Monday, May 10, 2010

Greek Austerity Should Include a Tax Amnesty

Greek Austerity Should Include a Tax Amnesty

Dean Baker

The Huffington Post

May 3, 2010


The news accounts of the Greek budget crisis have been

filled with stories about the country's bloated civil

service and generous Social Security program. While

these areas of spending probably need reform, the other

side of the equation has been largely overlooked.


Greece is the Olympic champion of tax evasion. The OECD

estimated that Greece has an underground economy equal

to 30 percent of GDP, by far the largest of any OECD

country. Some of this is involves small-time tax

evaders, but many of the country's richest people also

take advantage of the opportunity to avoid paying their

taxes. If Greece had anywhere near normal tax

compliance, its deficit problems would be far more manageable.


While Greece has pledged to crack down on tax cheats as

part of its bailout commitments, these pledges are less

concrete than the cuts scheduled for its civil service

and retirement systems. There is a simple way to put the

commitment to tax enforcement on an equal footing.


The Greek government can announce a special tax amnesty.

During a set period (e.g. 6 months), people will have

the opportunity to pay their back taxes from the prior

three years with little or no penalty. After the end of

this period, the government will pursue new efforts

aimed at tracking down tax cheats. This time, it will

impose larger fines and/or criminal penalties on those

who did not take advantage of the amnesty period.


This amnesty route accomplishes two important goals.

First, it can raise an enormous amount of money. If

Greece can collect just 20 percent of the unpaid taxes

from the last three years it would be a huge step in

reducing its deficits. (If taxes are equal to 30 percent

of GDP and 30 percent of GDP escaped taxation each year,

then the unpaid taxes over the last three years are

equal to 27 percent of GDP. If the government can

recover 20 percent of this money, it would be equal to

5.4 percent of GDP - the equivalent of more than $750

billion in the United States.) Also, once a person has

paid taxes on a large income, it will be easier to track

their income in the future, thereby ensuring greater

future compliance with the tax code.


The other important outcome from an amnesty program is

that it would indicate whether the country is serious

about enforcing the tax code on the wealthy. If rich

people believe that the government is genuinely

committed to enforcing its tax code, then they will take

advantage of the amnesty in large numbers, seeking to

avoid more serious penalties in the future. However, if

they believe that the government threats are an empty

gesture then they will ignore the amnesty, just as they

ignored the law originally.


This will tell the Greek people whether they are being

taken for a ride by a government anxious to impose

austerity on ordinary workers, but unwilling to touch

the income of the wealthy. There may be no easy way out

for the Greek people from this situation, but they will

at least know exactly where they stand.




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