Greece is being taxed to death

By Alan Reynolds

More than five years have passed since May 2010, when Greece was enticed to borrow €73 billion from the International Monetary Fund (IMF), European Commission (EC) and European Central Bank (ECB) with painful strings attached.
That 2010 program, said the IMF, “had two broad aims: to make fiscal policy and the fiscal and debt position sustainable, and to improve competitiveness.”  There was no emphasis on improving domestic economic growth or employment — just “competitiveness” in trade. The IMF speculated that “restoring confidence” would “lead to a growth recovery” in 2012. When that didn’t happen, another €154 billion in loans was provided. And the IMF blamed the bad “investment climate” on a “lack of confidence,” rather than any lack of after-tax income.

Prominent U.S. economists blame the seven-year depression in Greece on savage cutbacks in government spending. “The contraction in government spending has been predictably devastating,” wrote Joseph Stiglitz in February. And Paul Krugman later criticized the period “from 2009 to 2013, the last year of major spending cuts” in Southern Europe. In reality, however, Greek government spending rose from 44.9 percent of GDP in 2006 to 53.7 percent from 2009 to 2012 and to 60.1 percent in 2013. That 2009-2013 “fiscal stimulus” was precisely when the economy contracted — by 4.4 percent in 2009, 5.4 percent in 2010, 8.9 percent in 2011, 6.6 percent in 2012 and 3.9 percent in 2013. By contrast, the economy grew slightly in 2014 when government spending was “only” half of GDP.  That is, the economy fell when government’s share rose, and the economy rose when government’s share fell.
What is rarely or never mentioned in the typically one-sided misperception of spending “austerity” is the other side of the budget — namely, taxes.
The latest Greek efforts to appease creditors would raise corporate tax again to 28 percent, raise the 5 percent “solidarity surcharge” on personal incomes, and discourage tourism by raising the VAT on restaurants and island shopping.
Looked at separately, each of these suffocating tax rates might appear almost reasonable. Looked at together, they are totally unreasonable. To offer a Greek employee an extra €100 requires that €42 be first subtracted for Social Security tax, and then up to €46 more subtracted for income tax. Out of the original €100 of marginal labor cost, the remaining €14 of after-tax income going to a skilled worker could only buy about €10 worth of goods after value-added tax is paid.
The tax wedge between what employers pay for labor and what workers have left to spend, after taxes, is 43.4 percent for a Greek family of four with average earnings — the highest in the OECD and more than double the comparable U.S. wedge of 20.6 percent. This demoralizing tax wedge, which grows even larger at higher incomes, clearly depresses hiring and working in the formal economy. It also helps explain why a third of the Greek labor force is self-employed (making tax avoidance easier).
Little wonder that Greece has been suffering a massive brain drain — with hundreds of thousands of the best and brightest emigrating in recent years, including many doctors. At least a fourth of the remaining Greek economy survived by going underground, but that “shadow economy” ran on cash and banks are now sternly rationing cash withdrawals and transfers to delay capital flight.
The number of employed adults fell by more than a million from 2008 to 2014 — over 23 percent — even as the working age population fell by 319,375 through emigration. Does this sound like a problem likely to be alleviated by higher tax rates on labor?
The industrial production index (2010=100) fell from 119.3 in 2007 to 85.3 this May — the lowest since 1978. Does this sound like a problem likely to be alleviated by higher tax rates on business or investors?
Creditor nations wrongly assume that instructing Greek tax collectors to snatch a larger percentage of a shrinking economy has improved the government’s budget — albeit at the expense of the budgets of Greek families and firms. Measured as a share of GDP, revenues did indeed rise from 40.2 percent of GDP in 2007 to 45.8 percent in 2014. But the Greek economy shrunk by 25 percent. Since 40.2 percent of €100 is larger than 45.8 percent of €75, real revenues actually fell by 14.4 percent. By grinding down taxable payrolls, profits, and sales, punitive tax rates left the government with less real revenue, not more.
No debtor ever became more creditworthy by being forced to accept less income. People, firms, or countries faced with an unbearable ratio of debt to income certainly do not need more debt and less income. Yet that combination is precisely what has been repeatedly prescribed for Greece — with the IMF, EC and ECB demanding ever-increasing tax rates so that the dwindling number of remaining Greek taxpayers can be saddled with ever-increasing debts.
In 1377, Ibn Khaldun published his introduction to history, The Muquaddimah, in Cairo. In that famed opus, Khaldun explained, about as well as anyone has, what happens to a country when the tax collectors get too greedy:
“Eventually, the taxes will weigh heavily upon the subjects and overburden them. … The result is that the interests of the subjects in enterprises disappears, since when they compare expenditures and taxes with their income and gain and see the little profit they make, they lose all hope. Therefore, many of them refrain from all [economic] activity. The result is that the total tax revenue goes down. … Attacks on people’s property remove the incentive to acquire and gain property. … It is the state that suffers from all these acts, inasmuch as civilization… is ruined when people have lost all incentive.”