How to Fix Greece (and the EU): Part 3

In the previous part, we discussed the solution of conserving the euros of Greece by establishing a European Clearing Union to direct payments between European importers and exporters. In this post, we will discuss how Greece can generate more euros.

 

SOLUTION 1B-1: LOWER TAXES TO REDUCE TAX EVASION

“A nation may import more than it exports for half a century.. It may even have rising foreign debts. Yet its real wealth.. may increase in a much greater proportion.” (Simple Wealth of Nations, Book 3)

Greece_-_Public_revenue_vs_expenditure

To Smith, a high budget deficit does not automatically indicate poverty, because the net revenues might be higher. What is important is that the spending is not wasteful. The Troika introduced austerity packages to reduce wasteful spending while increasing taxes to hopefully increase revenue. Despite these, tax evasion and tax shortfalls still occur.

vasion

The self-employed are significant tax evaders

 

HOW TO FIGHT TAX EVASION

It’s not surprising that self-employed Greeks are said to be the top tax evaders since their earnings are regarded in socio-economics not as ‘wages of labour’ but instead as ‘profits on capital stock’, which can be hidden, and thus must be either taxed more moderately, or put under stricter tax rules.

“But his whole capital stock is almost always a secret.. Nations have taxed profits with a very loose, arbitrary estimation, instead of any severe inquisition. The extreme inequality and uncertainty of a profit tax assessed loosely can only be compensated by its extreme moderation.”

“High taxes frequently afford a smaller revenue to government than moderate taxes by reducing the consumption of taxed commodities.. When the reduction of revenue is caused by the reduction of consumption, the only remedy is to lower the tax.”  (Simple Wealth of Nations, Book 5)

“Only the strongest bodies can live and be healthy under an unwholesome regimen. Only the nations that have the greatest natural and acquired advantages in every industry, can prosper under such taxes. Holland has the most taxes in Europe. Yet it continues to prosper despite of them and not because of them.” (Simple Wealth of Nations, Book 4, Chap. 2)

The austerity measures are like medicine fit more for stronger countries like Germany than weak countries like Greece. We therefore advocate lower income taxes and VAT to combat tax evasion and to raise consumption. We also recommend a gradual phasing in of austerity cuts and other tax increases, instead of imposing them suddenly, so as to give more time for Greeks to adjust.

 

SOLUTION 1B-2:  Encourage Tourism: MAKE THE ATHENS SITE A PERMANENT OLYMPICS SITE

To raise regular revenue, we suggest strengthening one of Greece’s most important natural and national asset: tourism.

One way to do this is to build on or re-use the infrastructure of the 2004 Olympics and make Athens a permanent olympic site, since Greece was the original birthplace of both ancient (Olympia) and modern olympics (Athens, 1859). This will generate a regular revenue stream which can be used to help pay off the debt.

Impressive, but unproductive

Smith categorizes games as unproductive labour, which matches the tourism industry and the general characteristics of the Greek economy.

Having a permanent Olympic site such as Athens can disburden other countries from spending large amounts of money for building their own olympic and sports venues, which are often corrupted or even set up in unnatural places. In this way, Greece can build on its natural and acquired advantages as a top global tourist destination, just as German policies build on Germany’s natural advantages as a top destination for advanced manufacturing.

Another way to encourage tourism to Greece and to other Mediterranean countries, such as Spain and Italy, is for the EU to promote tourism in the south. This can be done by advertising and by policies that encourage Northern Europeans to take a vacation there. In effect, such policies can be treated as subsidies to support tourism, and operates in a similar way to what Smith called bounties on production, which oblige the stronger European countries to support the weaker ones for the sake of the stability of the Eurozone:

“A bounty on production would more directly encourage the production of any commodity than an export bounty. It would impose only one tax on the people which is paid as the bounty.. If such manufacture could not be supported at home, it might be reasonable to tax all other industries to support it.” (Simple Wealth of Nations, Book 4)

 

Fixing The Eurozone Itself

In the next post, we will discuss what changes should be done to the Eurozone itself, of which Greece is a part of, so that problems such as the Greek debt crisis will not repeat itself.

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