21 July 2015

SIMON WATKINS: It is idiocy to force Greece to raise taxes - it's terrible for economic growth

18 July 2015 

Putting up taxes unthinkingly is bad for economic growth and often actually leads to lower tax revenues to government.
If you raise the tax on business activity there is less incentive to expand and to make profit. Why work harder if the government is going to take more money? What is more, if you raise taxes carelessly it may act as an incentive to tax avoidance – legal measures to reduce your tax bill – or even outright tax evasion.

This is a widely held view and one which has considerable merit. But apparently it does not apply to Greece. The eurozone has decided that to renew Greece’s economy and to boost tax revenues, the appropriate policy is to jack up taxes. And not just any taxes, but VAT on leisure activities and on holiday islands, Greece’s prime industry and its biggest source of outside income.

Unruly: The country's politicians and its people need to use this period of calm to prepare for an orderly Grexit

This is quite simply idiocy. This entire issue has been poisoned by too much moralising and too much politics. The objectives appear to be either to punish Greeks for alleged fecklessness, or simply to make its position in the euro intolerable – forcing an exit.

Whatever the failings of Greece in the past, they will not be rectified by these policies. In fact, convincing Greek business to stop dodging VAT and pay its fair share will not be helped by raising VAT rates.

The second element in this Greek farrago is that of debt relief. It has been the contention of the Greek government that its debt burden is unsustainable ever since new negotiations with creditors began in February. Many observers, myself included, said in 2010 and again in 2012 when the last bailouts were agreed that Greece was bust, that more bailout loans would make matters worse and that more debt relief was the only solution.

This has been vigorously resisted by creditors and most strongly Germany. But now debt relief is accepted by the International Monetary Fund as necessary. The US Treasury has made clear that it regards debt relief as the only solution. Last week Mario Draghi, head of the European Central Bank, said the idea that debt relief was necessary was ‘uncontroversial’.

Unfortunately, he is wrong because in some quarters – Germany and Finland for example – it still appears to be very controversial indeed.

The talks that will soon begin to finalise the latest bailout, agreed in principle last week, will surely founder once again on this point.

The recent abatement of the crisis must not be wasted. If anything now is the time for even more hard work.

Because Greece’s politicians and its people need to use this period of calm to prepare for an orderly exit – and to default on their debts.

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