Tax Threatens Budget as Greece Tries to Keep Bailout Promises
By Maria Petrakis - Nov 18, 2010 11:54 PM GMT+0100 Thu Nov 18 22:54:06 GMT 2010
Greece’s budget planning is going awry because of a perennial problem: taxes.
Finance Minister
George Papaconstantinou plans to tackle tax evasion and cut spending on health care and transportation as revenue fails to meet targets. Yesterday, he reduced the estimate for 2010 net budget revenue a second time, to 6 percent compared with 13.7 percent when the country agreed in May to a 110 billion-euro ($150 billion) bailout from the European Union and International Monetary Fund.
“We all know the country’s economy is at a critical turning point,” Papaconstantinou said at a press conference in Athens. There is “a big difference between what we are doing now and what we did in May,” he said.
Greece has among the poorest rates of tax collection in Europe and avoidance remains rife, as more than 33 percent of workers are listed as “self-employed” and yet they provide just 4 percent of revenue, according to estimates from Athens- based EFG Eurobank. Inspectors from the EU and IMF began this week a review of progress to approve a third loan payment.
Taxes are vital to lower what was the largest budget deficit in the euro region last year at 15.4 percent of gross domestic product, according to the IMF. The shortfall will be 7.4 percent in 2010, the Finance Ministry said yesterday.
‘Strange Economy’
“We had an un-functioning, strange economy for 20 years and 18 months doesn’t get it back into place,” said
Jason Manolopoulos, who helps manage $100 million for a hedge fund at Athens-based Dromeus Capital. “It’s not only tax evasion, it’s that the Greek tax system is so complicated it pushes people into the grey. It’s going to take time.”
Money from income, corporation and sales taxes increased 3.7 percent in first 10 months of the year, the ministry said. Revenue from taxes is among the lowest in the EU at 32.6 percent of GDP, compared with the 39.3 percent average for the 27 EU nations, according to a 2009 Eurostat report.
Reductions to wages, pensions and investment have helped mask lagging revenue in Prime Minister
George Papandreou’s deficit-cutting drive. The government is counting on the last two months of the year to boost state income, buoyed by motor fees, real estate taxes and the effect of increases in sales taxes, even as the economy contracts 4.2 percent.
The IMF said Sept. 14, after approving a second loan installment, that curbing tax evasion and improving collection are key to achieving the deficit-reduction pledges.
“The program’s credibility hinges critically on improving tax compliance,” the IMF said. “Without improved compliance, restoring fiscal sustainability will likely require additional hikes in tax rates and painful expenditure cuts.”
Crimes Unit
In the first nine months of 2010, the country’s
Financial and Economic Crimes unit imposed 3.1 billion euros of fines, almost double the year-earlier figure, said Ioannis Kapeleris, who runs the office, in an Oct. 7 interview. His office isn’t responsible for collecting the money, he said.
“We’re being asked today to fix the errors of a decade,” he said. “There was an absence of tax collection. Restoring this mechanism and getting it working again requires some time. It can’t be done from one day to the next.”
The government will announce specific steps next week to curb tax evasion and overhaul tax services, includi
ng abolishing 100 offices and deploying collectors elsewhere, Papaconstantinou said yesterday. All the measures announced in the 2011 budget were approved by officials from the EU and IMF, he said.
Back Taxes
The budget includes 1.6 billion euros to be raised from clamping down on tax evasion by collecting back taxes and fines, and a new system to settle disputes to increase revenue next year without raising tax rates, Papaconstantinou said. The government extended the deadline to Nov. 29 after collecting 300 million euros, he said yesterday.
Greeks are complaining about notifications being sent to the dead, unemployed and tax-paying enterprises.
Theodoros Hiotakis, a 57-year-old with a veterinary practice in Athens, said he was “horrified” when he was told he owed 2,500 euros of back taxes.
“I pay my taxes every year, every single year,” Hiotakis said. ‘We’ve told the tax department there’s a mistake and we’re waiting to see what they’ll say.”
Deputy Finance Minister Dimitris Kouselas said that of the 1.5 million notices sent by the tax office, some may be mistakes. Preliminary results from the amnesty show “a significant response from taxpayers,” he said.
Concerns about the fairness of Papandreou’s austerity measures may risk the social and political support that is essential for the program to succeed, the IMF said.
‘Poor State’
Ninety-five percent of income-tax payers declare annual income of less than 30,000 euros, according to data compiled last year by the Federation of Greek Industries.
“The problem with Greece is that it is a poor state with rich people,” said Kapeleris at the Financial and Economic Crimes unit. “Some people didn’t just magically achieve wealth. They were breaking the law, evading taxes.”
Papandreou revealed a budget deficit after coming to power in October 2009 that was twice what was reported by the previous administration, in part exacerbated by falling tax revenue as the country geared up for elections.
Additional tax evasion in the two months before elections amounts to 1.5 percent of GDP when aggregated over all the elections since the return of democracy in 1974 after the military junta, according to a study by Spyros Skouras, a professor at the
Athens University of Economics and Business, and
Nikos Christodoulakis, a former economy minister.
(Bloomberg)