In early April, the Greek government was welcomed back into the bond markets, issuing five-year debt yielding just under 5%. That’s pretty impressive, considering the country was essentially bankrupt just a few years ago. The big question remains, however: Has Greece really changed its ways? My personal opinion: a guarded yes.
Having visited Greece the past several years, I have seen structural change for the better. This doesn’t mean Greece is out of the woods. Or that Europe doesn’t face major financial threats, as LNWM Chief Investment Officer Bob Benson pointed out in the latest Economic Outlook. But on the ground, there is a slow march forward.
I can point to three recent efforts likely to reign in tax-dodging and corruption, which have plagued Greece since the Ottoman occupation (but that is another story and no excuse).
Divide and conquer. About a third of Greece’s workers are self-employed (vs. 15% on average for the Eurozone). And Greece’s self-employed are notorious for underreporting their income, especially high-earners such as doctors, lawyers, and resort owners. My aunt, for one, says 99% of her doctors have never issued her a receipt, and she’s not about to antagonize them by asking.
So here’s what the government is doing: to get at taxable transactions, it’s been requiring taxpayers to submit current-year sales receipts equal to 25% of their reported income — or pay a tax penalty. For 2014, there’s news that taxpayers will have to submit receipts from targeted sectors, such as doctors, plumbers, and restaurants/bars, equal to 10% of reported income. Sure, business is booming for fake-receipt providers. But persistent efforts to have taxpayers collect receipts is one way to dig up the massive underground economy (estimated at about 25% of GDP).
Probably more effective is this new government-required signage at businesses: “You have the right to walk out without paying if a receipt is not issued to you.” Greek taverna owners chasing down customers to hand them receipts. Now there’s something new.
Computerization and electronic databases. Slowly, but surely, Greece’s antiquated paper-file systems are being computerized. Government data can be cross-referenced so people don’t collect pensions twice or while working full-time (like one of my cousins did, and not illegally at the time). Computerization also allows for electronic tax filing and quick calculation of residential property taxes based on market value, attributes, etc. Up until 2009, Greece did not tax residential real estate at all, and it was a battle royale to have a tax instated, let alone collected. Until now, real estate taxes have been added to electricity bills. No tax payment, no electricity.
A Greek version of the IRS. Officially at least, Greeks today are paying a considerable amount in taxes. Another cousin in the banking sector said he paid 18,000 euro last year on 80,000 euro in income (22.5%), for his family of five. This does not include property taxes and the value-added sales tax (as high as 23% on non-essentials). So taxes are being levied. Collecting is the problem.
To that end, the Greek government has created an agency modeled after the American Internal Revenue Service, which audits and enforces all aspects of the tax system, including jail time for tax fraud. Heading this agency is Haris Theoharis, a British-educated software engineer with an investment banking and insurance background.
Of course, what Greece really needs now is jobs and economic growth. Proceeds from the massive sale of government-owned property have to be invested wisely and private industry needs a business-friendly climate in which to thrive. Innovative Greek companies like Coco-Mat (a high-end mattress and bedding maker) should be the norm, not the exception.
The sooner the better, because Greece has other problems to address: education, the environment, and — ironically given the famous Greek diet — personal health.