A tax burden which Greeks must bear

Greece may covet Ire­land’s growth lev­els and low tax­a­tion but repli­cat­ing them is not an op­tion for now

Kathimerini English - - Front Page - BY NICK MALKOUTZIS

ANAL­Y­SIS When you put two re­cent news items – the sharp rise in Greece’s new un­paid taxes in May and the stag­ger­ing 26 per­cent growth rate Ire­land is sup­posed to have posted in 2015 – side by side it is easy to come to the con­clu­sion that the Ir­ish sys­tem of low tax­a­tion is the only way for­ward. It is a lit­tle more com­pli­cated than that, though.

Clearly, the lat­est tax in­creases adopted by the govern­ment will be dam­ag­ing for Greece’s econ­omy, likely act­ing as a brake on the slow-turn­ing wheels of re­cov­ery. Roughly 1.9 mil­lion of Greece’s 6 mil­lion to­tal tax­pay­ers are fac­ing an in­come tax bill this year that will be some 1,300 eu­ros higher on av­er­age; the top rate of value-added tax has been in­creased from 23 to 24 per­cent and the cor­po­rate tax rate was raised by 3 per­cent­age points to 29 per­cent.

There is con­cern that these mea­sures will back­fire by en­cour­ag­ing tax eva­sion or driv­ing firms out of busi­ness or abroad, where tax con­di­tions are more fa­vor­able. Greece’s cor­po­rate tax rate, for in­stance, is well above the Euro­pean Union av­er­age of 20.5 per­cent, ac­cord­ing to ac­count­ing firm KPMG.

There are al­ready in­di­ca­tions that the govern­ment’s hopes of bring­ing in more rev­enues via tax rises so it can meet the fis­cal tar­gets agreed with Greece’s lenders might not be ful­filled. Re­ports sug­gest that VAT rev­enues from tourist re­sorts are lower than ex­pected – likely due to some busi­ness own­ers fail­ing to is­sue re­ceipts – while the amount of new tax ar­rears cre­ated in May jumped to 1.25 bil­lion eu­ros from less than 700 mil­lion a month ear­lier. The to­tal of new un­paid taxes for the first five months of 2016 stands at just un­der 6 bil­lion eu­ros, which is 6.7 per­cent up on the same pe­riod last year.

It is clear that high taxes in a strug­gling econ­omy, with a state whose col­lec­tion ca­pa­bil­i­ties are lim­ited, do not make for a suc­cess­ful recipe. Can Ire­land, and its ap­par­ently pul­sat­ing econ­omy, pro­vide an al­ter­na­tive model, an ex­am­ple to fol­low? Greek lead­ers cov­eted the de­vel­op­ment achieved by the “Celtic Tiger” in pre­vi­ous decades and its cur­rent cor­po­rate tax rate of 12.5 per­cent cer­tainly seems an ap­peal­ing an­ti­dote to the re­peated tax hikes in Greece. And, as if any more proof were needed, the Ir­ish econ­omy grew by 26 per­cent last year (re­vised up this week from the 7.8 per­cent first es­ti­mated) to un­der­line that the coun­try is fol­low­ing a suc­cess­ful strat­egy.

This, though, is where a word of cau­tion is needed. When you delve deeper than the head­line fig­ure for Ire­land’s growth rate, it’s clear that the bal­ance be­tween be­ing a tax haven and a coun­try whose real econ­omy ben­e­fits from at­tract­ing busi­ness via low tax rates is a fine one. Econ­o­mists and an­a­lysts have pointed out that the dra­matic jump in Ire­land’s growth fig­ures was partly driven by com­pa­nies trans­fer­ring their pro­duc­tive as­sets to the coun­try. There have also been bal­ance sheet re­clas­si­fi­ca­tions through cor­po­rate in­ver­sions, which in­volved smaller Ire­land-based com­pa­nies buy­ing big­ger, mostly Amer­i­can, firms and head­quar­ter­ing the re­sult­ing en­tity in Ire­land. While such ac­tions have a con­sid­er­able im­pact on eco­nomic data, their ef­fect on the econ­omy it­self is lim­ited.

Stephen Kin­sella, a se­nior lec­turer in eco­nom­ics at the Univer­sity of Lim­er­ick, told Kathimerini English Edi­tion that the draw­backs of Ire­land’s low tax­a­tion and its open econ­omy are that it cre­ates “huge volatil­ity” in tax rev­enues and leaves the coun­try “sus­cep­ti­ble to be­ing gamed by multi­na­tional com­pa­nies.”

“The real les­son Ire­land teaches is that open­ness has pos­i­tives and neg­a­tives,” he said. “When glob­al­iza­tion is flour­ish­ing, and the fi­nan­cial as­pects of glob­al­iza­tion are flour­ish­ing, then small open economies are go­ing to boom be­cause of in­flows of for­eign cap­i­tal. When those flows stop, then coun­tries like Ire­land and Ice­land are in big trou­ble.”

Be­yond this warn­ing, Kin­sella also points out that Ire­land’s eco­nomic up­surge in pre­vi­ous decades de­rives from a num­ber of fac­tors that have been in play over a long pe­riod of time. In other words, it is not a model that can be trans­posed sim­ply, nor can im­ple­ment­ing one el­e­ment (the low cor­po­rate tax rate, for in­stance) guar­an­tee suc­cess.

“Ire­land be­gan open­ing its econ­omy up in the 1950s and cut­ting cor­po­rate taxes was a part of that move,” he said. “Per­haps more im­por­tantly was the cre­ation of agen­cies whose only job was im­port­ing for­eign cap­i­tal, cre­at­ing a busi­ness-friendly cli­mate and push­ing in­dige­nous sec­tors to ex­port more. Ire­land also has ge­og­ra­phy and lan­guage on its side.”

The other fac­tor that means Greece and Ire­land are worlds apart in terms of align­ing their tax regimes is that Athens still has to carry out a sig­nif­i­cant fis­cal ad­just­ment. Given that public sec­tor wages and pen­sions, which have been cut sub­stan­tially since 2010, ac­count for more than 80 per­cent of public spend­ing, the eas­ier po­lit­i­cal choice is to al­low the rev­enue side to pick up as much of the slack of pos­si­ble. As long as Greece is chas­ing this tar­gets and the econ­omy is not show­ing sig­nif­i­cant enough lev­els of growth to boost rev­enues, then tax­a­tion will re­main high.

“Within the con­fines of the euro, the ad­just­ment process Greece is un­der­go­ing through the wage chan­nel is un­stop­pable, un­less those in power in Brus­sels re­lax the fis­cal tar­gets,” said Kin­sella. “One of the rea­sons Ire­land was able to grow its way out of aus­ter­ity was the very dis­con­nec­tion be­tween the do­mes­tic and multi­na­tional/ex­port-fac­ing parts of the econ­omy.”

It is clear that any sug­ges­tion there may be a quick fix out there for Greece’s eco­nomic tra­vails through a sys­tem of lower taxes will have to be set aside for the time be­ing.

The flip­side to Ire­land’s low tax­a­tion and its open econ­omy are it cre­ates ‘huge volatil­ity’ in tax rev­enues and leaves the coun­try ‘sus­cep­ti­ble to be­ing gamed by multi­na­tion­als,’ says Univer­sity of Lim­er­ick lec­turer Stephen Kin­sella.

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