as just "money in pockets" that drives consumer spending and "demand." But looked at either way, this is really counterproductive.
In practical terms, there is a Laffer curve, whether of supply side incentives or demand side multipliers. And for paying back debts, the long-run Laffer curve matters: the effect of taxes on business formation, expansion and growth; on people moving to and from a country. The contentious short-run Laffer curve is on the question whether people with jobs work fewer hours at high taxes. Maybe yes, maybe no, but that's not the issue for Greece or for her creditors.
I think the Europeans think they can just raise tax rates and produce more interest payments. Alas, you have to let a garden grow before you harvest the fruit.
I know just as little about Greece and the Greek economy as any other monolingual American who just skims the headlines.
ReplyDeleteBut, I was under the impression that a major cause of Geek government deficits is that there is massive and universal cheating on reporting and paying taxes.
If that is so, is it more likely than not, that this tax increase will have no impact other than to increase the amount of non-compliance.
I had the same thought: what happens when you increase zero by 50%?
DeleteAnd how do you enforce a fuel tax only on farmers? If I were in that position I'd be paying non-farmers to make gas runs for me. I'm sure the Greeks can come up with far more clever workarounds.
That last sentence reminds me of the movie "Being There" with Peter Sellers.
ReplyDeleteThe business cycle:
President "Bobby": Mr. Gardner, do you agree with Ben, or do you think that we can stimulate growth through temporary incentives?
[Long pause]
Chance the Gardener: As long as the roots are not severed, all is well. And all will be well in the garden.
President "Bobby": In the garden.
Chance the Gardener: Yes. In the garden, growth has it seasons. First comes spring and summer, but then we have fall and winter. And then we get spring and summer again.
President "Bobby": Spring and summer.
Chance the Gardener: Yes.
President "Bobby": Then fall and winter.
Chance the Gardener: Yes.
Benjamin Rand: I think what our insightful young friend is saying is that we welcome the inevitable seasons of nature, but we're upset by the seasons of our economy.
Chance the Gardener: Yes! There will be growth in the spring!
Benjamin Rand: Hmm!
Chance the Gardener: Hmm!
President "Bobby": Hm. Well, Mr. Gardner, I must admit that is one of the most refreshing and optimistic statements I've heard in a very, very long time.
[Benjamin Rand applauds]
President "Bobby": I admire your good, solid sense. That's precisely what we lack on Capitol Hill.
Creative destruction:
Gary: So, you’re saying this is just another season in the garden, so to speak.
Chance: Yes. A garden needs a lot of care and a lot of love. And if you give your garden a lot of love, things grow. But first, some things must wither. Some trees die…
Greece needed to experience a significant drop in its average standard of living. It is possible that real average consumption by Greeks has to fall by 30% to bring things into something like balance. One possibility would have been to abandon the Euro adopt the Drachma and let the exchange rate crash - reducing real incomes.
ReplyDeleteGreece has decided to stay in the Euro. Given inflexibility in domestic prices the needed adjustment in personal consumption can be partially achieved by tax increases.
Conventional economic commentary about Greece (meaning just about everyone but you and me) rarely expresses concern about any possible adverse impact from the country's amazingly high and rising tax rates. This should be considered a professional disgrace.
ReplyDeletehttp://www.cato.org/publications/commentary/greece-being-taxed-death
"The contentious short-run Laffer curve is on the question whether people with jobs work fewer hours at high taxes."
ReplyDeleteThere's also the issue of incentives/disincentives to report taxable income when rates are higher or lower. This would seem to be particularly relevant in Greece.
Prof C says “The only hope to pay back debt is growth, and this sort of thing just kills growth. Part of growth is also keeping smart young Greeks in the country…”. I beg to differ.
ReplyDeleteGrowth as such won’t enable Greece to repay debts: e.g. growth could come from a straight increase in demand from Greek consumers, but that would just suck in imports, which would increase Greece’s debts. Alternatively if “smart young Greeks” stay in the country and growth comes from their exporting goods or services, than that would enable debts to be repaid.
Ergo the crucial point so far as repaying debts is improving Greece’s balance of payments rather than growth.
Ralph,
DeleteWell said.
Lower taxes are better.
ReplyDeleteOn the other hand, US federal income and capital gains tax collections have exploded by 75 percent in the United States since 2009, and our recovery continues.
The top federal marginal income rate in the United States in the boom-boom-boom 1960s was 90%.
Maybe the average tax rate is more important than the marginal rate on a small fraction of the population.
That said, I would prefer to hold federal outlays to 15% of GDP. Greece has a long long way to go to get to a level like that.
"I would prefer to hold federal outlays to 15% of GDP. Greece has a long long way to go to get to a level like that."
DeleteSo does the United States. US Federal outlays are about 22% of GDP. You want to cut a third of that. Where do you propose to cut 7% of GDP (one third of total Federal government outlays) from total spending?
Jan,
DeleteFederal expenditures by category:
Health Care - 25% of expenditures
Interest on the Debt - 11% of expenditures
Social Security - 21% of expenditures
Defense Spending - 16% of expenditures
Welfare and Social Services - 16% of expenditures
The big 5 represent 90% of all expenditures. The other 10% is education, transportation, science and medical research, and other miscellaneous budget items.
Since 1950, the lowest that federal expenditures have been as a portion of nominal GDP is about 16%. During Clinton's presidency it never got below 18%.
Assuming the "right number" is 18% requires a spending cut of about 1/5 (20%). Converting 18 Trillion of U. S. federal debt to equity gets you more than half way there.
Let's face it: this is wealth extraction.
ReplyDeleteThe Greek government will take wealth from the private sector.
Instead of redistributing the wealth through bloated and corrupt social programs (which would be bad enough) the wealth will be paid to the Troika.
Ergo, wealth will be extracted from the people of Greece to the rest of Europe.
Is this wealth extraction punitive or could it be argued that wealth inappropriately flowed from Europe to Greek citizens and this is the tide running back out? A form of cosmic justice dressed up as the Bay of Fundy?
Whatever. The only practical thing you can do with bad debt is write it off and that's just not going to happen here. Instead the Troika will resort to an older form of debt resolution: indentured servitude.
'I think the Europeans think they can just raise tax rates and produce more interest payments. Alas, you have to let a garden grow before you harvest the fruit.' If this were true then Germany would expect Greece to access non concessionary finance within a year or two whereas, in fact, they think Greece is going to be on the concessionary teat for a few more years. What is changing is that Greece looks as though it will actually comply with the Europlus rule-book to which it signed up in 2011. If, over the next couple of years, Greece does in fact go the whole hog and accept peer-review of its budget and put competitivieness ahead of welfare and legislates for a debt brake etc, etc, then the Eurozone as a whole becomes ordoliberal. Presumably, Social Fund transfers and the adoption of 'Flexicurity' with a 'Social Minimum' in a couple of years as the Continent moves leftward, will increase the drag on growth but this isn't worrying the Germans. They really aren't interested in getting money out of Greece. This does not mean they want to give money to Greece either. However, at the margin, in order to move to Maastricht 2- i.e. replace discretionary policy with competitiveness oriented rules and turn the Eurozone into a sort of permanent A.A intervention, or Weight Watchers Group for Finance Ministers- they are prepared to stump up their share because they get a countervailing benefit from their cut on greater Euro seigniorage, reduced uncertainty and hence lower real interest rates.
ReplyDeleteThis raises the question- is there any 'Growth' at all, for Greece, in the 'Growth and Stability' pact? Was Syriza right to oppose Papandreou's signing up for it?
One possibility is that the implementation of Europlus raises the reward for Capital (by shifting some of its 'responsibilities' to the Govt- i.e. it can hire and fire, escape health and pension costs, and gain Management Economies of Scale by no longer having to observe local bylaws) while reducing it for Labour and indigenous Enterprise- which may have a backward bending supply curve or else see it shift outwards because of perceived lower Permanent Income, if Leisure is a normal good. Ultimately, it doesn't really matter what the Greeks do. Those who can, emigrate as part of Tiebout sorting, but their place is taken by immigrants with lower historical standards of living. Meanwhile the Capital to Income ratio increases, in line with the lower steady state Labour share of National Income. thus Govt. debt becomes a smaller and smaller portion of the secondary Capital market and, at some point, can be privatised without any crowding out effect because, at the margin, all that has happened is that uncertainty has decreased.
"The only hope to pay back debt is growth, and this sort of thing just kills growth."
ReplyDeleteThis is a balance sheet recession, not one attributable to declining growth rates - the solution is obvious, sell assets to pay back debts. As to special increases for fuel for farmers, they get a subsidized tank of gas if they drive to the pump in a vehicle with plates marked "agricultural vehicle" (those are imported free of tax). For decades I've been trying to discover what conceivable agricultural activity necessitates purchasing a Lamborghini, Ferrari (12 cylinders, 4 valves per cylinder, of which there are several registered to Greek farms), and so on and was never given an explanation - wonder why.
Debt relief for Greece requires a cut in the principal amount of the debt, as I understand the term (unless Ms Lagarde will settle for yet more extensions and rate reductions). That means an official default, so my question is: since well over half of Greek banks' assets consist of Greek government bonds, bonds issued by the bank, and deferred tax assets (ie capitalized past losses) now transformed into outright (non-transferable) government credits, doesn't that imperil what minute collateral these banks have to discount to get new funding?
ReplyDeletePS sorry the bonds issued by the banks also bear guarantee of the Greek state. See also http://www.bloomberg.com/news/articles/2015-07-20/national-bank-of-greece-creditors-offer-funds-to-prevent-losses
ReplyDeleteand this from last year
http://www.bloomberg.com/news/articles/2014-12-18/kkr-takes-control-of-1-2-billion-euros-of-greek-bank-s-loans
I would like to offer some thoughts as an insider.
ReplyDeleteFirst, the tax-rate increases are meant to ensure that Greece runs small primary surpluses. A haircut may make a difference if it allows Greece to regain access to financial markets and start running primary deficits again but I wonder, if Greece's debt declines as a result of, in essence, a controlled default, would credit markets be willing to lend again to Greece like before? I agree with the IMF that without restructuring the debt is not sustainable GIVEN that prolonged surpluses of 3% or more of GDP are not feasible, but I am not sure how a haircut would influence the country's current measures which are projected to generate surpluses of 1% to 2% of GDP.
Second, the need for high tax rates arises from the pervasive tax evasion. If the tax base was larger, the tax rates would not have to be so high.
Third, the question of how the government should achieve primary surpluses is important. In my opinion, more should come from reducing the provision of subsidized services that the private sector is perfectly capable and much better at producing, a practice that contributed significantly to the fiscal disaster. Examples include TV programming, transportation, electricity production, education, health care, etc. If one wants to help the poor, well-targeted income subsidies are much cheaper and more effective. It is crazy that the new government re-opened the state-owned TV station that the previous government had shut down as part of its spending-cuts effort. The good news is that they seem to be making a 180-degree turn on the halt of the privatization of part of the public electric company, ports and airports that the previous government had decided. However, this will probably lead to a break-up of the ruling party, as its left fraction is unwilling to support such a policy change and is now beginning to believe that "socialism", as they envision it, is not feasible within the confines of a "neoliberal" Europe. The idea that you can 'have the pie and eat it too" is, indeed, very hard to kill.
John,
ReplyDelete"The only hope to pay back debt is growth, and this sort of thing just kills growth."
Eh, wrong. The only hope of paying back debt is permanent surpluses (which means permanent private deficits) or selling equity and using the proceeds to retire debt.
Growth alone IS NOT sufficient to retire debt. Never has been, never will be.
growth is not sufficient, but it is necessary. tax revenue = tax rate x GDP. The easiest way to grow tax revenue is to grow GDP.
DeleteTax revenue = tax rate x GDP level, not GDP growth rate.
DeleteYou do not need to grow tax revenue to retire debt.