Universal Translator

Sunday, November 27, 2011

Following Up on Greece

I cross-posted yesterday's The 1%'s European Coup over at DailyKos, where it generated quite a bit of commentary.  In reading some of those comments this morning, I came across a number that took issue with my characterization of exactly what happened to Greece.  I addressed these points in a lengthy comment of my own, but it occurred to me to cross-post that additional argument/data here as well.

I originally had left out this information because I thought yesterday's post was getting long enough as it is, but I do think that this additional data supports my contention that Greece's debt problems arose because its wealthiest citizens simply refused to pay their taxes.  The comment I posted up over at DailyKos and the additional supporting information are both below the fold.

My contention is that Greece's problems don't result from any alleged overindulgence or overspending, so much as they result from its wealthiest citizens simply refusing to pay the taxes they owed.  In response, some have pointed out that (i) Greece has a huge debt problem, and (ii) Greece cooked its books and lied its way into the EU.
I confess, I don't really understand how these arguments are supposed to work.  As to the first, regarding Greece's debt, that argument only works if one assumes that a country's debt is purely a function of its public spending.  But this clearly isn't so; a country's debt is a function of its public spending and its tax revenues.  I contend that Greece got heavily into debt because the wealthy didn't want to kick in taxes.  Pointing out that Greece is heavily in debt doesn't really refute that contention.
As to the second argument, I am aware that Greece cooked its books to hide its debt.  I am also aware (as many others already have pointed out) that it did so with the help of Goldman Sachs.  From my point of view, this only underscores the underlying premise of my argument:  that the 1% basically are running things for the benefit of the 1%.
The Greek 1% didn't want to pay taxes but they did want Greece to be part of the Eurozone, so they got their fellow 1%ers to help them juggle the books to do whatever was needed to make that happen.  A fairly simple explanation.
And now, here is that additional data/argument regarding the culpability of Greece's 1%:
* * *
The wealth of a country is generally measured by its GDP; the wealthier the country (the higher the GDP), the more government services that country can afford.  In the diary, I pointed out that – purely as a percentage of GDP – Greece’s “profligate” gov’t spending is pretty much identical (less than a single percentage point’s difference) to that of the UK’s new “austerity” gov’t spending.  It seems pretty clear that Greece could afford the government it had.
But, of course, in order to pay for what it could clearly afford, Greece had to collect some of that GDP in the form of tax revenue – and this Greece refused to do.
Here is data on Greece’s income distribution for the year 2000 (most recent I could find).  The distribution breaks down as follows:

Income Share by Lowest 20%     -      6.74%
Income Share by Second 20%     -    11.89%
Income Share by Third 20%        -    16.84%
Income Share by Fourth 20%      -     23.04%
Income Share by Top 20%          -     41.49%
(And within that top quintile, the Top 10% have an income share of 26.04%.  In other words, more than a quarter of all Greek income goes to the top 10%, more than goes to any single quintile, and -- assuming the income share within the Third 20% is distributed evenly – about the equivalent of all the income going to the bottom one-half of Greece’s population)
So . . . the Greek economy has a high degree of income disparity, with a large percentage of the economy’s total income going to a relatively few people at the very tippy-top.  If one wants to generate tax revenue, one is going to have to tax these people.
And, on paper, Greece did so.  Greece’s top income tax rate (for anyone making above $75,000 Euros/year) was 40%.
But . . . Greece did very little to actually collect these taxes.  It’s not enough to impose the taxes, you’ve got to collect the taxes too.  (Cue Seinfeld:  it’s not enough to take the reservation, you’ve got to hold the reservation.)

 Here is a chart showing various countries’ total tax revenue as a percentage of GDP.  Of the 13 Eurozone countries listed, Greek is second to last in taxes collected (behind only Slovakia) with a pitiful 31.3% of its GDP being collected in taxes.
(Greece fares even worse when compared to the wealthy non-Eurozone Scandinavian countries:  Denmark, 48.9%; Iceland, 40.7%; Norway, 43.9%; Sweden, 49.1%.  Even the UK, whom I use as a comparator in the diary, smokes Greece in tax collections as a percentage the UK’s GDP:  37.1%.)
Why was Greece’s tax revenue so low compared to everybody else?  Especially when so much of its income was distributed to the people at the top, who presumably would be subject to the 40% income tax rate?
Answer: Because it was an open secret that the wealthy in Greece were skating on their tax obligations.  Here is a story from last week about a European Commission “tax force” urging Greece to improve its tax collection.  And here is a story about EU officials helping Greece negotiate an agreement with Switzerland to clamp down on tax evasion and claw back some of the tax money that fled the country.

And how did the wealthy skate on their tax obligations?  Easy:  they had a partner.  The simple truth is that the Greek government was not interested in collecting taxes on the wealthy.  Greece currently has a backlog of about 165,000 tax cases – some more than 10 years old – representing only half of an estimated amount of tax owed to it of $81 billion.

And how do we know this money is owed by the wealthy, as opposed to – say – by mom ‘n pop shopkeepers?  Well, by common sense for one thing, but also because we have this report from The Hellenic Observatory of The European Institute about the "Distributional Implications of Tax Evasion in Greece."  Among the report’s findings are that Greek’s Top 10% of earners (the people who command more than a quarter of the Greek economic pie) underreported their income by 14.7% - the highest of any of the deciles measured.  More significantly, the top 1% underreported their income by a whopping 23.6%.
(Also of note:  “the share of respondents agreeing with the statement ‘cheating on tax if you have the chance is never justified’ was greater at low- than at high-income levels in Greece (43% vs. 30%).”  So low-income earners in Greece are much more inclined to believe it is never appropriate to cheat on their taxes than are high-income earners . . . and because of Greece’s high levels of income disparity it is the high-income earners who have all the money.)
* * *
What we have here is a country that heavily weights its income toward the top and whose gov’t claims it is going to collect that income back as revenue in order to pay for its public services, but then, in reality, (i) those top earners gleefully defraud the gov’t of the tax revenue they owe and (ii) the gov’t looks the other way while those top earners do so.
So I think the original analysis holds up:  Greece could have (and still can) afford the level of public services its people demanded, but it would have had to tax the very wealthy who take home a disproportionate percentage of Greece’s economy.  The 1% don’t want to pay those taxes, so instead they worked out a deal w/Goldman Sachs to cook the books and borrow the money.
And now the Official Narrative is that ordinary Greek people overindulged themselves and the Eurozone Technocrats have to take charge and start slashing the Greek safety net.
The Official Narrative is a load of crap.

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