Taxation Versus Revenue Targets: A Delicate Balancing Act for Greece
Greece has been capturing the headlines in Europe and across the globe for all the wrong reasons. The country’s economy has spiraled to the worst it can ever get amidst an increasingly fragile political situation. Foreign debt has degenerated into an endless crisis that has pushed Greece to the walls, to an extent that almost prompted its political leadership to mull over the possibilities of quitting the EU altogether.
The EU and the IMF have been at the forefront of assisting the country in implementing economic reforms that that will reignite economic growth. The economic recovery measures have largely been focused on government spending cuts and the raising of taxes for purposes of stimulating the economy, while at the same time addressing the growing budget deficits. However, these measures have been too unpopular with the public and they have sometimes triggered widespread street protests and unrests.
All the same, Greece has continued to wade through the harsh economic conditions with all its hopes pegged on the EU. As such, the political establishment has agreed to implement most of the EU and IMF-sponsored economic policies albeit with repercussions that are hitting the populations hard.
The increase of taxes was one of the main conditions that were set out by the EU, IMF and other foreign debt partners. Tax matters are extremely sensitive in any given country, especially during period of economic turmoil as it deprives the population the little that is left in their pockets. However, with little options left on the table amidst the biting economic crisis, Greece law makers finally summoned the courage to pass a new taxation law in the spirit of enhancing economic revival. A new law that was enacted in January 2013 effectively spread the 42% tax rate down the hierarchy of the tax brackets to those earning more than $56,000 annually.
The expanded taxation was extremely drastic considering that the previous tax regime applied a 45% tax rate on annual income exceeding $132,000. These tax rates are applicable to citizens and foreigners alike because Greece imposes taxes on any income earned from the country regardless of the origins of the income earner. Therefore, foreign employees and business establishments whose annual income falls above the $56,000 income tax bracket will surrender a greater portion of their income to the tax man. This will cause major gaps in household incomes of foreigners in Greece and may even destabilize livelihoods of these families.
Like any other foreigners abroad, foreign employees and businesses in Greece would want to send portions of their income back home. These international fund remittances are fundamental in supporting their families back home and even promoting the economies of their home countries. Unfortunately, the remittances are going to spiral because households will have less income at their disposal to save or send back home.
The Greek government is seeking to raise revenues in excess of $3.3 billion in 2013. This raises the question as to whether these targets are realistic considering the current economic conditions in the country. There is no question about the urgent need for Greece to shore up its income to meet its public obligations. However, the decision to raise taxes seems to be wiping out all the gains made in the past that were aimed at attracting and retaining foreign investments. To this end, the urgency of the economic situation seems to have taken precedence above anything else, yet some of the economic revival measures that are being adopted are absolutely untenable.
Wiping out the gains that were targeted at attracting foreign investments and expertise will particularly harm the country over the long term. This is because there will be capital flight as foreign investors will seek alternative investment destinations. Indeed, there is no doubt that some foreign businesses and investments will find it difficult to shoulder the impact of expanded direct taxation and dwindling market prospects at the same time. When taxation is raised by such magnitudes, then it follows that households will have less amount of money for spending at their disposal and this will reduce sales.
To this end, the solution lies more in need to pursue realistic revenue targets relative to the prevailing economic conditions. This will allow the government to impose reasonable taxes that will not destroy the country’s foreign investment profile.