Friday, 20 May 2011

Greek Taxation Mess

The current situation that Greece finds itself in is really unfortunate and I’m afraid that there are no easy ways out of it. Some people think that battering tax-evasion will help. I have my doubts whether something like this is feasible in such a short time interval.

IF something like this is going on in Greece for such long time it will definitely not go away in 1-2 years. For it to go away people’s perceptions and values have to be altered and this, usually, is not a short-term process.

But in the middle of all this economic and social upheaval there is a chance for the Greek taxation edifice to be reformed (or to become completely degraded). 

The receipts collection measure combined with tax-reduction incentives was a positive one. I’ve repeatedly made a point about trying to be fair and in my eyes this was a step in the right direction.

Given the Greek GDP per capita level (let’s forget for the moment how we got there), the total tax revenues from taxes on individuals are low, when compared with our OECD peers. But maybe the not so normal/straightforward way that we got there is reflected on that as well…

source: OECD

I personally think that making the Greek taxation and tax-collection system more effective is a major requirement if we want any growth and development that our country achieves in the future (distant or not) to be on solid foundations.

For once, it increases the cash flow generated by the state and with it, its ability to pay wages and service debt is increased. It increases the state’s capacity to provide social services of higher overall quality. Of course increasing one’s capacity doesn’t ensure that this will happen, but the capacity to do so is there.

In the scatter plot above, the black dot is Greece. These are panel data for all the OECD countries.

The chart clarifies that given Greece’s GDP per capita level, tax revenues from taxes on individuals are low when compared to other similar (GDP-wise) OECD countries. Maybe this is an indicator that gives us a further idea of where Greek GDP should be (roughly) given the effectiveness and overall quality of public administration. Well, such indirect indicators can be quite revealing…

But this is not something confined in the direct taxes universe, the same more or less goes for indirect taxes as well. In an older post I have discussed certain aspects of the difficulty to collect VAT in Greece due to Greece-specific micro-factors.

source: OECD Economic Surveys Mexico, May 2011

The VAT Revenue ratio is the ratio of actual VAT revenues divided by what VAT revenues would be if the VAT rate was applied to total consumption expenditure (this indicator and the data are taken by the OECD Economic Surveys Mexico, May 2011 publication). It is supposed to reflect the VAT collection effectiveness. Of course it’s a pretty crude indicator since in many countries for different goods and services, VAT rates are not uniform (Greece is such an example). Nonetheless, it gives us a whiff of the taxation mechanism’s effectiveness. Moreover the year chosen, 2005, is perfect since it captures the western world in a state of calm where there is no recessionary effect to tilt revenues downwards nor was there an oil prices rally to tilt tax revenues for oil producing countries upwards.

On that count too Greece is a laggard. Is that really a surprise? Certainly not to me.

Another factor that has to be taken care of if we want to stand a chance to attract some FDI inflows eventually and after the dust of the Greek sovereign situation is settled (we are probably talking several years down the road here) is to simplify our overly complex tax system. 

source: World Bank

According to an a World Bank survey (charted in the graph above), the process of preparing and paying taxes in Greece takes about 224 hours on 2010, while it took 264 hours on 2005. The same figure for Ireland stand at about 1/3 of Greece’s reading. Surprisingly Germany’s reading is not that different from Greece’s. I don’t think that this survey captures the true extent of the distortions present in the Greek public administration grid.

Last but not least, the taxation legislation has to become more stable and not to be altered every year. This fact distorts many aspects of corporate planning and is just another disadvantage that Greece has to overcome.

This is the right time and a good chance to make the Greek public sector more functional and efficient, but such a process, like all changes make some people lose certain privileges and perks. These groups will apply pressure for things to remain the same, in the end it’s a question of who’s more determined. I surely hope that Greece will sail round this reef…

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