Posts Tagged ‘taxation’

the case for transparent taxation

December 19, 2009

Imagine a corporation that is not required to share financial information with its own shareholders. Imagine that there is no independent external auditing in place to verify the claims of employees, ensure good financial governance and protect shareholder value. Such an organisation will be soon plagued with problems: even if the CEO has the best intentions, without external scrutiny, pockets of corruption will soon form and grow. At some points these pockets will cross and a network will be formed, indicating the point of no-return: each corrupt cell will cooperate with other corrupt cells, offering support and protection. Changing the CEO is now irrelevant; the shareholders must take their role as owners, step in and clean up the mess.

Such an organisation exists, and it is called the Hellenic Republic: the financial information concerns tax receipts, and the shareholders are the citizens, the ones who own the country and are the beneficiaries of this tax. At the moment, rampant tax evasion means that large amounts never find their way to the government coffers where they belong, while widespread corruption inflates expenses and directs assets into the hands of the few that have ‘a special relationship’ with the system.

A casual investigation of Greek internet posts, discussions and blogs reveals strong feelings and confusion: Civil servants blame the self employed enterpreneuers for not declaring their full income, paying little tax and drawing benefits; the self employed claim in return that civil servants are corrupt, produce next to nothing, and provide no tangible return for their tax-funded salaries; while White collar workers blame both, as they are forced to work long hours in the private sector for a fully taxed salary. Everyone blames the politicians for indecision or for dipping their hands in the honey pot too, but no one offers hard data or evidence, largely because such evidence is not accessible. Everything is based on conjectures and rumors, but still fuels resentment, finger pointing and anger. It is not a healthy state of affairs, creating frictions between different strata of the social fabric.

The newly elected government seems to be willing to use new technologies to remove some of the archaic layers of opaqueness, having promised to publish online key committee minutes, hiring decisions and some payroll data for senior civil servants. This is certainly a step in the right direction, but it is not going far enough. It adressess to some extent the mismanagement of cash outflows, but does not touch the bigger problem of tax inflows. The new measures just implement something that is common state practice in other Western Countries for years, nothing radical or impressive. Coupled with a barrage of new taxes, it has left the holders of Greek debt unconvinced that these measures are sufficient to halt the downward spiral of the economy. Anyway, what is the added value of imposing new taxes in a country that cannot collect the taxes already due?

And the Greek government needs a radical, decisive, headline-grabbing initiative to convince. They must attack the tax evasion problem head on, by publishing online all income tax statements and receipts every year, starting from 2010. Every citizen will be able to go online and check the declared income and contribution of any tax payer. There are compelling reasons for doing that:

1. It is feasible, cheap and easy to implement. The relevant government departments already have this information in digital form. All needed is a front end that can be set up in a matter of days with minimal cost. A lot more cost-effective than the alternatives.

2. It has been tested elsewhere. Nordic countries have implemented similar methods successfully for years, and they should know: they have some of the highest tax rates in the world, and manage to collect them efficiently. There you can access this information digitally or even by sending an SMS. If they solved the problems associated with the privacy of financial data, why can’t the Greeks? The new government certainly has a very comfortable majority to pass any law required to achive that.

3. It is fair and transparent. Tax contributions belong to everyone, and everyone has the right to know what their fellow citizens contribute (or not contribute). By publishing everyone’s receipts, no one is pointed at, treated unfairly or victimised. And the government shows that they are serious when it comes to transparency and equity, treating all citizens equally and without discrimination.

4. It puts the problem into perspective. Now everyone has data to construct arguments and back up theories; no one can falsely blame dentists, doctors, lawers or plumbers for undercontributing. The true magnitude of the issue becomes real to everyone, when her own contribution is compared to the ones made by her peers. It brings home the notion that tax evasion is theft from schools, hospitals and the classes that need support.

5. It allows everyone to spot the discrepancies between declared and apparent wealth. At the moment the scale of tax evasion for certain classes is the stuff of rumors, and there are doubts on the contributions of individuals that have a lavish lifestyle with villas, yachts and frequent appearences in magazines. But nobody knows for sure what the real situation is.

6. Fear and shame are strong deterrants. Fear, because when everything is in the open it is easy to report obvious cases. Shame, because no one will want to be the odd one out that sticks below the bottom: it will be bad for business if you are known as the dentist that declares substantially less than his peers in town. Not before long, websites will be offering aggregated information, and I am sure that many Greeks would prefer to hire a plumber with an decent looking tax record. Such an initiative can create a race to the top, increasing dramatically the tax receipts.

The Greek government must make decisions that enhance transparency in the ways the country is run. There is an opportunity to take back the initiative, and show financial markets that the Greeks mean business. They can also illustrate that they are not afraid of bold statements or using novel ways to tackle age long problems.

will higher tax rates bring more money?

December 16, 2009

This week the Greek prime minister produced an array of measures to cut the deficit over the next year or so. Most of them amount to either direct tax increases (a progressive tax rate with a maximum up to 50%, a tax or millage levy on large properties, the re-introduction of inheritance tax, 90% tax on bank bonuses) or indirect taxation (freeze of civil servant salaries beyond a EUR2,000 threshold, no bonuses in government run organisations). The question is of course whether or not these measures will bring more money in the depleted state coffers.

What is the evidence? Kurt Hauser in 1993 observed that “no matter what the tax rate has been, the post-war tax revenues in America have been stable and around 19.5%”. This observation became known as “Hauser’s law”. Taxation is not ‘static’, as economic agents will have an increasing incentive to use accounting techniques to shift or hide their tax exposure. In addition, increasing tax rates will have an adverse impact on the GDP and thus increasing taxes will reduce the actual Euro amount that comes in the government coffers.

This article in the WSJ revived Hauser’s law in 2008, and the 15 years of new data also confirm its validity.

Tax receipts and rate

Greek tax receipts (blue) and the tax rate (red). Dotted line for projected values. Source: Eurostat

But what is the evidence for Greece? Unfortunately the statistical data are scarce and not overly reliable, but I managed to dig some information from the EuroStat website from 1995 onwards. The effective tax rate for a family of two full-time working individuals with two children has risen from 18% in 1995 to about 24% in 2000, 25% in 2004 and 27% today. On the other hand the tax receipts as a percentage of GDP have remained without a clear trend at about… errrr 20%.

For that allow me to be sceptical on the effectiveness of these measures.

PS: The data I managed to dig are as follows (P denotes a projection, otherwise known as a wish :–) (a) tax rate 96-08: 17.9, 18.2, 18.5, 17.8, 23.9, 23.7, 24.6, 23.2, 25.5, 26.1, 27.8, 27.6, 27.2; (b) tax receipts 95-04 projected to 07: 19.0, 19.1, 20.0, 21.6, 22.6, 23.5, 22.1, 21.7, 20.0, 19.8, P20.3, P20.3, P20.3