EconoMatters, Global HotSpots

Now, Let’s Get To Work, Mr. Tsipras!

It is high time to combat tax evasion for real, Mr. Tsipras!

Credit: Per Bengtsson - Shutterstock.com

Takeaways


  • Tsipras will have to take on tax evasion in the most aggressive manner imaginable.
  • The existence of a large informal sector is always the sign of a dysfunctional formal economy.
  • People in the informal sector do not get social benefits and cannot borrow at reasonable rates.
  • An immediate revenue-raising step is to crack down on tax evasion by the country’s plutocracy.
  • The Tsipras government has to make it clear that tax amnesties will work, but only once.

The outcome of the Greek referendum might not have been a surprise, but the margin by which Greek voters decided to take the road of uncertainty and possible exit from the Eurozone definitely was. (See TG’s recent coverage of Greece here.)

What to do now? Greece is already in technical default with the IMF (there is a 30-day grace period, which will expire on July 30). Moreover, the country’s banks depend on lines of liquidity from the European Central Bank (ECB) to stay afloat.

For Greece, for Syriza and for Alexis Tsipras, this is a brief moment of triumph. But this triumph will morph quickly into calamity, unless action is taken now.

Mr. Tsipras, prove them wrong!

What it takes for Greece to remain in the Euro is for the government to clearly divide the sides of its fiscal ledger during the negotiations (if there are any).

On the spending side, further austerity has been rejected by Greek voters. Where Tsipras can make a real difference is on the revenue side of the ledger.

And that means he has to take on tax evasion in the most aggressive manner imaginable. If he doesn’t do so at this juncture, he is literally sealing his – and his country’s – fate.

Greece, like so many countries with poor tax collection, is caught in a tax wedge. In practical terms, that means that only the employed middle class pays its taxes, because those levies are deducted directly from their paychecks.

Why is that so? First, the country has a very large informal sector. The existence of a large informal sector is always the sign of a dysfunctional formal economy. Rules, regulations, licenses and other barriers of entry prevent the informal sector from becoming part of the formal economy.

Meanwhile, due to its exclusion from the formal economy, this informal sector also has the one “benefit” that it does not pay any taxes.

Integration of an informal sector into the real economy is a long-term and complicated project. It should not be expected that the necessary reforms – even if implemented today – would materially affect tax collection within the next few years.

But that is no reason at this point in time not to set the stage for integrating the informal sector. The Syriza-led government should propose the needed reforms immediately.

Their own constituency, at least in theory, should be very supportive. Why? Because the “benefit” of not paying taxes is far exceeded by the cost for those who work in the informal sector.

Just soak the rich tax evaders

The disadvantage for those employed in the informal sector is that they do not get social benefits and they cannot borrow at reasonable rates to grow their businesses, to name just two. They are condemned to live in the shadows.

Second, an immediate revenue-raising initiative would be to crack down on tax evasion by the country’s plutocracy, also a common trait in countries with poor tax collection.

Notably, in 2010, then-French Minister of Finance and current head of the IMF, Christine Lagarde, submitted a spreadsheet with 2,000 names of Greek citizens to the then-Greek government.

These fine Greek citizens were suspected of actively evading taxes through Swiss bank accounts. Conveniently enough, the list “got lost” — and no action was taken against these individuals.

It is thus long overdue that the current Prime Minister, with the wind beneath his wings for the moment, should take immediate action.

A one-time amnesty could work wonders

According to some news reports, the Greek government is already considering a tax amnesty for those who come forward and declare their foreign assets. It is also reported that such assets would be taxed at a rate of 21%.

This would indeed be a suitable first step (and a step, frankly, that one would have expected from Tsipras right after he took power in Greece earlier this year).

Swiss authorities, who used to be reluctant to cooperate in tax evasion investigations, have shown much greater willingness to facilitate the prosecution of these criminal acts.

An amnesty would allow Greek plutocrats, who have quietly moved their money to Swiss bank accounts, to get a break from prosecution — as long as they declare the full amount of such transactions and pay the penalty.

There is a big caveat, however. Tax amnesties work well, but only once. If taxpayers get the impression that they will get away with it again, they will continue their criminal practice.

It is, therefore, critical that the Tsipras government make it clear to those who fail to come forward now that they will be prosecuted. Likewise, those who will have a “relapse” after coming forward once will be prosecuted to the full extent of the law.

Incarcerating prominent tax evaders has a huge demonstration effect. Of course, it would also have tremendous increase in novelty value. But that, one must assume, is just what Tsipras should want, if he wants to be taken seriously.

Many countries around the world have lacked the political will to take that second critical step in the amnesty scheme.

Too often, the people who should go to the “big house” don’t. It is always easy to show “forgiveness” — and then have a second, third and then-multiple amnesties.

Unfortunately, this completely undermines tax compliance across-the-board, as well as the rule of law.

To be sure, Greece’s past track record on this front does not provide for a lot of optimism. That is all the more reason why the Tsipras government must avoid that temptation.

In all other respects, this is a win-win proposition. Collecting from tax-dodgers should sit well with Syriza’s constituents as well as the Greek people at large.

And it should be a major step forward in gaining the respect of the government’s European counterparts — if the move does not come too late.

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About Uwe Bott

Uwe Bott is the Chief Economist of The Globalist Research Center. [New York/United States]

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