Why Greece and its creditors still disagree (or, Everything you wanted to know about Greek taxes but were afraid to ask)

Two statistics published this week speak volumes about the heavy yoke Greek private sector workers labour under.

The first concerns unpaid taxes. Under Syriza, which came to power in January 2015, these have soared, but the government keeps breaking its own record.

According to the Independent Public Revenue Authority, unpaid taxes for January alone amounted to €1.63bn. That’s partly because on January 1^st a new law took effect that changes how many Greeks pay for social security. It attempts to make up for the fact that pension contributions have fallen from €11.5bn in 2009 to €9.1bn in 2015 due to rising unemployment and falling wages.

Unfortunately, the new law makes up for this shortfall by overcharging the 3.5mn people left in the workforce. Until January, salaried Greeks paid a percentage of earnings and the self-employed - more than a million taxpayers – paid a flat monthly fee. 

As of this year, the self-employed also pay a percentage of earnings for health and pension contributions – 27 percent of gross income, due to rise to 31 percent over three years. Once other expenses have been deducted, income tax of between 22 and 45 percent is calculated on the remainder. For most, this amounts to a sharp increase in social security contributions.

The staggering level of taxation is one reason why many young people are leaving the economy, and even established professionals with client bases are closing their tax books. The government’s inability to collect has now forced it to twice push back the January social security contributions deadline from February 28 to March 17 and March 31.

The state’s past performance in tax collection does not make inspiring reading, either. Taxpayers now owe a record €91.78bn, up from €81bn last year, €71bn in 2015 and €60bn in 2014.

Most of that will never realistically be recovered. Nine billion euros are owed by public sector companies, which are used to government handouts and easy loans backed by state guarantees. The culture of non-payment begins at the top. Another €13bn is owed by private sector companies that have folded. Even the €69.58bn that is owed by non-bankrupt individuals and companies in the private economy will not realistically be recovered, since it is difficult for people with little or no income to pay taxes.

Under pressure from its creditors, the International Monetary Fund and the eurozone, the government is moving on the country’s four million offenders: 851,000 are in the process of having property or deposits confiscated, while twice that number are in danger of confiscation.

The new figures are sure to hurt the government’s claim that the austerity measures taken over the years are enough to produce a primary surplus of 3.5 percent of GDP demanded by creditors. The IMF believes more measures are needed.

The main reason Greece’s current review by creditors is such a dragged-out affair is that there are no easy answers to the question of how to tame Greece’s main expense: its pensions.

The government argues that after 13 rounds of cuts, pensions are already low. The chart below, supplied to The New Athenian by the labour minister on February 20, shows a breakdown of Greece’s 2.65 million pensioners. A good 58 percent of them earn under €800 a month before additional benefits.

Source: Greek Labour Ministry, Feb. 20 2017

The government also argues that cutting pensions before restoring growth to the economy is problematic, because studies reveal that pensions are now the principal source of income for half of Greek households. 

The IMF, on the other hand, argues that the economy will never recover while pensions remain the government’s biggest budget item, absorbing at least a third of tax revenue.

The government’s own pensions bill, brought to parliament last May, revealed staggering social security costs: notably that fully one half of the Greek debt, some €154bn, had been incurred by borrowing to pay pensions.

It is little wonder that the IMF insists on tax relief for businesses, rather than maintaining high taxes to redistribute the wealth to the poorest. Syriza argues that the latter will boost consumption and help business. The IMF argues that high taxes make business globally uncompetitive, and boosting consumption at home without boosting exports will create another unsustainable economy akin to that of the 1990s.

Earning gap between private and public sectors persists

The second heart-sinking statistic of the week was the other big reason for high taxes in Greece: the income gap between private and public sector workers. It is best illustrated by the table below: 62 percent of private sector workers net under €900 a month, whereas 66 percent of public sector workers net between €900 and €1,800 a month.

Source: Kathimerini, March 14 2017

Yet those private sector workers spend a billion euros a month paying the salaries of their public sector counterparts, making the public payroll the government’s second-highest budget item.

Neither group earns good money by European standards, but the figures, which were published by the Labour Institute, a think tank, seem to disprove a popular myth of the left, which Syriza also upholds: that what is suffered by one group is eventually suffered by the other. The figures rather seem to confirm that privileges earned through political pressure persist, even if diminished. In other words, the labour aristocracy Pasok created in the 1980s is still a 700,000-strong voting bloc capable of swinging elections.

Greece, like France and Italy, has long been a statist culture and will remain so for the foreseeable future. This is good in that it provides strong popular support for socialised medicine and decently funded public education – essential prerequisites for a secure and civilised society. But it is bad in that it allows a class of party-appointed ne’er-do-wells to dwell inside the state culture and destroy its value for taxpayer money. Until political parties realise they must divest themselves of their appointees, Greece will run the risk of throwing out vitally important state services provided by hard-working doctors, nurses and teachers at great personal sacrifice, along with the louts they must carry.