Tuesday 29 September 2009

Enjoying the Greek Elections

National elections have been called in Greece for October 4th. Although this may sound counter-intuitive, it struck me last night that the Greek electoral process is vastly superior to its American counterpart:

1. In Greece, everyone knows the politicians are lying, including the politicians themselves. Despite their best intentions, they cannot or will not implement about 85% of their campaign promises. This is a huge advantage over the United States, where true believers still hail George W. Bush as a “compassionate conservative”, and where Barack Obama still walks on water.

2. In Greece, it’s a short campaign. Elections were announced in early September in a televised address by the Prime Minister; the election occurs on October 4th. That’s just over 1 month of campaigning, compared with a US process in which primaries take over a year, and the elections usually 3-4 months after that, and then administrations change two months after the election, in January. This means that in a four-year Presidency, the campaign starts some 2 years prior to the election: 50% of the term of the Presidency is spent campaigning.

3. In Greece, it’s a cheap campaign. Free airtime is provided by all channels. Most expenditure is on additional TV advertisements and outdoor advertising. It’s far less than the billions spent on US campaigns.

4. There is broad and real representation in both national politics and the Greek Parliament. The Parliament currently has five parties, representing the far left to the right. In the United States, despite the presence of the odd third-party contender such as Ralph Nader or Ross Perot, the House and Senate have essentially been duopolies since the beginning of the Republic. I think it’s far healthier having a more diverse political representation, rather than giving two decrepit political parties a monopoly of decision-making.

5. In Greece, in addition to hearing from the party leaders, we hear from party MPs who are slated to become ministers in government debate during the campaign. Yesterday morning, for instance, the PASOK and ND candidates for Minister of Economy & Finance, Louka Katseli and Iannos Papantoniou, were slugging it out on ERT’s morning show. This is great stuff: it permits a far greater level of assessment by the public. In the US, in contrast, the election is all about the President: we only find out about Cabinet nominations some 3-4 months later.

6. And, perhaps most strikingly, the Greek electoral process is straightforward and simple. Voters cast paper votes in their registered place of residence, displaying their legal ID cards. There is no possibility of hanging chads; no need for expensive, computerised voting machines that can be hacked; no way to disenfranchise a voter. Every Greek citizen of 18 years or more has a right to vote. The voting and counting process is overseen by the Bar Association and representatives of political parties. Results are announced by 22:00 of the day of the vote. Recounts, legal processes and Brooks Brothers mobs stealing the Florida election are unknown.

It’s also true that Greek politics are noisy, direct and personal. You may think that having six politicians of various stripes screaming intelligibly at each other in the “parathirakia”, or windows on evening news broadcasts is low behaviour. In fact, it’s politics in its purest form. Debates in the Senate of ancient Athens must have been just like this; debates in the early Congresses in the United States must have been quite similar.

I must say I am enjoying the Greek election far more than I enjoyed the interminably cheesy show between Barack Obama, Hillary Clinton and John McCain. This battle of the titans was long on superficiality and stupidity, but short on common sense and ordinary decency, and is unfortunately replicated in the broken-down, corrupt legislative process we see in Washington today. The American tendency to demand that Presidential candidates are immaculately conceived is ludicrous, particularly given the tremendous costs of the US electoral process which assures rich, special interests a seat at any decision-making table.

In Greece, it’s a far more human, far more simple process. The politicians scream a bit more loudly that usual on the evening shows, a few political rallies are held, and then it’s voting day. And at the end of it we will go back to our tavernas and offices and supermarket aisles without deceiving ourselves that too much has changed, or that the new saviour has come.

Thursday 24 September 2009

America Exceptionalism (ii)

What is it with Barack Obama? He can give a great speech, but either he or his speechwriter have a streak of willful arrogance that is totally discordant with reality. Consider these lines from his UN speech:

"This is what we have already done, but this is just a beginning. Some of our actions have yielded progress. Some have laid the groundwork for progress in the future. But make no mistake: This cannot solely be America's endeavor.

Those who used to chastise America for acting alone in the world cannot now stand by and wait for America to solve the world's problems alone. We have sought in word and deed a new era of engagement with the world, and now is the time for all of us to take our share of responsibility for a global response to global challenges."

As I asked before in my blog post about Susan Rice’s comments, WHAT is he talking about? What problems has America solved alone?

Global warming? The US refused to ratify Kyoto under Clinton and Bush. Today, it is the largest emitter of CO2 in the world, and has no real plan for long-term environmental efficiency or CO2 abatement.

Terrorism? The US invasion of Iraq has led to hundreds of thousands of dead and trillions of dollars in damage, with no perceivable benefit in stopping terrorism or the proliferation of weapons of mass destruction. In Afghanistan, politicians dither while the troops make endless sacrifices and thousands of people are killed.

The global economy? US banks and investment firms are at the heart of the current economic collapse. After trillions of Federal dollars pumped into the system, the US financial industry now continues to lobby against any kind of meaningful regulation of the sector.

Mr. President, an objective observer of current events would conclude that rather than solving the world's problems, America has played a leading role in creating many of them. Let's keep this in mind when we lecture the world at the United Nations.

Thursday 17 September 2009

I am a tax evader

I hate to announce this news in public, but … I am a tax evader.

I evade paying both VAT and social security taxes when I hire a cleaning lady to clean up my mess one day per week for my house in Athens. She is legal-I tried-but she doesn’t know how the system works and doesn’t have a book of receipts.

I evade paying VAT and real estate taxes by under-declaring the number of usable square meters and actual loan volume in my house in Athens. In fact, the bank that’s given me the loan helps me in this, as does the Hellenic Tax Authority (the Eforia) through its advice. Honestly, I tried to do it, but if I had declared the true number of square meters (developed by the previous owner), the house would probably have to be torn down and re-built.

My complicity in not demanding receipts from the laiki (farmers’ market) seller when I buy my tomatoes, or from the taxi driver when I take a taxi into Athens, makes me an active participant in VAT and income tax avoidance (of the vendors).

I’m a little bit behind in my TEBE payments…actually some months behind. But I never use the service, don’t understand its benefits, and whenever I have a question I don’t get any answers. Nevertheless, I’m going to catch up this week…or next.

On the other hand, I pay my income tax assessments, declare my income, and when VAT needs to be collected from third-party suppliers in Greece, I collect it and pay it.

Which lead me to my ultimate conclusions: the tax system simply doesn’t work. It’s irrational, and creates too many incentives for tax evasion or avoidance.

Let’s take the real estate tax as an example: in Greece, a real estate object is taxed on the basis of (a) the number of usable square meters, and (b) an “objective value” (minimum value) per square meter.

When you go to buy a house, you immediately determine three things:

(a) the previous owner has made changes to the approved building plan, such as by enclosing balconies, but not declared this to either the Town Planning Authority (Poleodomia) or to the Tax Authority (Eforia), and

(b) The actual value is far above the “objective value”, and everyone knows this, but everyone lists the “objective value” anyway, and

(c) Sellers, buyers and banks are all implicated in this cheerful deceit, even to the point of the banks making off-the-books mortgage transfers to sellers on behalf of buyers.

When government-owned banks start setting up secret accounts to cheat the government from tax revenue, you know there’s a problem.

The whole tax system is a classic case of treating a symptom rather than a root cause. The symptom is tax evasion: in order to combat this, the government has passed hundreds of laws and amendments trying to “fine tune” the system. The result is continuing, rampant tax evasion. I doubt any politician in Greece, or any citizen, can boast that he or she is in 100% compliance of the law. Even the ones that want to.

So the question is, why continue this system? What’s the point of spending hundreds of millions of Euro on antiquated compliance systems which create bureaucracy and paperwork, slow down productivity, and result in a culture of petty corruption and tax avoidance?

I suggest we start to think of basic ways to fundamentally reform the system. I’d start with the following:

(a) Eliminate VAT on any transaction where the main input involves labour. Thus, any professional activities which depend on manual, hourly labour, such as cleaning, construction, market vendors, taxi drivers, waiters, cooks, etc. should not be taxed with VAT. This does not cover professions with a high degree of specialization, such as architects, accountants, lawyers, etc., who should pay taxes under the Personal & Corporate Income Tax Bands (see below).

(b) Levy a flat tax of EUR 750-1,000 per year on all manual trades. No other taxes on personal income, earned by own personal work, should be required. However, if a manual worker has income from other sources (e.g. rental of an inherited apartment), this should be taxed under the standard Personal and Corporate Income Tax bands (seen below).

(c) Equalise corporate and personal income taxes using a “2.5%” flat rate, using tax bands as follows:

The highest corporate or personal income tax band ends at 25% of income. At the personal level, this applies to any individual. Eliminate deductions for children or other claims (replace this with direct subsidy from the state if necessary). The personal income tax applies to independent professionals or salaried employees.

(d) Social taxes on employment and earned income (e.g. professional services) should be levied according to a 1% band, starting at 1%, and rising as follows:

(e) Levy real estate construction or sales taxes on a 1% tax band . These taxes apply either to construction of a new property, or sale of a property, but are only levied once. The maximum tax rate is 10%. This same tax applies to commercial or residential projects. There is no VAT on construction activity, although a form of VAT on construction materials will be set. (This rate does not apply to annual municipal taxes on property).

All taxes are based on a professional valuation conducted by a qualified surveyor who is employed by a bank or, in the cases where a bank is not involved in financing, by the tax authority. The valuations of each surveyor will be evaluated separately by a separate branch of the tax authority. Banks cannot provide mortgages unless the buyer or seller provide evidence that the real estate tax has been paid.

(f) Remove complicated taxes for real estate. The only restrictions on real estate in the future will be (a) the building coefficient in terms of total area built, (b) the height of the building and its relationship to the buildings on either side, and (c) energy efficiency, seismic safety, etc. If an owner wants a building with no balconies and 100% internal floor space, it’s up to him. The process of evaluating the “usable” living area and assessing a value on this should be eliminated.

Adopting these bands will create an immediate loss of apparent tax revenue in the short-term, as well as a long-term revenue loss over time. Such a loss must be alleviated in two ways:

(g) Increasing “sin” taxes on alcohol, nightclubs, cigarettes and certain other categories of products and establishments. For instance, cigarette prices are clearly far lower than European norms, and cigarettes are a direct contributor to cancer and adverse health effects. A special health tax on cigarettes of EUR 1 / year should be added until the average price per pack reaches EUR 7.00/pack in 2014. (See table below).

(h) Enforcing the existing tax law on certain categories of establishments and professions, where tax evasion is standard operating procedure. More on this in a future post.

An example of re-calibrating the “sin tax” on tobacco and cigarettes is seen below. In 2009, assuming an average price for a pack of cigarettes of EUR 2, and an average tax rate of 74% of that tax, means that the tax per pack is EUR 1.48, and the total tax which should be attributed to government revenue is EUR 2.48 billion.

Cigarette "Sin" Taxes and Public Revenue

Under my proposal, the price per pack would rise by EUR 1 per year until 2014. The large majority of this price rise would comprise tax. I’ve assumed a 4% increase in the product price; by 2014, a pack of 20 cigarettes would cost EUR 7.00 to buy (which is similar to high street prices in France and Germany today). I estimate that consumption would fall by about 500 million pcs per year. Tax revenue to the government would rise to EUR 9.87 billion. This is nearly 10% of the regular 2008 central government budget.

A "sin" tax of this sort has several collateral benefits: According to the European Commission, Greece has the highest smoking rate in the European Union. Approximately 600 deaths are caused per year from passive smoking; approximately 20,000 per year from active smoking. Reducing the number of smokers would have a positive impact on national public health, while remaining an individual decision as to whether (and how much) someone should smoke.

This tax should be earmarked for shoring up the public health system and pension funds, replacing in part the funds currently collected through high IKA and other payroll taxes. Lowering the payroll taxes should in turn have a positive impact on employment, as people understand that they can keep a higher share of earnings, and employers do not have to count on high payroll taxes in employment.

This proposal does not answer several key questions in Greek tax policy today:

• How to enforce the true recording of income (receipts)?
• Whether the amount earned through indirect taxes will replace the taxes currently payed by a limited number of taxpayers (usually salaries employees)?
• Whether the Greek people will finally respond to positive incentives and assume their legal responsibilities?
• Can these ideas be implemented under EU VAT and tax law?

However, I firmly believe that we need to simplify the tax system and remove as many taxes on labour as we can, particularly for the low-paid, manual trades which are necessary in the Greek economy, and have made Greece a labour magnet since the Soviet Union fell.

Additional posts will be dedicated towards answering some of these questions. But the system needs fundamental renewal, not on-margin tinkering. It is doubtful whether any current political party is prepared to address this issue.

Monday 14 September 2009

Neither PASOK nor ND have a plan to reform the public sector in Greece

ERT Building (c) ERT AE

National elections have been called for October 4th in Greece. For perhaps the first time, both PASOK and ND are vying with each other over who will introduce the most austere budget. This is a welcome change, if it were believable. I believe both party leaders are sincere. But I also believe that the party barons on both sides, as well as decades of vested interest, will sabotage or slow any reform implemented.

What Greece needs is a vision of lean government. Right now, the parties are focussing on top-line, revenue and expenditure assumptions:

• We will freeze public sector salaries
• We will freeze new hiring
• We will crack down on debt avoidance.

Unfortunately, there is no unifying vision or coherence to these measures, or how these would affect the fundamental structure and operations of public administration.

Let us view a simple example. Greece has no fewer than five public broadcast channels. These are bundled under ERT A.E., a public organisation that functions according to private law. ERT A.E. includes the following channels:

• ERT 1
• ERT 3
• ERT World
• Digital Channels : Prisma, Cine, Spor
• Vouli TV

In addition to this, the government is already funding a range of local authority and municipal TV stations, which mainly transmit programmes of local interest, and occasionally meetings of municipal councils.

The main organisation, ERT, is funded by a mandatory tax on electricity bills. It has some 3,500 employees, and a range of ancillary activities, including several radio stations, a publishing company, and no less than five orchestras:

• National Symphony Orchestra
• Orchestra of Contemporary Music
• ERT Choir
• ERT-3 Orchestra
• Childrens’ Orchestra.

I am a great fan of public TV: in Greece, it is one of the few quasi-objective media organisations (although I am sure this is also open to debate). But frankly, we are in the middle not only of an economic crisis, but of a situation where public debt has reached at least 103% of GDP, and quite possibly 108-110% by the end of 2009. We simply don’t have the resources for massive public sector organisations and repetitive functions which in many cases are paid for by the taxpayer without recourse or choice.

I would expect to see an attempt to transform the Greek public sector using the tools of lean management and e-government. If we take the example of ERT and public media in Greece, I would expect to see the following strategic changes:

1. Greek public TV will comprise 3 channels:

• A national terrestrial broadcaster
• A terrestrial broadcaster oriented towards northern Greece and the Greek islands (ERT 3)
• A digital/satellite broadcaster oriented towards Greeks of the diaspora and equivalent markets

2. All ancillary functions will be divested or closed.

3. All local TV and parliament TV can continue, but will be broadcast only online, and will not be paid for by the central government as a separate item. The costs should be borne by the IT budgets of these organisations, and should be less than EUR 1,000 per organisation from the central budget, with anything remaining gained by sponsorship or advertising.

4. The Greek state will only support a limited number of orchestras, choirs, etc. In any case, the budget for these activities has nothing to do with state television: it should be transferred to the Ministry of Culture. No more than two national symphony orchestras are needed in the entire country: one in Athens; one in Thessaloniki, which are paid for by public funds.

5. The strategic role of the national broadcaster should be to conduct in-depth analyses of Greek history, culture, news, economy, and international relations. We do not need so many programmes on recipes, sports, Greek music, etc. How many separate yet similar programmes on Greek music are aired by ERT, and why are these needed?

6. The headcount of ERT will shrink to 1,250 within 4 years, from the current total of 3,500. The celebrity media culture of untrammelled spending for gossip TV, Eurovision, and other frankly ridiculous events which are currently programmed by ERT must end.

7. Should a public subsidy for ERT continue, it will be collected by the normal tax collection method, and not through DEH (public electricity authority) bills. DEH is a totally separate business, which—apart from convenience—should not function as a billing mechanism for another quasi-governmental organisation. In any case, any public subsidy should be re-channelled to debt reduction, while ERT should improve its already important advertising revenue.

8. All major public debates and decisions should be put online as a matter of course; every Greek (and other) citizen should have access to government through the internet.

Similar decisions are needed in every government or semi-governmental organisation. The time of “caviar socialism” is over: unless hard decisions are made on the basis of a real cost-benefit analysis, the country will soon reach a debt-to-GDP ratio of 140-150%, and it will then be bankrupt.

Greece is spreading its expenditure across thousands of public organisations, replicating a model of government suited to the 1800s of employment and patronage over efficiency. There needs to be a clear strategy of focussing the role of government where it is truly needed, and exiting ancillary functions. Where government is needed, for instance in education, healthcare or the military, then we should spend the correct amount of resources to make sure Greek citizens receive world-class services, not banana republic excuses.

We need to develop a public sector from the ground up, using lean thinking and the power of the internet, if we are to compete, and indeed survive, in the future.