Cabinet hopes tax cuts will kick-start economy
The government yesterday unveiled a series of tax reduction measures targeted at both businesses and individuals as part of a strategy to kick-start the domestic economy, create jobs and lessen the tax burden on lower-income groups. The measures, which come into effect next year, are part of a broader reform of the taxation system planned for 2003. The package of tax cuts will cost the State 230 billion drachmas, equivalent to 0.5 percent of gross domestic product (GDP). Prime Minister Costas Simitis said the tax incentives will propel the local economy forward in the midst of the global uncertainty. The Greek economy has strong momentum and we must capitalize on this, he told reporters yesterday after chairing a Cabinet meeting to approve the measures. The tax boost will be needed to keep the economy growing at a projected 4.1 percent this year and 3.8 percent in 2002, strong figures compared with the eurozone equivalents for the same two years, even after the latest downgradings. Economy and Finance Minister Nikos Christodoulakis said the tax cuts aim specifically to strengthen corporate competitiveness, encourage job creation and reinforce wage-earners’ disposable income. The tax measures will create a wave of new jobs while helping to improve corporate profitability, he told reporters. The corporate tax rate for companies listed on the Athens Stock Exchange will fall to 32.5 percent from the current 35 percent, with the size of the reduction equivalent to the number of jobs created. The move is expected to cost the State 60 billion drachmas. The tax-free thresholds for individuals and professionals, the latter category comprising doctors, lawyers and accountants, among others, will be raised by 20 percent to 8,400 euros (2.87 million drachmas) and 7,400 euros (2.53 million drachmas), respectively. The 5-percent tax rate for incomes slightly above the tax-free ceiling will be abolished. The cost to the State will amount to 60 billion drachmas. Christodoulakis also announced a decision to do away with five stamp duties at a cost of 130 billion drachmas to the government. These include the 0.6 percent stamp duty paid by private sector wage-earners and employers, the levy for the commencement of a business or a change of corporate activity, and duties applying to foreign exchange transactions, promissory bills and personal declarations. The lower benefits accruing to the government will be offset by the decline in production and labor costs for businesses and higher salaries for wage-earners, he stressed. The move is also part of a strategy to simplify public administration and reduce bureaucracy. Responding to perennial complaints from industrialists on the high cost of crude oil, the minister said the tax on the fuel will be halved next year, depleting state coffers of 15 billion drachmas. Contradicting the government’s generous mood, Christodoulakis said that a 7-percent tax would be imposed on repos, reinstating a practice of the 1994-1998 period. He had on previous occasions hinted at plans to rationalize Greeks’ savings habits. Statistics from the Bank of Greece showed that an increasing number of Greeks have put their savings in tax-free repos in the face of negative yields from bank savings and low returns from the equity market. The government hopes to bring in 35 billion drachmas from the reimposed repo tax. While the tax cuts are in the right direction, they could have been bolder and more encompassing, said Schroder Salomon Smith Barney economist Miranda Xafa. By linking the corporate tax cuts to job creation intentions, the measure could penalize companies in the export industry or those interested in labor-saving investments. Others affected are companies planning to outsource a number of activities, she pointed out. The tax cuts are not bold enough. Previewing the 2002 Budget, due to be tabled in Parliament on November 21, Christodoulakis said the fiscal surplus for this year has been revised downwards to 0.1 percent of GDP from 0.5 percent, and to 0.8 percent from 1.3 percent next year. The debt to GDP ratio this year is projected to decline to 99.6 percent from an original goal of 98.9 percent and expected to fall to 97.3 percent in 2002 against an initial forecast of 95.2 percent. The pace of debt reduction is now at more realistic levels, said Xafa.