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Greece's slippery tax dodging professionals

PUBLISHED : Monday, 17 September, 2012, 12:00am
UPDATED : Monday, 17 September, 2012, 12:07am

There is a good reason for Greece to stay in the euro: to combat corruption. The country is riddled with it, and needs outside pressure and support to sort things out.

Even if Greece and its prime minister, Antonis Samaras, could overcome the huge loss of pride and reap some of the economic benefits of quitting the single currency, they would still be left with a corrupt economy, much of which strengthens the power of unions and trade associations.

City economists tend to ignore the problem. They have arrived at the opinion that leaving the euro zone is the best, if not the only, option for Athens.

Central to the argument is that an independent drachma would immediately be devalued, making Greek exports more competitive and at a stroke wiping out many, if not all, of the country's debts.

Yet these economists ignore the challenges that beset a nation where very few people pay their taxes, public-sector jobs are secured through family ties, and contracts for work are rarely signed without someone in a position of power asking for a backhander.

As in Italy and Spain, bankers perpetuate all the worst corrupt practices. Martin Sandbu, chief leader writer on economics at the Financial Times, recently chided the southern Europeans for not jumping at the chance to join a European banking union.

He argued that the loss of control over a crucial pillar of the economy to a higher EU authority was worth it when set against the chance to end the corrupt relationship between bankers, politicians and the professional classes.

It may seem conspiratorial to argue that corruption is at the heart of the Greek malaise. But it is one of the main reasons Berlin is adamant Athens has had all the help it is going to get, without evidence the cuts are going through. For German politicians, cuts to sacred state subsidies and increases in tax revenues are a crude indicator that corruption is being tackled.

A recent study of Greek banks, politicians and professional workers supports the idea that Greece is beyond helping itself. The report is written by two economists from the University of Chicago Booth School of Business, and a Greek academic at the Virginia Polytechnic Institute.

The report, "Tax Evasion Across Industries: Soft Credit Evidence From Greece", which documents the hidden, non-taxed economy, blames the current malaise on the professional classes.

They found that €28 billion (HK$280 billion) of tax was evaded in 2009 by self-employed people alone. As GDP that year was €235 billion and the total tax base was just €98 billion, it is clear that this was a significant sum.

At a tax rate of 40 per cent, it amounted to almost half the country's budget deficit in 2008, and 31 per cent in 2009.

The authors, Adair Morse and Margarita Tsoutsoura from the Booth School of Business and Nikolaos Artavanis from Virginia Tech, were given access to the records of one of the top 10 Greek banks. They found that when professionals approached the bank for a loan or mortgage, their tax returns showed that debt payments ate up 82 per cent of their incomes. This meant their income was too low for income tax.

On average, they found the true income of self-employed people to be 1.92 times their reported income. Banks assume this is the case, so they offer loans to almost every customer; that is why Greece has more home ownership than Britain (80 per cent versus 68 per cent).

The Greeks have begun to crack down on tax evasion. But broader attempts to move against the professions were blocked last year. MPs voted against a bill mandating tax audits on people who had incomes below a minimum threshold. The bill targeted 11 professions, including vets, architects, engineers, economists, doctors, lawyers and accountants.

Guardian News & Media



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