Over taxation at the heart of Greece’s non-recovery economy

The question mark that Michael Mitsopoulos and I put in the title of our book Greece. From Exit to Recovery? back in 2014 still seems to be, unfortunately timely. According to the latest data from the Greek Statistical Authorities, the country’s GDP grew 0.5 percent quarter on quarter (QOQ) and 0.8 percent year over year (YOY) during the second financial quarter this year, compared to 0.5 percent QOQ and 0.4 percent YOY in first quarter. The main factor behind the “positive” reading was public consumption expenditures and exports, which grew by 6.5 percent QOQ and 9.5 percent YOY. In contrast, imports grew far slower by 3.1 percent in the second quarter, reflecting an almost stagnating domestic demand (food retail down 0.4 percent). Even worse are the numbers regarding gross fix capital formation, -25.6 percent QOQ and -17.1 percent YOY. 

The completion of the second review last June will release 1.6 billion euros for the clearance of state arrears, a fact that will surely accelerate GDP to reach possibly the 1.5 percent growth forecast for 2017. Again, this is only after the release of bailout money pouring exclusively to help the domestic private sector that adds to GDP. It is like helicopter money, and one can easily understand that without this extra financial help the economy would surely be completely flat for a third consecutive year. Another important point is that GDP data shows how important a public expenditure oriented recovery is to the populist government, dominated by “dirigisme” politics. Numbers are telling the truth.

The four bailout institutions (European Commission, European Stability Mechanism, European Central Bank, and the International Monetary Fund) are insisting that structural reforms will help boost the GDP—a necessity if debt is to become sustainable for the foreseeable future and the economy is to avoid a fourth bailout program after the prospective completion of the third one in August 2018.

Certainly, Greece’s economy needs a strong recovery, but even optimist forecasts are rather mediocre compared to what the economy needs in terms of GDP growth.

In 2014, M. Mitsopoulos and I wrote an article entitled Greece. Tax anything that moves!,” emphasizing, at the time, the negative role of over taxation regarding GDP recovery. Today, instead of having a friendlier environment for the productive sector of the economy, since January 1 there has been an absurd race to over tax—yes, even more—which is depicted in the following Figures 1 and 2.

Figure 1: Taxes for each 100-euro profit since January 1, 2017 for VAT 24 percent for profit over 40.000

Income Coefficient % Taxes in Euro % Taxes/Income
VAT 100.00 24.00 19.35 19.35
Social Security 80.65 26.95 21.73 21.73
Income tax 58.91 45.00 26.51 26.51
Solidarity tax 80.65 7.50 6.05 7.50
Sum of taxes 73.65 73.65
In advance tax 26.51 100 26.51 26.51
Sum incl. in advance tax 100.16 100.2

Figure 2: Taxes for each 100-euro profit since January 1, 2017 for VAT 24 percent for profit, companies

Income Coefficient % Taxes in Euro % Taxes/Income
VAT 100.00 24.00 19.35 19.35
Social Security 80.65 26,95 21.73 21.73
Income tax 58.91 29,00 17,08 17.08
Solidarity tax 0.00 0.00 0.00 0.00
Sum of taxes 58.17 58.17
In advance tax 17.08 100.00 17.08 17.08
Sum incl. in advance tax 75.26 75.3

Needless to say, for both individuals and companies, there is not any incentive to invest or start up a business or even maintain an existing one. Under this very unfavorable tax environment, one can easily explain both the fall of gross capital formation as well as why it is so doubtful if any structural reforms can really help the economy to a strong recovery.

German Chancellor Angela Merkel backs the idea of a European Monetary Fund, signaling a willingness to deepen Eurozone integration, adding that this could allow for better coordination of fiscal policies. Even more important is that French President Emmanuel Macron, who visits Athens this Thursday, wants to harmonize tax systems among Eurozone countries including a transparent, common tax base.  All European citizens should applaud these statements, but even more the Greeks, whose willingness to produce is hampered by an absurd government’s tax and social security policy that destroys a much needed recovery. In this context, it’s inexplicable that creditors approve or even tolerate this policy. In any case, it’s never too late. Just read the tables!