Radical overhaul of tax system

The pending income tax reform currently being drafted by the Ministry of Finance reflects the government’s intention to begin a radical overhaul of the country’s taxation system. The conservative prime minister feels that the changes in the labor market, work hours and aspects of the social security system are very important but nevertheless still fall short of ensuring a high growth rate for Greece’s economy. Prime Minister Costas Karamanlis believes that reforming the tax system – currently full of loopholes that allow tax evasion – will constitute a tonic for overall growth. The government is mulling introducing a single 25 percent income tax rate, but that decision has not been finalized yet. Therefore, it would be premature to limit the analysis to that specific measure. Nevertheless, it is certain that any reform of the income tax system will require the government to strike a balance between the tax system’s incompatible goals, namely boosting growth while also redistributing wealth. The dilemma concerns all tax sectors and is bound to spark debate within the government and among the public. That said, all sides must go beyond theoretical concerns and drill to the bone of tax system needs. For, unfortunately, in practice, high tax rates have failed to ensure the fair redistribution of wealth. In truth, they have encouraged tax evasion and acted as a counter-incentive to labor. Moreover, taxpayers often find the current system complex and incomprehensible, as well as it being costly to monitor. Its cost is too high, its redistributive effect is insufficient, and its contribution to economic growth is minimal. The tax reform plan currently being drafted by Economy Minister Giorgos Alogoskoufis aims to remedy these deficiencies. For the plan to succeed, conservative policymakers will have to be cautious and imaginative. There are many examples where the reduction in tax rates led to higher revenues as the drop curbed tax-evasion and increased taxable economic activities. Greece has to tread a similar path. We must finally realize that the country needs a system that will encourage labor, productivity and investment; a system that will seek to multiply sources of revenue by increasing the number of transactions and not by imposing cash-oriented measures that end up harming those who cannot disguise their activities.

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