The number of market participants and citizens who are worried about Greece’s future is on the rise, but that has little to do with the timing of the third bailout program’s first review. It has more to do with the emphasis that the Greek side seems to be placing on increasing taxes and social security contributions to close the fiscal gaps and fund the liabilities of the pension system.
Although there has been no official confirmation, it looks as if the lenders and the government seem to agree there is a fiscal gap in 2016 which has to be addressed. Of course they differ on the size of the estimated gap but measures have to be taken anyway. Bear in mind that the primary surplus will have to be at least 0.5 percent of GDP this year compared to a deficit of 0.25 percent targeted in 2015. The government claims the primary outcome resulted in a small surplus last year.
To fill the fiscal gap and reduce the budget funding of pensions, it suggests new tax hikes on top of the proposed increase in social security contributions. This is despite recent evidence showing tax hikes are not effective in meeting fiscal targets as they end up weakening a heavily taxed private sector. As a matter of fact, the country may have reached the point where tax rate increases bring in fewer revenues.
According to the 2016 budget, revenue-enhancing measures amounted to just above 1 billion euros last year. However, the real number is even bigger since about 400 million – described as expenditure cuts – came from an increase in health contributions paid by pensioners. Despite all these measures, tax revenues turned out to be lower than in 2014 by more than 400 million euros.
Of course, budget spending was also lower than projected but this is largely due to the state’s decision to delay payments to the private sector, i.e. suppliers. This tactic explains why state arrears to the private sector rose to more than 4.8 billion at end-2015 from about 3 billion a year earlier.
A recent study by the National and Kapodistrian University of Athens showed that the average Greek pays 39.90 euros out of every 100 euros of income to the state in the form of social security contributions, income taxes and indirect taxes on consumption. The tax burden of a Greek household with one salaried employee and two children earning 35,000 euro annually is the third highest among 21 countries in the European Union. Only Denmark and Sweden beat Greece, with a tax burden of 41.6 and 40 percent respectively.
In reality, the average Greek pays much more to the state if one takes into account property taxes (ENFIA), road tax, local authority taxes, windfall taxes and other levies. The tax burden is becoming unbearable because there is little or no reciprocity. Elsewhere in the Western world, people pay taxes and in return the state provides a number of goods and services free of charge or subsidizes them, but this is not the case here.
In Greece, people pay taxes to have free, public education but they end up paying for private tuition for their children because the public system is not adequate. If someone wants to build a house, they will likely have to pay a bribe to one or more public officials at some point simply to get things done. The same is true with the free provision of services in the public health system, where the infamous “fakelaki,” a cash payment in an envelope, also reigns, although the size of the payments demanded by doctors have come down considerably during the crisis. Security is also supposed to be free but many seek the protection of private security firms because the police are not effective in dealing with crime, while at the same time the financial crimes squad is busy rounding up people who owe taxes to the state.
So the average Greek citizen pays twice for the same “free” services. He or she pays taxes to get them and then pays again in private to enjoy the supposedly “free” public services. This means the principle of reciprocity between taxes and the provision of public goods and services does not hold. This setup mostly favors the vested interests which are involved in providing these “free” public services.
A few authors, including Takis Michas, have pointed out there has not been a movement against taxation in Greece although the lack of reciprocity would justify one. On the contrary, there have been other movements, such as “We Won’t Pay,” concerning road tolls, bus tickets etc, a few years ago. This is attributed to the ideological dominance of the left. According to the leftist doctrine, people do not pay taxes in exchange for free public goods and services; they pay taxes for punishment if they are well-off or as a form of social solidarity with those in need. However, a good deal of the tax revenue goes toward salaries and other perks in the public sector, where political appointments have been the norm all along, as well as to pensioners in their 40s and 50s. From this point of view, the lack of an anti-taxation movement has led to greater tax evasion.
It is an interesting argument which backs the notion that higher taxes encourage tax evasion and therefore bring in less money to the state. This, coupled with evidence that hikes in taxes and social security contributions do not produce the expected results, should make both the lenders and the government take notice. The Greek side, especially, should reconsider its idea of using taxes to meet the fiscal targets.
[Kathimerini English Edition]