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2017 | OriginalPaper | Chapter

15. Taxes as Barriers to Sustainable Economic Prosperity: The Case of Greece

Authors : Panagiotis Liargovas, Nikolaos Apostolopoulos

Published in: Taxation in Crisis

Publisher: Springer International Publishing

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Abstract

This chapter aims to explore sustainable economic prosperity in Greece’s taxation system by answering how the increase in taxation affected people’s ability and willingness to pay taxes and if taxes act counter-cyclically or pro-cyclically. As the sustainable economic prosperity is a major priority of the European Union, taxes should influence positively production and growth as well as income distribution. To this extent, this chapter analyzes implicit tax rates (ITR) on labor and consumption. It also advances the analysis through the effective tax rate (ETR) on corporate investment in the European Union and Greece by focusing on effective marginal tax rate (EMTR) and effective average tax rate (EATR). Our multidimensional analysis reveals, among others, that the statutory corporate income tax rate of Greece is higher than the EU averages, while effective tax rates on capital investments appear to be high and dispersed. Consequently, Greece should reform its taxation system by lowering tax rates.

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previous chapter The Double Trap: Taxes and Subsidies as Determinants of Economic Growth and the End of the Downward Growth Spiral in Greece

next chapter The Impact of Tax Policy on the Economic Growth of Greece

In the case of Greece, the indirect taxation does not lead to fair income distribution (Kaplanoglou and Newbery 2003) as it is more regressive than other forms of taxation (Decoster et al. (2010).

Taxes on consumption include taxes on transactions between producers and final consumers (mainly VAT and excise duties).

Taxes on labor are divided among employed and unemployed labor. Employed labor: mainly personal income tax and compulsory social security contributions. Unemployed labor: part of personal income tax and compulsory social security contributions of self and non-employed are the main components.

Taxes on capital include capital and business income taxes and taxes on stocks of capital. Capital and business income: mainly corporate income tax, personal income tax, and social security contributions by self-employed persons. Taxes on stocks of capital: mainly taxes on land, buildings, and other structures and taxes on business and professional licenses.

The statutory corporate tax rate is the rate that is imposed on taxable income of corporations, which is equal to corporate receipts less deductions for labor costs, materials, and depreciation of capital assets.

The annual data used cover a period from 1970 to 2012 regarding the total tax receipts as a share of GDP and from 1986 to 2012 with respect to the tax rates. The data come from the OECD database.

In spite of this fundamental problem, many researchers have relied on data on tax revenues—or, more frequently, tax revenues as a proportion of GDP, which could theoretically be construed as an “implicit tax rate”—to analyze the cyclical properties of tax policy. Unfortunately, however, doing so conveys a highly misleading picture (Frankel et al. 2013), although in Greece our argument on pro-cyclical tax policy is further supported.

The data cover the period 1970–2012 and come from the OECD database (revenue statistics-comparative tables). To isolate the cyclical component of a time series, we used the filter Hodrick-Prescott (HP). It is important to note that a pro-cyclical fiscal policy implies a negative correlation between tax revenues as a percentage of GDP and/or tax rates with respect to GDP over the economic cycle. This terminology differs from the Real Business Cycles literature according to which each variable positively (negatively) correlated with the cyclical component of GDP is referred to as pro-cyclical (counter-cyclical).

The data have been obtained from OECD.

The counterargument that is particularly true for Greece (a heavily indebted country) is that in times of recession, counter-cyclical policies increase the countries debt as well as the needs for future refinancing it. See also “Are countercyclical fiscal policies counterproductive?” of David B. Gordon and Eric M. Leeper (NBER Working Paper No. 11869), published in December 2005.

Briefly, taxes distort economic decisions of people because these decisions are influenced not only from the real economic costs and benefits (the first best) but also from taxation.

In this context the choice between work and leisure is also influenced, the choice of the country for the realization of an investment, for migration, for savings and consumption.

Alesina, A., & Ardagna, S. (2009). Large Changes in Fiscal Policies: Taxes Versus Spending (NBER Working Paper No. 15438).

Bearer-Friend, J. (2012). A New Path Towards Tax Harmonization in the European Union: A Prospective Analysis of the Foreign Accounts Tax Compliance Act’s Effect on EU Tax Policy (Stanford-Vienna European Union Law Working Paper No. 9).

Decoster, A., Loughrey, J., O’Donoghue, C., & Verwerft, D. (2010). How Regressive Are Indirect Taxes? A Microsimulation Analysis for Five European Countries. Journal of Policy Analysis & Management, 29(2), 326–350.CrossRef

Devereux, M. P., & Griffith, R. (1998). The Taxation of Discrete Investment Choices (The Institute for Fiscal Studies Working Paper Series No. W98/16).

Devereux, M. P., & Griffith, R. (2003). Evaluating tax policy for location decisions. International Tax and Public Finance, 10(2), 107–126.

European Union. (2016a). Tax Policies in the European Union: 2016 Survey. European Union.

European Union. (2016b). Taxation Trends in the European Union: Data for the EU Member States. Iceland and Norway: European Union.

Frankel, J. A., Vegh, C. A., & Vuletin, G. (2013). On Graduation from Fiscal Procyclicality. Journal of Development Economics, 100(1), 32–47.CrossRef

Giavazzi, F., & Pagano, M. (1990). Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries (NBER Working Paper No. 3372).

Kaplanoglou, G., & Newbery, D. M. (2003). Indirect Taxation in Greece: Evaluation and Possible Reform. International Tax and Public Finance, 10(5), 511–533.CrossRef

King, M. A., & Fullerton, D. (1984). Introduction to” The Taxation of Income from Capital: A Comparative Study of the United States, the United Kingdom, Sweden, and Germany”. In The Taxation of Income from Capital: A Comparative Study of the United States, the United Kingdom, Sweden, and Germany (pp. 1–6). University of Chicago Press.

Matsaganis, M., & Flevotomou, M. (2010). Distributional Implications of Tax Evasion in Greece (Hellenic Observatory Papers on Greece and Southeast Europe, GreeSE Paper No. 31). London, UK: The Hellenic Observatory, LSE.

PwC. (2016). World Tax Summaries: Taxation in Greece. Retrieved January 17, 2017 from http://www.pwc.com/gr/en/publications/greek-thought-leadership/world-tax-summaries.html

Wasserfallen, F. (2014). Political and Economic Integration in the EU: The Case of Failed Tax Harmonization. JCMS: Journal of Common Market Studies, 52(2), 420–435.

Title: Taxes as Barriers to Sustainable Economic Prosperity: The Case of Greece
Authors: Panagiotis Liargovas
Nikolaos Apostolopoulos
Publisher: Springer International Publishing
Book: Taxation in Crisis
Print ISBN: 978-3-319-65309-9

Electronic ISBN: 978-3-319-65310-5

Copyright Year: 2017
DOI: https://doi.org/10.1007/978-3-319-65310-5_15