Grexit or no Grexit, Greece must tackle its tax evasion problem – The London Economic
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Grexit or no Grexit, Greece must tackle its tax evasion problem

By David Binder

Unless you’ve been living under a rock, you won’t have failed to notice the sudden rise of the radical left in Southern Europe and the social, political and economic shockwaves this has sent across the continent. As voters across the Mediterranean have reacted against severe austerity measures, parties previously seen on the fringe of national parties have seen an unprecedented surge in support. In Greece, this has been manifested through Syriza, which has grabbed headlines for its incredible win in this month’s elections, whilst in Spain; Podemos have emerged from relative obscurity and are on course to be the Iberian nation’s largest party.

Whatever your own political views, you can’t but be impressed with what the ‘new left’ have achieved in such little time. Yet, with great power comes great responsibility and with this in mind, the radical left’s greatest may yet await them. This fact won’t have been lost on new Prime Minister Alexis Tsipiras and ‘too cool for school’ Finance Minister Yianis Varoufakis, who have been locked into tense negotiations with fellow European Union ministers, regarding its national debt commitments.

At the time of writing, Athens and Europe have thrashed out a deal that gives the Hellenic nation a short term injection of funds that should tide them over for the next four months. The agreement made in Brussels commits Athens to honour its debt commitments, and in return Greece will set out reforms (attempting to ease the strict IMF parameters placed upon it) on Monday and present them to European finance chiefs. Both sides are clear that this is just the beginning, much hand wringing is yet to be done, and we are yet to see whether Greece will remain in Europe or whether some sort of financial compromise will be reached

Yet, regardless of the outcome of the next few weeks and months, Mr Varoufakis and his pals will have to deal with one very hot potato: tax compliance.

Please don’t fall asleep! For all the dreariness this phrase evokes, it’s actually acutely important. Why? If the Greeks want a debt free socialist future with all the trimmings then it will surely need to increase personal taxes and its tax revenue intake. For most socialist and social democratic governments and their supporters, high levels of personal taxation are inevitable, and a fair price to pay for a generous welfare state, lower economic inequality, reduced levels of poverty, comprehensive public services and so on. As can be seen in Scandinavia, which despite recent political changes is still seen as something of a socialist utopia, the tradition has been for taxes to be higher than average, and so far, its citizens have bought into this vision, and are known for their compliance. In short, both high taxation and high levels of tax compliance are necessary for the ‘socialist dream’ to work.

This is where things could turn tricky for Greece.

The culture it seems is very different down south than it is up north, and Greece in particular has a prevalent culture of tax avoidance. The figures here are quite startling, research by Athanasios Tagkalakis suggested that at the end of October 2014, tax arrears were more than 70 billion euros, or nearly 39 per cent of GDP. The same research also shows that around three-quarters of large enterprises, high wealth individuals/self-employed, and VAT non-filersin Crete were guilty of not paying enough tax, with around two thirds not doing so in the Central Greece region.

The International Monetary Fund (IMF) meanwhile found that the gap between assessed taxes and the actual amount collected is vast. Indeed, it found that deficit for the Greek self-employed fund ETAA was 25 per cent, and an eye-watering 65 per cent for the agricultural OGA fund. Little wonder then that in 2012, unpaid social security obligations exceeded €12 billion. Thus, if the new Syriza Government cannot find a solution to this pressing problem, history could well repeat itself.

As such, tax compliance matters on two levels. Firstly, if Greece can increase its tax intake, debt servicing and reduction, the core issue at the focus of its recent EU negotiations, will become more realistic. Further, increased tax revenues will help Greece in realising the above tangible benefits mentioned above (generous welfare and the like). Introducing policies to this end might not be popular at first (who likes paying tax?!) but by capitalising on neo-liberal disillusionment now, political leaders of the Mediterranean can set into motion a highly tax compliant culture, ensuring a brighter future for the current populace and for generations to come.

Thus, the radical left may have sold the socialist dream to its adoring public, but will they foot the bill? And more to the point, will Europe play ball?

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