Greece Is Giving The European Union ‘The Finger’ – And Europe Can’t React

Submitted by Sprout Money on 09/18/2014 10:18 -0400



Greece surprised the international community earlier this week after Prime Minister Samaras has announced he is considering to lower the income tax and corporate tax in Greece, and that he’s looking to get the European troika to sign off on his plans. According to press agency Reuters, Samaras said in his annual speech in the parliament that it’s ‘time for Greece to stand on its own feet again’.
So what is Samaras actually proposing to do? The Prime Minister has announced a plan whereby the corporate tax rate would be gradually reduced from the current 26% to just 16%, and that the top tax bracket would see a substantial reduction in personal income tax. Samaras clearly said the wants to reduce the highest personal income tax rate from 42% to 32%. Additionally, a certain property tax would also be reduced.
It’s remarkable that the Prime Minister is already publicly stating he wants to reduce the income taxes, even though the current quarter will be just the first quarter of economic growth in not less than six years time. This might be hubris (which is a Greek word after all), as it’s extremely risky to immediately think that all the problems are behind his back. After all, one quarter of economic growth doesn’t mean that Greece has found the path to a sustainable recovery. We would dare to say this economic improvement is still very fragile, and even though the economy must indeed be stimulated, the Greek politicians need to be careful they don’t act too fast on preliminary indications.
What would the impact be of a lower tax rate? Most importantly, the households and companies would get additional breathing room, as a lower tax rate should increase the disposable income which will be used to increase the consumption numbers. However, the main problem in Greece is its underground economy, and a lower overall tax rate might not be sufficient to legalize this informal economy. Samaras didn’t talk about additional plans to tackle undeclared gainful employment. In our view, a reduced personal income tax rate could only work if the government steps up its efforts to decrease the informal employment contracts. If Athens would neglect to do this, its tax revenues would decline, and none of the informal economy would be formalized. So the reduction in tax revenues should be compensated by an increased supervision and frontal attack on the informal economy.
Another reason why we think this easement is coming too early is because the country hasn’t met the ‘primary surplus’ target of 4.5% which was required by the European governing bodies. Rating bureau S&P estimates the average primary surplus over the next three years to be just 2%, which is less than half of what the Troika demanded. By daring to propose a substantial tax cut after just one quarter of economic growth (after 25 quarters of a contracting economy) and by meeting less than half of the Troika’s requirements regarding the primary surplus, Greece is essentially giving Europe ‘the finger’ after the community bailed the country out for a total amount far in excess of 200 billion euro’s. Additionally, by lowering the corporate tax rate to just 15%, Greece might seduce companies to relocate to Greece, thereby reducing the tax revenues from other member states which helped to bail Greece out.



The Greek 10 year government bond yield; Source:Bloomberg
One would expect the Troika to react aggressively to this Greek idea and to outright reject any plans to reduce the taxes, but the truth is that the hands of the Troika are tied and it has no other possibility than to accept these measures. Prime Minister Samaras just HAD to propose these very populist measures as it is feeling the breath of the left-wing anti-austerity Syriza party in Greece (hence the one liner ‘the over-taxation has to end’. The only reaction to muzzle an anti-austerity party is to soften the impact of the rules and nothing works better than lowering (or at least pretend you’ll lower) the tax rates. And that’s also the reason why the Troika is with its back against the wall. Theoretically, it should refuse Samaras’ request because the requirements of a very decent primary surplus have not been met at all and that a sustainable recovery hasn’t been achieved yet.
But the Troika is smarter than that and has found a very cooperative partner in Antonis Samaras. If the government would stand its ground and not reduce the tax rates it would be very likely that Samaras would be voted out of office and the anti-Europe and leftist party Syriza would take the reins. As this euro-sceptic party would most definitely not want to cooperate with the troika, it has no other option than to agree with a lower tax pressure, even though the situation is very fragile.
This reads like the average telenovela, and instead of the Troika commanding the Greeks, it’s now the other way around. And the worst thing is, Prime Minister Samaras isn’t even proposing the tax cuts because it’s in the best interest of the nation and the common Greek citizen. No, the planned cuts are nothing else but basic self-preservation to keep him and his party in the saddle. One has to wonder if the Troika is indeed immune for political games.

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