Sunday, 2 February 2014

Enfia: Greece’s new symbol of austerity

This article was published by Al Jazeera English

George N owes the government 200,000 euros. He already pays a rate of 45 percent on his income. The debt stems from a property tax on a one-acre estate left to his family by his grandparents. “We are all dried out,” he says, “since they have already taken all our money and we can no longer pay. We’re waiting for the day when we will be arrested for tax evasion.” It now appears that the family will have its property confiscated.

Greece has begun to take measures never before attempted during the crisis to squeeze more revenue out of taxpayers: The government is using new powers to seize and empty bank accounts, and it has now begun foreclosure proceedings on homes and other properties. Debts to the government have been elevated to felonies, so many otherwise law-abiding citizens are facing prison terms in addition to confiscations of property.

George is one of a rapidly expanding number of Greeks who call themselves neoptohoi, or nouveaux pauvres: people who are firmly middle class by education and fixed assets, but who haven’t enough cashflow to face a slew of taxes governments have introduced since 2009 to balance the budget. These include a 1-4 percent surcharge on income tax called a “solidarity tax”; an annual “professional tax” for, literally, having a profession, and massive increases in petrol and consumer tax. But the tax that has come to dominate Greeks’ perception of living in debt bondage is Enfia, or Consolidated Tax on Property Ownership, voted into law last month.

Property tax is not strictly new to Greece. About half a million people with high net worth estates have paid such a tax for decades. In August 2011, as unemployment climbed and income tax revenues plunged, the socialist government instituted the first ownership tax on the country’s remaining five million real estate-holders – about half the population. Initially it was to be a two-year, emergency levy, but last month the conservative-led coalition renamed the levy Enfia (it has been rebaptised five times, as though its vilification by a hard-pressed public were the result of poor marketing), and made it permanent.

“Until 2010, the contribution of property tax to state coffers was much lower than in the majority of European countries,” finance minister Yannis Stournaras told parliament. “Our tax system almost ignored this source of revenue.” In fact, Greece already had some 40 property-related taxes and fees on construction, rent, sale, inheritance, transfer, and legalisation of illegal structures, but none of them taxed the average household for mere possession. Enfia raised government revenues on property from 500mn euros to about 3.5bn euros. Making matters worse, the government set a strict February 2014 deadline for all 2013 Enfia, and rushed overdue notices for 2011-12 arrears, creating a debt bottleneck.

Repossessions are pointless in practical terms, the government’s tax enforcer recently admitted to a Greek newspaper. “I don’t think we do more than 100 auctions a year and almost none of them bears fruit,” said general secretary for public revenue Haris Theoharis. Asked by Al Jazeera why the government pursues them, he replies, “It allows debts not to be forgiven… it has a value in itself in the sense that we hold the debtor against their debt.”

In other words, the government needs to collect, and believes that through real estate it has some real leverage. Property cannot be hidden or moved. It is the ultimate hostage, and Theoharis seems convinced that Greeks will find hidden stashes of money to protect it.

A parliamentary budget monitoring report released on January 29 disagrees. “Raising taxes on an already heavily taxed population won’t increase revenues,” is says, “because taxpayers are exhausted and tax evasion is thus increased.”

Some taxpayers are struggling to remain honest. For Gloria Aliyianni, the daily negotiation with her tax authority has come to define her life. When she was 13, her father repatriated his family and savings from a lifetime as a copper miner in South Africa. They invested it all in real estate, expecting to build a better life in Greece.

Aliyianni and her husband worked hard, he as a television technician and she subtitling foreign films. They supplemented their income renting out shops and flats. They paid off the mortgage on their primary residence and remortgaged it in 2008, just before the crisis hit, to build a large second home.

In the crisis, both lost their jobs and cannot now meet the bank’s schedule of payments; and all but two of their tenants have left. Their property has become a millstone. “This is a seizure of my property and my parents’ property, which they earned working so hard overseas,” she says. “We shouldn’t work our whole lives for someone to lay hold of what we’ve earned.”

Like many here, Aliyianni believes the government should focus more on lowering its overhead. According to the parliamentary report, the Greek state currently costs 53.6 percent of GDP, above the European Union average of 49.3 percent.

Enfia may not have brought demonstrating masses onto the streets, but behind closed doors middle-class voters are quietly smouldering. The criticisms against it are legion. For example, it makes no discrimination between revenue-generating property and property that generates no income at all, such as unbuilt land or vacant office space. The Hellenic Property Federation, which represents owners, points out that that effectively forces property onto a market that has lost almost a third of its pre-crisis value. It has suggested that multiple property owners be allowed surrender one of their properties against tax debts, but the government insists on cash.

Theoharis admits that the situation is far from ideal. “I have personally felt it as well that it is a difficult thing to do, but… it is better to clear any backlogs of taxes that we have rather than try to introduce one-off measures that perhaps will affect many more people,” he says. “I’m not sure there were many alternatives and all of them would be equally or more unpopular.”

The problem with Enfia is its effectiveness. It raised 2.85bn euros in 2012 on a compliance rate of 82 percent, making it one of Greece’s most successful taxes. Greece’s creditors, the European Commission, European Central Bank and International Monetary Fund, quickly saw it as an indispensable tool in eliminating the government deficit.

The threat of asset seizure is only the latest in a series of enforcement measures Theoharis says have reduced the number of tax debtors by 200,000 individuals in the space of a year. “It’s not scare tactics but pressure on people who owe to change their priorities and pay their debt,” he says. 

The pressure tactics may work with the better-off, but inability of the less well-off to comply with Enfia is one of its design flaws, says Theodoros Skylakakis, the leader of Drasi, a small, centrist party that has made the tax its cause celebre. 

“[Enfia] started with the hypothesis that about 25 percent of the population won’t pay,” says Skylakakis. “This creates a terrible social problem. We’re talking about hundreds of thousands of people who cannot pay. This is a rupture of the social contract, which is that 90-95 percent can pay a tax.”

The government has tried to finesse the tax. It discounted it by 15 percent to raise 2.65bn euros this year. It offered discounts of 50 percent to the unemployed and low-income households, and almost entirely exempted farmers; it also tilted more of the burden towards estates worth over 300,000 euros, easing it on three quarters of property owners (1).

But Enfia still bristles with perceptions of unfairness because of its nature as a possession tax. The government is toying with the idea of devolving Enfia to local government. Most property taxes are already municipal, and this one would be big enough to replace central government handouts to city halls, so the government could pass on the tax’s implementation and unpopularity, and save itself a bill to boot (2)

But devolution of power is difficult before Greece balances its books, because the government has to mediate the tug-of-war between its voters and its creditors with delicacy (3)

Before the crisis, the Organisation for Economic Co-operation and Development, a Paris-based think-tank, estimated that Greece harboured an unregulated economy of about one third of its official GDP. The regulated economy has since shrunk by 27 percent, but overall tax revenues have barely fallen, because indirect taxes like Enfia have more than made up for the drop in income tax revenues

The inevitable surmise is that some of taxpayers’ ability to pay comes from undeclared money. So while the government has declared the black economy an official enemy, it is also a principal source of new tax revenue and the probable reason why Greek society has so far muscled through austerity. But Greece’s black gold is a finite reserve. The question is, how long will people’s ability to pay last? The government’s fate depends on how accurately it answers that question. 


Notes

1. The 50 percent discount also applies to three-child families and the handicapped. Businesses have their own raft of mollifications. Space-intensive operations such as schools and hotels will pay a half-rate. Sales tax on property was dropped from 10 percent to three in an effort to make it easier for people to bail out of property.

2. Communities might introduce a measure of humanity. For example, last year municipalities enjoying surpluses won the right to pay power bills for destitute constituents who were living in the dark. That brought ray of hope for some 350,000 households whose power has been cut off.

3. There are signs of progress. Greece this month announced an estimated primary surplus of 700 million euros for 2013. The trouble is that it has to squeeze several billions more out of taxpayers on an annual basis before it has a surplus capable of paying down the debt.

Economists concur that the prospects for such a surplus – which would require turning last year’s four-point recession into four-point growth by 2016 – are practically nonexistent; which poses the question of whether government policy is heading down a dead end. Greece is poised to demand a massive extension of its debt maturity – the repayment of the principal of 230bn euros in facilitation loans from its Eurozone partners; but until such a deus ex machina appears, the Greeks have to show commitment to fiscal adjustment.

2 comments:

  1. Hello John.....I just wanted to say how delighted I am to have found your blog. Having moved relatively recently to Athens and not yet reading Greek well I have until now struggled to find anywhere that gave detailed and insightful analysis and commentary of the current situation. Looking forward to reading future posts.

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