ECONOMY

Simitis promises tax cuts over the next four years

Prime Minister Costas Simitis announced yesterday that income and corporate tax rates will be reduced by 5 percent over the next four years. This is probably the most important measure among those announced during the presentation of the so-called «Convergence Charter» by Simitis and Economy and Finance Minister Nikos Christodoulakis. In any case, most of the other measures have already been announced by the ministers concerned and some of them had been part of the ruling party’s pre-election promises for the last national election (April 2000), and which are now re-packaged ahead of the next election, which will take place by early May 2004. According to Christodoulakis, these measures will cost the State a total of 7.7 billion euros. This figure, however, is being disputed by critics of the government, who point out that the «social package,» announced by Simitis and Christodoulakis last week and which was supposed to cost 2.3 billion euros, barely amounts to 1 billion in handouts to lower-income groups. Although Christodoulakis insisted that the cost of these measures has been «computed exactly,» it seems that the government is using these figures to impress prospective voters. It probably cannot afford to spend as much as it claims without letting the budget deficit and debt run out of control. Still, in order to implement these measures, the government depends on three rather shaky assumptions: that annual economic growth, currently at 4.5 percent, the highest in the European Union, will accelerate; that defense spending will be cut and public debt will be reduced. For the moment, Christodoulakis announced that the projected deficit of the 2004 budget was revised upward, from 0.4 percent of gross domestic product to 1 percent. Simitis announced that the top income tax rate will be cut gradually, from the current 40 to 35 percent by 2008, an average cut of 1.25 percent per year. The other tax rates will be reduced as well, although he did not provide specific figures. The tax exemption ceiling will be revised to account for inflation. The tax code will be simplified with the abolition of the so-called income criteria, such as ownership of yachts, jets, large houses and swimming pools, as well as the abolition of several tax breaks, with the exemption of those accorded to people with children and, especially, large families. The corporate tax will also be gradually reduced by five percentage points, to 30 percent, from 2005 to 2008. Simitis also announced that the transfer tax on new properties will be abolished and value added tax introduced on property transactions. Christodoulakis avoided responding to technical questions about the introduction of VAT, such as how this will affect the so-called objective property values used to tax property. Indeed, he gave no specific date for the introduction of VAT, saying it would be done over the period 2004-2008. The government is concerned about the effect of VAT on people who invest in their first house or flat. Until now, such an acquisition was tax-exempt. One of the alternatives considered is to make the buyers of new property pay only 8 percent of the property’s value in VAT from the unique 18 percent rate. But this measure would be quite complicated. The seller of the property would demand and get the 18 percent VAT tax from the buyer, which he or she would then pay to the State. The buyer would then be eligible for a rebate equal to 10 percent of the property’s value.