“Lower tax rates to in­crease rev­enues”

Financial Mirror (Cyprus) - - FRONT PAGE -

An­dreas Theo­phanous, a vo­cal economist who very of­ten chal­lenges the es­tab­lish­ment, is call­ing for an im­me­di­ate re­duc­tion in taxes in or­der to get the econ­omy up and run­ning again. “The most im­por­tant way to im­prove the in­di­ca­tors of pri­vate and pub­lic debt is to in­crease our GDP once again. And the only way to do that is by re­form­ing the tax­a­tion sys­tem. Taxes must come down across the board,” said Pro­fes­sor Theo­phanous, head of the Cen­tre of Euro­pean In­ter­na­tional Stud­ies at the Univer­sity of Nicosia.

Pre­sent­ing a re­view on the “Ef­fec­tive way to re­solve non-per­form­ing loans” co-au­thored by Christophoros Christophorou and Kyr­i­akos Ge­or­giou, Theo­phanous said that loan hold­ers can­not or are not will­ing to cover their loan pay­ments.

“What hap­pened in March 2013 was a tragic de­vel­op­ment of our greed of years past and the re­ces­sion will stay with us in the years to come.”

An out­spo­ken op­po­nent of the eco­nomic adjustment pro­gramme im­posed by the in­ter­na­tional lenders, Theo­phanous said, “I don’t be­lieve in the Troika. I only be­lieve in God.”

He said that even at the eleventh hour, it is pos­si­ble to re­vise many of the con­di­tions of the bailout plan and listed 20 ways to im­prove rev­enue earn­ing and aban­don the Troika pro­gramme, “that has cre­ated more prob­lems than solv­ing them.”

Un­for­tu­nately, he said, this and many other pro­pos­als by the Cen­tre or any other think tank keep on fall­ing on deaf ears. Asked by the Fi­nan­cial Mir­ror if his sug­ges­tions had been re­viewed by the Na­tional Coun­cil for the Econ­omy, Theo­phanous laughed.

Ad­mit­ting that the gov­ern­ment’s pro­posed bills on fore­clo­sures is nec­es­sary, he said that “this alone will not save the sit­u­a­tion.”

“It is im­pos­si­ble to re­pay any pri­vate or pub­lic debt un­der con­di­tions of con­tin­ued and deep re­ces­sion. What we need is for the gov­ern­ment, the politi­cians and so­ci­ety to work to­wards a com­pre­hen­sive holis­tic ap­proach for the econ­omy. We need a new so­cial con­tract.

“While our study is fo­cused on NPLs, that ac­count for 50% of all loans, it is vi­tal that there be ef­fec­tive mea­sures for the real econ­omy.

At this rate, even with a down re­vi­sion of the GDP (by the Euro­pean Com­mis­sion and the statis­tics ser­vice), our debt man­age­ment is still not vi­able,” Theo­phanous said.

Kyr­i­akos Ge­or­giou said that Cyprus has al­ready re­paid 9 to 13 bln to in­ter­na­tional lenders, while re­ceiv­ing only 5.9 bln from the 10 bln euro bailout plan.

“I don’t know how much of the re­main­der 4 bln euros we will need, but the ad­min­is­tra­tion does not seem to be too wor­ried to cover its im­me­di­ate needs as it seems con­fi­dent of its cur­rent rev­enue earn­ing plans.

“We are not that con­fi­dent,” Ge­or­giou said, adding that the cur­rent tax regime en­cour­ages tax eva­sion, not rev­enue col­lec­tion.

The study sug­gests that Cyprus, at its present state, can seek a mul­ti­fac­eted support pro­gramme, sim­i­lar to the Mar­shall Plan, and re­lax­ation of the mem­o­ran­dum of agree­ment con­tracted with the Troika.

Theo­phanous said that there should be ef­forts to rene­go­ti­ate the Emer­gency Liq­uid­ity As­sis­tance (ELA) af­forded to Laiki and sub­se­quently bur­dened on to Bank of Cyprus, as well as a com­pre­hen­sive plan to man­age the NPLs and the in­tro­duc­tion of bank­ing arbitration.

Liq­uid­ity must re­turn to the mar­ket and gen­er­ous in­cen­tives to help re­duce loans re­pay­ments, he said, adding that banks could also ar­gue for a lower liq­uid­ity ra­tio, as this will come out of the stress tests, ex­pected at the end of this week.

One source of fresh rev­enue is for­eign di­rect in­vest­ments, with spe­cific in­cen­tives pro­vided to po­ten­tial in­vestors, in­clud­ing tax breaks to CEOs and fi­nan­cial ad­vi­sors, while a red car­pet ser­vice is manda­tory to deal with labour and mi­gra­tion is­sues.

How­ever, Theo­phanous also ad­mit­ted that the “one stop shop” de­clared by present and past ad­min­is­tra­tions has never ma­te­ri­alised.

Tourism, and re­viv­ing Cyprus as an ed­u­ca­tion and med­i­cal cen­tre must be en­cour­aged to bring in fresh funds, he said.

“I am con­fi­dent that tax re­form will lead to pos­i­tive earn­ings, but also clamp down on tax eva­sion,” Theo­phanous said, ex­plain­ing that the study’s pro­pos­als in­clude low­er­ing the higher in­come tax bracket from 35% to 30%, VAT from 19 to 15% and the re­duced VAT from 9 to 7%, cor­po­ra­tion tax from 12.5 to 10% and tax on in­ter­est from de­posits from 30% to 9.5%.

“Who in his right mind would de­posit money if the in­ter­est is go­ing to be taxed? That is why we need to re­vive trust in the bank­ing sys­tem and en­cour­age de­posits once again.”

Theo­phanous added that con­tri­bu­tions to the So­cial In­surance Fund could also be re­duced from 7.8% to the pre­vi­ous 6.8% and a re­duc­tion of prop­erty tax to zero for real es­tate worth up to 150,000 euros, a 50 euro tax for prop­er­ties worth 150,000 to 200,000 and a grad­ual rate for prop­er­ties above that, rang­ing from 0.0005% to 0.0125%.

How­ever, Theo­phanous con­cluded that while wages must be kept at present lev­els and not to re­duce the pub­lic sec­tor salaries any fur­ther in or­der to main­tain a level of pur­chas­ing power, the civil ser­vice work­force must be re­duced, while economies of scale achieved by the merg­ing of pub­lic ser­vice.

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