Sunday, 30 January 2011

Some Positive Developments in the Greek Tax System

There have been a number of highly positive developments in the Greek tax system lately which have unfortunately been overlooked or misunderstood by the press and other commentators. It’s worth taking a look at some of these, and also to try to understand what the underlying drivers of the situation are.

The fundamental problem with Greece’s corporate tax policy is not so much the level of taxes (more on this later), as it is three related issues:

a.       Despite the tax burden paid by companies and individual workers, the quality of public services is low in critical areas such as public healthcare and education. Since the state retains a de facto monopoly in these areas, the average taxpayer understandably questions why s/he should pay taxes. Besides this monopoly, there is plentiful evidence that suggests that tax evasion occurs due to purely personal, selfish reasons. Whatever the case, this leads to a situation where, depending on which report you read, between 20-40% of the GDP remains in the “black” or “grey” sectors, and is therefore untaxed.

b.      A major share of the responsibility for the poor quality of public services is, in turn, the fact that the public sector is grossly underfunded, primarily because Greece taxpayers do not pay their fair tax allocation. Greece’s per capita spending on healthcare or education, or share of spending as a proportion of GDP, are among the lowest in the European Union. In terms of average salaries, the wages paid by the public healthcare and education system in Greece are also far below what a living wage would be.

c.       The lack of efficiency in resolving issues related to licensing or approvals from the public sector, which is often referred to as “red tape” or “bureaucracy.” While this is undoubtedly higher than we may wish, it is a fact that this is far lower than many other EU countries, and usually far cheaper to deal with. Nevertheless, it remains a major disincentive to business activity and investment in Greece.

The result is something of a vicious circle: successive governments invest in public education and healthcare (both in terms of capital investment as well as operating expenditure, e.g. salaries). But these investments are not financed through sustainable public spending, but by debt spending. In the meantime, the large majority of independent professionals and companies systematically under-report its true income, thus avoiding taxes. At the same time, they availing themselves of at least some public services, thus incurring public expenditure which cannot be met by public revenue.  

For those readers interested in a brief comparison of tax rates, I consider that the problem is not so much corporate or individual income taxes, which are roughly in line with main European norms, but the social insurance taxes. At a combined rate of over 44% for employer and employee, the main social insurance tax under IKA is far too high compared to equivalent rates in Europe. It is a major barrier to legal employment, and a main reason why salaries are kept artificially low, why there is high unemployment, and why there is a large share of “grey” market unemployment.

Table 1: Main Direct & Indirect Taxes for a Limited Liability Company
Tax Type
United Kingdom
Corporate Income Tax
Payroll Taxes2

1.        The rate of 21% applies to companies making profits of up to UKP 300,000. Profits from UKP 300,000 – 1,500,000 are taxed at 28%.

2.        The payroll taxes listed include employer and employee taxes.

3.        The UK rate is extremely complex to calculate: the UK rate listed here is based on a salary of EUR 32,000 per year.  

4.        For VAT, the question is not only the tax rate, but the speed of VAT refunds. In Cyprus, VAT is refunded quarterly. In Greece, it is refunded annually, and given the economic crisis there are major delays with refunds – over 18 months on average.

To Greece’s credit, a reform introduced by Minister of Labour Louka Katselli foresees a gradual reduction in the social security rate. This would, in my opinion, constitute a major incentive for employment and business development. It remains to be seen how exactly this will be applied, but it is sorely needed.

There are also a range of tax incentives which many readers may not be aware of. For instance, a business owner who declares only dividends from his or her personal work in a company (in other words, declares no salary) is exempt from the 25% dividend tax. This is a major incentive which is not found in UK, German or French income tax law.

It remains to be seen exactly how far future tax competitiveness will become in Greece. But I would like to reiterate my main point: the main issue involving taxes in Greece are:

a.       The fact that many, if not most, independent professionals and companies in Greece do not pay their fair tax assessment. As a result, the government has been forced to raise indirect taxes (such as VAT and fuel taxes), which hurt all consumers.

b.      The fact that in particular, social security taxes are a major disincentive to employment and to the provision of living wages by employers.

c.       The fact that the quality of public services remain low, for reasons both to do with the absolute level of investment (due in no small part to low tax collection), as well as due to political patronage and other issues.

There are obvious solutions to these issues, and it is a major test of political will, strategic planning and operational implementation for the government. But it deserves the benefit of the doubt as it begins this process, and it would be of great national benefit to the country if most companies and individuals to take a real look at their own income and their own personal responsibility for the present situation, and take corrective measures.  

Monday, 3 January 2011

January 1st, 2011

My first purchase of 2011 occurred in the Superfast XI Ferry bar on 01.01.11 at 7:21. I ordered and paid for a cappuccino, costing EUR 3.15, with 0% value-added tax, presumably because we were already in international waters. The bar is empty—the lounge silent except for one TV transmitting blurry images of Italian morning shows at the far end of the room. Outside it is still dark. Inside, it is quiet, as the roughly 150 passengers sleep off last night’s revels.

This anecdote captures both the benefits and costs of globalisation as we know them in Greece and perhaps elsewhere in this 11th year of the third millennium AD. Today, we can travel on New Year’s Day in a well-outfitted, comfortable high speed ferry to Italy. It is an early morning normality to order a cappuchino from a menu listing exhorbitant prices and the forced enthusiasm of two badly-dressed but hip members of the younger generation brandishing Coca Colas.

This extraordinarily material sense of affluence and convenience was unimaginable only 10 years ago. In 2001, Greece entered the Eurozone. Prices switched from Drachma to Euro inflation fell from the 18%+ to a more manageable level (at least theoretically). Ten years before that, in 1991, the ferries to Italy were exercises in discomfort. Laptops, Wifi and cappuchino were unknown. A trip of this sort would usually mean making friends with a group of travelers at the bar. The waiter would probably have been shabby, unshaven and chain-smoking cigarettes; while the toilets would be stinking into the corridors.

If I were asked to clarify the difference between 1991 and 2011, I’d have to say that in 1991, our world was somehow still new. The vast range of comforts and conveniences we enjoy today were less pronounced; the sense of a share national identity and spirit were much stronger. The vast wave of immigration from the collapse of Albania and the Soviet bloc had not yet begun. Greece was a much more ethnically homogeneous place: language was the passport, the shared sense of identity which differentiated Greek from foreigner. Foreigners were not despised or feared. “Where are you from” was typically the first invitation a Greek extended to a stranger. The sense of adventure was stronger: we had less, but were no worse off for it. It was a brave new world.

Fast forward 20 years, and Greece has changed, as have we all. We aspire to creature comforts but often shun human contact, except with those people we know. The sense of spontaneous mixing which would have occurred on a voyage on New Year’s Eve is gone: people stick with whom and what they know, rather than taking the social risk of speaking a common language with strangers, even of the same social class. Our social interactions are stratified. In the past, one could expect the bar man to launch into a soliloquy on Greek history. Today, his role is to serve the coffee and disappear.

In this, I sense that we have achieved a form of convergence with the West. For those unfamiliar with this European Union term, convergence describes the increase of living standards between the newly-joined countries of the European periphery compared with those of the 6 core EU founders, expressed primarily in terms of GDP per capita. We have indeed converged, although the moving target that is GDP growth means that the 6 core countries have continued their development, and today remain far ahead in areas such as social development, public services, private sector careers and education. Our convergence has been one of the poor relatives joining the party, only to find that the sophisticated set have fled the hotel ballroom for a private party far away.

The convergence has been much more pronounced in terms of social attitudes. In the brutal social and political upheavals of the 1990s, over 1 million uneducated and often starving immigrants flooded into Greece. Society, perceptions and attitudes changed massively as a result. This process repeated itself again in the first decade of the 2000s, with the added wrenching change of an explosion in information technology, communications and media which destroyed Greek traditional values forever.

Today, I believe that we have become something like a limited form of suburban America in the 1950s. I say the 1950s, because in Greece we are clearly before the socio-political upheavals of the 1960s, and long before the integrationist 1990s, which made it possible, in 2009, for an African-American of racially mixed marriage to become President of the United States.

The dream of our middle-aged middle classes in Athens today is a three-storey maisonette in Halandri or Vouliagmeni. We aspire to a secure but unchallenging job which allows us the means to accumulate a middle-class lifestyle and enough money to enjoy a vacation on Mykonos. The fierce, breathing idealism which allowed a society to survive the brutal Nazi occupation and the collapse into equally brutal civil war has been replaced by a sense of bourgeoisie vulnerability. Let them riot in Syntagma, but keep the stores on Ermou open. Let them rage against the system, but don’t interfere with my ability to meet my monthly mortgage payments.

We view our Georgian cleaning ladies or Pakistani street buskers as symbolic aliens, to be interacted with as minimally and antiseptically as possible. Social justice, yes, but for the white, ethnically-Greek class. Equality has been defined as a financial transaction rather than a sense of shared humanity.

In writing these observations in an empty ferry lounge, I conclude that today we have become very similar, if not indistinguishable, to the white middle class most other European and North American countries. For a country which still prides itself on its humanity (ανθρωπία) and hospitality (φιλοξένια), and who’s past exemplifies the summit and the depth of human achievement, such a revelation will no doubt be disappointing.

We are no longer an Εθνος, or single ethnicity: today we are just another multi-ethnic European country, characterised by the familiar problems of immigrant integration, growing social stratification, increasing child obesity, illegal immigration, religious equality, and a host of other symptoms of a society in change.  

The sooner we recognise this and come to terms with it the better. There is no going back to an imagined past where everyone spoke Athenian Greek and attended Church on Sunday. The village priest is no longer the arbiter of rural life; Aliki Vougiouklaki no longer stars in black-and-white films with happy endings. We must make a wrenching mental adjustment, and by we, I mean both the diaspora Greeks who retain an image of an idealised past, as well as the Greek middle class which determines the political life of this country.

We must build a society where fundamental equality before the law drives social mobility. Where anyone talented or hard-working, whether their parents came from Trikala or from Tirana, is able to succeed without discrimination and hindrance, providing they obey the laws. Where a career in government is no longer the sinecure of the past, and where politicians are no longer objects of veneration, but ordinary individuals fully subject to the law.  

Where the university is no longer about the title of your degree, but about the extent of your learning, and your ability to evolve in a fast-changing, challenging global economy. Where a Muslim or a Jew or a Hindu can worship with dignity in his own church, be married by his own priest, and be buried in his own graveyard, just as a Christian can.

Where the past is honoured, but not revered or worshipped at the expense of the future. Where we all understand that we live in a fluid present, and that 10 years from now Greece will have changed all over again. Where extraordinary social and political stagnation is a recipe for disaster, such as the one we find ourselves today. 

Most of all, a society which favours the young and the future. Without investing in the current generation in school, as well as the generation which has just entered the workforce, we have no future.

I firmly believe these changes are within our power to make. They are found first and foremost not in any new laws or budgets, but in our own hearts and values. There is no cost to making them, apart for the cost of challenging our own stereotypes and preconceptions, and the cost of investing a little bit more time and energy caring for the people and environment around us. We have everything to gain from this, and nothing to lose.

As this ferry plows the seas towards Ancona, our destination, I reflect that life itself is a journey, where the only sure thing is that no sooner do you arrive in one place than it’s time to leave again. I hope that in this year 2011, this journey for all of us will be cherished and loved for its intensity, its fair weather and foul, and for the destinations and the friends we will reach along the way.