Dodging taxes or dodging the issue?

You know it’s August when journalists work themselves into a lather over a tax-dodging astrologist, as they did earlier this month. Granted, this particular Greek stargazer had allegedly hoarded some 4 million euros away from the prying eyes of tax inspectors. But the real news was that he managed to earn so much offering such a bad service. After all, if he were any good at predicting the future, he would have seen the taxman coming.

The snaring of an astrologer is usually about as titillating as tax-related matters can get, but it’s been an action-packed few weeks for members of the financial crimes squad (SDOE) and the newly formed Financial Police. They nabbed academics at the University of Ioannina who allegedly denied state coffers 700,000 euros, they caught 31 tourism-related businesses hiding their profits and the new hotline for citizens to register suspicions of tax evasion has reportedly been doing roaring business.

This surprising efficiency has put to shame employees at tax offices, where inspectors appear to have been busy doing nothing. The Finance Ministry revealed this week that in June, out of the country’s 34 major tax offices, 12 had not performed a single audit on taxpayers, while 31 clocked an average of less than one check per employee.

The figures are sickening. If anything good is going to come of Greece’s economic crisis, it’s imperative that everyone must pay their share. Apart from adding to public revenues, an efficient tax collection system would provide the basis for a fair, progressive society.

However, there has been a tendency by some foreign observers to portray the country’s economic ills as simply the product of tax dodging. In a recent piece in The Sunday Telegraph titled “Greece: It’s the corruption, stupid!” British journalist Jeff Randall dedicated much of his article to tax evasion, even though he admits: “Tax dodging is merely one strand of aberrance that is woven into the fabric of contemporary Greece.”

The constant focus on tax evasion and various forms of corruption ultimately leads to an over-simplified interpretation of Greece’s economic problems.

It is easy, for instance, to dismiss tax evasion as being endemic in Greece. Yet, recent Finance Ministry’s figures indicate that the vast majority of unpaid taxes can be traced to a relatively small group of people and companies. Last month, the ministry said that some 900,000 people owe 41.1 billion euros but that 85 percent of this is owed by just 5 percent of the alleged cheats. In other words, just 14,700 individuals, companies or organizations owe 37 billion euros.

Despite this glaring evidence, it remains convenient for some journalists to rely on anecdotes and hearsay, especially when they are egged on by business leaders and politicians in Greece, who have found that this is a convenient method of covering the tracks of their own corruption and timidity.

Also, the view on Greek tax evasion sometimes promulgated by the international, and even local, media tends to reek of prejudice. If a plumber in Greece fails to issue a receipt, it is deemed tax evasion and the kind of irresponsible behavior that has undermined the country. But, if a British, German or American businessman employs a bookkeeper to take advantage of every available tax loophole, it is deemed creative accounting and evidence of a healthy entrepreneurial spirit.

Let’s not forget, for example, the revelation a few months ago that Barclays Bank only paid 113 million pounds in taxes in the UK in 2009, a year when it racked up 11.6 billion pounds of profits. Also, the UK signed last week an agreement with Switzerland to tax British deposits that will reportedly raise billions for public coffers. Greece is in the process of finalizing an identical deal with the Swiss.

In economic terms, tax evasion is a spanner in the works. During the past decade, the Greek government’s revenues as a percentage of gross domestic product (GDP) have averaged at just under 40 percent of GDP, lagging about 5 percent below the European Union average. The cumulative effect of this gap in revenues had been damaging but we should not overlook the fact that revenues for three other members of the eurozone — Spain, Ireland and Cyprus — also averaged at below 40 percent during the same period. It’s a further reminder that Greece’s problems do not stem from tax evasion, or sagging revenues, alone.

In fact, the greatest problems emanate from much deeper failures at national, European and international levels. In Greece, the most devastating legacy of this generation is not anemic tax revenues but a wheezing economy unable to keep up with the pace demanded by the 21st Century. The country’s decision-makers, be they politicians, business leaders, media barons or unionists have bestowed upon Greece the lead weights of an inefficient public sector and an unimaginative private sector.

The cumulative effect of this selfishness has been far worse than tax evasion, although it does not excuse the latter. It is interesting that now Italy has run into economic problems, reports about tax dodging across the Adriatic Sea have started appearing in the international media. Yet, if you read what the experts say, it is clear that like in Greece, Italy’s problems run much deeper and that responsibility for them ultimately rests with those who hold power.

“It is clear at this stage that the problem of Italy is not only one of policies,” wrote Tito Boeri, a professor of economics at Bocconi University in Milan earlier this month. “The credibility problem includes those who should carry out economic policies. It is a problem of bad politicians over and above a problem of bad policies.”

Beyond the national level, the eurozone must accept that it has created a structure not sturdy or nuanced enough to support the single currency. Greece’s debt, for which tax evasion was only partly responsible, was run up in full view of the eurozone’s institutions and the markets. This exposed serious systemic failings, as Berkeley economics Professor Barry Eichengreen highlighted in an article in The National Interest journal this week.

“The simple fact that Greece no longer possessed an independent central bank with full freedom to finance the government’s budget deficits was not enough to concentrate the minds of shortsighted politicians,” says Eichengreen. “The bond market vigilantes supposedly responsible for disciplining those politicians remained complacent for an extended period before awaking with a start, at which point all hell broke loose.”

The systemic failures are not limited to the eurozone. The volatility on global financial markets in recent weeks and the looming double-dip recessions for many of the world’s advanced economies is evidence that the problem is not just national or European; it’s international. Parts of the world, driven by questionable motives and indulged by lax oversight, racked up private sector debt and then turned to the public sector to provide a solution. Now, many countries are trying to pull back on the reins but their austerity programs are sending economies into a death spiral.

Economist Nouriel Roubini argues that we have reached the moment we have to accept that our economic systems have passed their sell-by date. “To enable market-oriented economies to operate as they should and can, we need to return to the right balance between markets and provision of public goods,” he wrote earlier this month. “That means moving away from both the Anglo-Saxon model of laissez-faire and voodoo economics and the continental European model of deficit-driven welfare states. Both are broken.”

Roubini’s response to the crisis reads like a distillation of all the things that Greece and others have failed to do over the last few decades: job creation through fiscal stimulus, progressive taxation, long-term fiscal discipline and stricter regulation of the financial system.

“The alternative is — like in the 1930s — unending stagnation, depression, currency and trade wars, capital controls, financial crisis, sovereign insolvencies and massive social political instability,” writes Roubini.

Some people will choose to continue to see Greece’s economic woes simply as a by-product of local foibles and failures. They have played their part but the country’s problems must now be placed in a wider context. Those who persist with the narrow view risk missing the looming danger, just like the cheating astrologist.

Nick Malkoutzis

4 responses to “Dodging taxes or dodging the issue?

  1. For me there is a clear distinction between a plumber who is not giving out a receipt with the clear intention not to declare his income to the state and someone who uses every legal possibility that the tax laws are profiding (yes they are called loopholes) to minimize the taxation he will receive after he declares his income.

    The first one is cheating and breaking the law. The second one is using his rights within the law.

    The sad fact is though, that in Greece, the lawbreaker will never get his punnishment. And the person who declares his income will. That fact is the root cause of all our problems.

    • Anton, while the comment you make is perfectly accurate, I would argue that morally they should both feel guilty. Also, the end-result is the same: the state is deprived of revenues it could use to spend on a variety of things.
      A study by a Washington think-tank published earlier this month suggested that 25 of the 100 highest paid U.S. CEOs earned more last year than their companies paid in federal income tax. I find this wrong, regardless of whether it is withing the law.
      Do you remember the former minister Giorgos Voulgarakis who destroyed his political career after saying “Whatever is legal is also moral” after he was found to be doing real estate deals while in office? I would argue that in the case of taxes, what is legal is not necessarily moral.

  2. This author appears to be a disciple of Roubini, the great advisor to our current resident of the WH. How’s that working for you, Obama?

    • Robert, I don’t see how referring to something that Roubini said makes me a disciple of his. Also, Obama’s economic policy is far from a carbon copy of what Roubini has recommended. I think the problems in the US go far deeper than that.

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