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My friend David Dayen, who used to write with me at Calitics and now writes at FireDogLake, posits this argument - that Greece's problems are similar to California's, in that both have had artificially low levels of taxation in order to favor the wealthy, undermining the entire economy:

California Is Not Like Greece; Greece Is Like California | FDL News Desk

Greece simply does a poor job of revenue collection, and there are many reasons for this. One is that they have a large shadow economy, accounting for close to one-quarter of all economic activity. Second is that they have an unusually high number of tax evaders, and their collection programs haven't been able to crack down on them (unreported swimming pools are apparently a major problem). And third is their tax rates are simply too low to match their middle-of-the-road spending (at least for Europe).

Basically, this sounds like California in many respects, but not in the typical sense seen in newspapers and on talk radio. In fact, like California, Greece has a structural revenue problem. Both locations suffer from an underground economy, whether from immigration or deliberate tax evasion (which is why a path to citizenship would only boost the economy and reduce the deficit by bringing that underground economy out of the shadows). And both have tax cheats. But at the root, both Greece and California do not collect the revenue to finance the goods and services their populations demand. Nor are these demands out of line relative to those similarly situated - at this point, California spends less on K-12 education than any other state in the union; they are the only state without an emergency poison control center; they have the second-lowest amount of public employees per capita in the nation; and so on. This year they may end their welfare-to-work program. In both cases, the rich refuse to pay their fair share; in Greece, they basically shelter it, and in California, they are protected by legislative rules that allow a small majority to veto the budget and tax increases.

So yes, Greece and California are alike, but in exactly the opposite fashion that commentators typically opine. And so this drive to austerity misdiagnoses the real issue, whether in Sacramento or in Athens.

Is there any basis to this claim? If so, it would seem to be further evidence that the problem here isn't social democracy or a generous "welfare state" but instead tax giveaways to the wealthy.

And the world will live as one

by Montereyan (robert at calitics dot com) on Tue May 25th, 2010 at 06:04:08 PM EST
I read that and responded to him like so:

I think the overspending story is overhyped, but so is the tax evasion story. In order to look at Greece's 25% tax evasion as the problem, you need to put it in context. Greece is at 25%, the Eurozone is at 20%, the USA is at 17%, so even if Greece did better on collection, you can't assume it would go from 25% to 0% as so many have.

The vast majority of the money is lost due to political corruption. Greek tax revenue per capita is $12.7k in US dollars (108 billion euros in tax revs divided by less than 11 million people) which compares to $8.6k in the USA. Greek per capita GDP is also a lot less than in the USA. Conclusion: Greeks pay more taxes than Americans in REAL money though they earn less. Tax evasion is simply a measure of tax that SHOULD have been paid but wasn't, and when you take into account the many variables country to country (i.e. differential tax rates) it's impossible to compare rates of tax evasion. In some countries you can have a very low tax rate (for instance, 15% capital gains in the USA) that allow people to LEGALLY avoid taking a big tax hit. The important thing to really look at is per capita tax revenue, because that tells you about relative taxation, especially when you're comparing small countries like Greece that are loaded with mom-and-pop small businesses, countries that have a VAT tax that tends to drive taxes underground, against countries with huge multinational corporations.

It's too simplistic to look at Greek tax evasion (at 25%) and say, well, they are losing $30 billion a year in tax revenue.

There seems to be a professional class in Greece that ignores its responsibilities, but nonetheless, someone is paying tax revenues for them to reach $12.7k per capita. The biggest economic sector in Greece is shipping, and shipping profits are totally untaxed for obvious reasons (ships can register anywhere) though there is a tonnage tax. It could be that employees in the shipping companies receive non-salaried compensation that is then taxed at some other rate, and this would explain why there are so few declared high salaries in Greece. Otherwise, I'm at a loss to explain the tax revenue per capita rate unless it ALL falls on the middle class.

The Brookings Institution did a study that showed Greece would have a surplus were it not for corruption.

by Upstate NY on Tue May 25th, 2010 at 06:15:30 PM EST
[ Parent ]
A poor job of revenue collection IMHO is quite on the money, and as I mention above it is a systemic poor job of revenue collection.

In fact if the deficit was the problem, then it should be possible to eliminate it in a few years simply by capturing tax-evasion

A few days ago the associate finance minister revealed that taxes certified, yet owed to the Greek government are on the order of ~30 billion Euros, of which 20 billion Euros are owed by 8000 people (that's almost the size of the current deficit). He further claimed that total tax evasion is around 40% of GDP - that's around 95 billion Euros. In fact the National Bank of Greece has recently added up tax-evasion and black economy to around 50% of GDP [in Greek]. The deficit could be turned around, it seems if this was simply a technical issue, simply by a stricter tax evasion detection and tax inspection mechanism (some small parts of which, we see now hastily implemented) and serious reform in public spending allocation, especially in the disgustingly corrupt and inefficient public health system, where corruption and mismanagement easily cost 2% of GDP per year - never mind the enormous and piling hospital debts. (Or it would were not the Greek GDP collapsing, thus reducing real revenue, taxed or not). This, in fact was what the Governor of the Bank of Greece, Yiorgos Provopoulos was urging in April 2009, a year before the crisis exploded, in his annual address:

"[To blunt the effects of the crisis, we need..] A fast and deep correction of the fiscal debt so that it disappears by 2012 [at the time the officially projected deficit was 6% of GDP, but Provopoulos must have had seen by that time evidence that it would reach at least 9%]. This is feasible, if part of the enormous tax-evasion is captured and, especially, if waste is cut substantially and public expenditure becomes more productive...
... We need significant primary surpluses (of the order of 4,5-5% of GDP) if we are to  reign in the public debt in order to diminish the ratio of debt to GDP to the reference level of the Maastricht treaty (60%), within a reasonable time-frame of, say, 10 years... Establishing numerical limits for expenditure, reinforcing the transparency and quality of fiscal statistics, limiting tax andsocial security contribution-evasion can play a role in deleting the deficit"

At the time, Provopoulos might not have realised that we were dealing with a 13 percent deficit, by it seems quite probable that he knew it was close to 9%.


The road of excess leads to the palace of wisdom - William Blake

by talos (mihalis at gmail dot com) on Tue May 25th, 2010 at 06:51:49 PM EST
[ Parent ]
95 billion plus 108 billion in tax revenues collected would equal 203 billion.

That's about 19k euros per capita.

Something is wrong in those tax evasion projections. Greece would be collecting as much as 3x more per capita in REAL currency than is collected per capita in the USA.

It's a high amount, and it would be equivalent to the highest amount in Europe, Sweden, in real terms, but it would also mean the absolute highest amount in Europe in terms of per capita GDP.

On another topic, I found this chart as I was looking up stats on Sweden:

http://www2.parl.gc.ca/content/LOP/ResearchPublications/images/prb05107_1-e.jpg

It shows that the country with the highest government expenditures happened to have the lowest debt to GDP (Sweden) while the country with the lowest amount of government expenditure (Japan) had the highest amount of debt to GDP.

by Upstate NY on Wed May 26th, 2010 at 12:28:43 AM EST
[ Parent ]
No, the 95 billion obviously includes taxes due from previous years. It almost certainly includes the 30 billion in unpaid taxes I mentioned (that's over the previous decade) and possibly a serious amount of VAT owed but never collected over the whole period.

The road of excess leads to the palace of wisdom - William Blake
by talos (mihalis at gmail dot com) on Wed May 26th, 2010 at 03:59:57 AM EST
[ Parent ]
I see, my mistake.

50% tax evasion is still a huge estimate.

by Upstate NY on Wed May 26th, 2010 at 07:25:48 AM EST
[ Parent ]

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