Fighting the gray economy

When governments have trouble raising revenue, they fall back on the easy solution: They tax people’s dreams. In the past, a new car was an example of this overtaxed dream. These days, governments are more tempted to tax real estate. Private construction constitutes one of the most important economic activities in Greece. It amounts to a significant part of the country’s total employment and income. It is common knowledge that a large chunk of the income stemming from construction activity is earned through the gray economy. The profits of private construction firms, the various middlemen as well as the wages of those who are employed in construction sites make up a large section of tax evasion. The challenge for the government is to regulate this large section of the gray economy. The benefits are easy to see. The move would help lift state revenues and at the same time clean up the construction sector – with all the spillover effects of that move. The measures that have been announced by the conservative government indicate that the sector is in for a big change. The government intends to impose VAT on newly built houses, lift objective property values, and finally raise the minimum cost of construction which is now used to assess fees for building licenses and the minimum social security contribution to the engineers’ fund. Although these are all steps in the right direction, they are likely to push up construction costs and, as a result, intensify the financial strain on households. Many households are already too far in debt due to housing and other loans and are intimidated by the prospect of higher interest rates. If the new tax has an appreciable effect on prices, the sudden meltdown of the market will have broader consequences. Government efforts to clamp down on gray economic activity should not be limited to unleashing yet another wave of taxes. Not because there is not enough taxable material but because of the negative effect of the high tax burden – a burden that would also take its toll on incomes and jobs.