The underlying problem in Greece and Italy is their tax systems. Both leak like a sieve. By admission almost one in three people in Italy works outside the tax system. Some say that the situation in Greece is worse. In recent interviews the "haves" in Italy are not prepared to subsidize the "have nots". This is not so much because of fairness but because so many do not pay any taxes at all. In Greece the problem is worse because of padded social programs that have to be funded out of general revenues. Soon the money runs out.
Israel faced that problem in the 1970s where the largest marginal tax rate rose to 80%. However, one in two Israelis had a second job that was "off the books". This was so endemic that the government allowed businesses to take deductions for expenses where the recipient was not on the tax roll. The problem was exacerbated by the Israeli government printing money when it ran out. This resulted in inflation at over 40% per month! The Israelis solved the problem in a characteristically innovative way. First, they changed the money. On a given day the "old" money would not purchase value. Old money exchanged for new money at a bank had to be reported and many taxpayers, formerly off the rolls, were reluctantly reinstated. Secondly, they reformed the system by lowering tax rates so that beating the system was less cost effective. Thirdly, and most important, they instituted a value added tax, or VAT. that levied tax at point of purchase. The underground economy, while never completely eradicated, was seriously reduced.
Which leads me to Greece and Italy. The VAT tax in Italy is 20% with some items being taxed at a reduced rate of between 4-10%. In Greece the proposed VAT is 23% up from 13%. The rate rise has yet to be approved by Parliament. Income tax rates range from 18% to 45% for incomes over 100,000 Euros. The problem is that very few people pay income tax. Those with government jobs are punished because their income taxes are deducted at source. Small business and small craft business pay little or no income tax. The tax situation in Italy is only marginally better.
I have posed, on many occasions, that the most efficient tax is a point of purchase tax that allows everyone below the ultimate purchaser to recover tax paid against taxes owing. For example if you charged $100 in HST and paid $50 in HST your tax liability would be only $50. The ultimate purchaser would not deduct for taxes paid. Therefore the HST (really a VAT) is paid on the highest price. Low income taxpayers can be granted rebates depending on level of income. This also causes all taxpayer to register within the system in order to reap the benefits. There is ease of collection and hiding is very difficult. Those who are more wealthy usually consume more and therefore the tax is somewhat progressive. The tax also catches foreign visitors who, in theory, can get a refund of the tax but experience has shown that these refunds are rarely claimed.
The main knock on the VAT is that it adversely effects pricing. It is true because a consumer has to pay the price out of current income. However, imagine ti increase to your take home pay if tax deductions at source were eliminated or seriously curtailed. You would have more disposable income to fund the tax at point of purchase.
In most western countries the tax legislation has gotten completely out of hand. Compliance is difficult without paid tax preparers. Simplifying the tax base is difficult because so many of the tax programs are interactive in that changing one provision affects many more provisions. Consequential changes are now tracked by computer but a reduction in complexity of one provision usually adds complexity to others. A single rate tax is no less complex because it's the tax base that is complicated not the rate. A consumption tax does not take into account the tax base because it's only the value of the goods purchased that determines the tax. There is some evidence that a comprehensive VAT at 20% could eliminate the personal (not corporate) tax in Canada.
Tax is a complicated tool. Paying tax is an implicit agreement with government that your payment will give you value. In Canada a higher personal tax rate was implicitly exchanged for a reduced cost of education and free medical services. This kind of reciprocity does not exist in Greece and barely exists in Italy. Greece has, until recently, bloated social programs that it could not fund on the existing tax base. Increasing taxes and eliminating social programs is bound to fail. Increasing taxes without some kind of social contract is like putting a bandaid on a gaping wound.
It is for this reason that outside pressure from EU countries to reform tax systems and collection is bound to fail. The pressure must come from within. This recently happened in Ireland with good results. What we need is a social reordering in Greece and Italy and that's hard to do.
Bernie.
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