Self-harming taxation, or, the liquidation of the kulaks

Someone earning 7,000 euros [per month]; we tax him and take 4,000. Don’t tell me he can’t live well with 3,000.

[SYRIZA MP Giorgos Kyritsis, explaining the government’s tax philosophy on the radio]

Anytime taxes rise, anywhere on the planet, dark prophets of doom predict a self-defeating failure. Like a boomerang that instead of hitting the prey, returns and kills the hunter, the tax will cause such harm in the economy that total tax receipts will fall. In real economic data we rarely find definitive evidence of such self-defeating taxation, despite the popularity of “Laffer curve” arguments. It seems, however, that Greek economic policy is going for one more negative record, the clearest self-defeating taxation in Europe.

Self-defeating taxation prophecies usually stem either from economic ignorance or self-interest. Taxes always directly harm those who pay them (they might be of benefit indirectly, if they fund necessary public policy), but very rarely backfire to such an extent that they harm the person setting the tax: No government is so self-destructive as to aim for lower tax revenues and angry taxpayers at the same time.

To show what an amazing feat a truly self-defeating taxation is, consider the case of heating oil in Greece. Rising taxes in the last years have led to a vertical drop in demand and a shift toward inferior (but relatively untaxed) heating methods, which is obvious in the Dickensian smog that often follows particularly chilly days in Athens. Despite the strong consumer reaction to the tax though, total tax revenues still rose (see Yannis Palaiologos: "The 13th Labour of Hercules")!

Even the infamous case of the VAT in Greece (which has risen to be among the highest in the EU) does not yield a clear negative fiscal effect. Of course it’s not enough to show that VAT revenues fell after the rates rose, since at the same time, many other factors changed, harming the Greek economy. It is notoriously hard to isolate the effect of every change, the same way as it’s hard to predict what the effect of smaller fiscal deficits in the middle of a multidimensional crisis will be (by the way that’s the issue at the heart of the whole fiscal multipliers debate, involving the IMF, Greece and the EU).

In the recent Ryanair case though, economic investigators would probably be able to find a smoking gun. Because of a 12-euro tax per passenger, the no-frills airline recently decided to reduce its flights to Greece. The total damage for the country due to lower visitor numbers is clearly higher than the benefit of the tax revenue.

This is an extreme case of a long bureacratic tradition in Greece, agencies taking measures with

a. a very narrow own-receipts goal,
which is also viewed
b. in a very myopic sense, ignoring second-level effects (what we call general equilibrium effects)

Typically, an agency or ministry that wants to be able to boast of “results” takes a measure with immediate benefit for itself, that could however be causing a net loss for the country as a whole, or even its own government. A classic example is the “voluntary exit”: civil servants at government agencies or utilities being let go to lower the salary item on the agency’s budget (as the government has requested), but increasing the burden for pension funds, that again is covered by the same government, often at greater cost.

In the tourism sector, the 12-euro per capita tax is negligible next to the more than 700 euros that the average European summer visitor spends in the country (that’s why in Hania, for example, hoteliers have allied to subsidize Ryanair’s activity). Even if the government ignores the country’s benefit and only cares about its tax revenues, it seems to be ignoring the 300 euros of additional VAT and income tax that every tourist brings.¹

A government looking at the numbers without hypocrisy or ideological bias would not be taxing just for the sake of taxation, but would look at the net benefit for the economy. If it’s negative, as in Ryanair’s case, the tax would have to go.² As Ryanair’s chief commercial manager David O’Brien succinctly put it, “better passengers with no taxes, than taxes with no passengers.”

Unfortunately, instead of looking for backfiring taxes and abolishing them, the current Greek government is preparing such a dramatic onslaught of new taxes and increased pension contributions (up to 600 percent) that the only outcome can be increased corruption and accelerated emigration of incomes (if not always emigration of the people behind the income). The toll on high incomes is so harsh that it resembles punishment, not just a fair contribution to the common good. In that, it starts to resemble Stalin’s taxation of the “kulaks.”

Rather than see their cattle and pigs confiscated, many peasants preferred to slaughter and eat them, so that by 1935 total Soviet livestock was reduced to half of its 1929 level. But the brief orgy of eating was followed by a protracted, agonizing starvation.

[Niall Ferguson, The War of the World]

For the first time, Greeks earning 40,000 or 80,000 euros annually seriously consider emigrating, to be able to fulfill their obligations without cheating the state. Despite the widespread complexes in Greek society that deem the upper middle class to be unworthy of sympathy, everyone has to admit that the rich are fiscally necessary: They are the taxation heavyweights.

If the government manages to expel every kulak from Greece, the result will not be a Marxian paradise where everybody is allocated goods “according to her needs,” but a Hobbesian hell “omnium contra omnes”; a truly dangerous situation of self-reproducing poverty and misery. Let’s hope that is a negative record for postwar Europe that even the most ideologically obsessed government will not want to break.

1. The comparison here is tricky. Assume that the 12-euro tax discourages 2 million tourists from coming to Greece, leading to just 24 million visitors. Abolishing the tax (if it can’t be done just for Ryanair) means losing the 12 euros for all 24 million tourists. For the no-tax reform to make sense, Ryanair’s additional tourists must be bringing tax revenues of at least 144 euros per capita. That is very likely the case.

2. The question remains why the lenders are not pushing for more rational taxation. While Brussels is often dominated by tax-happy formalistic bureaucrats, the IMF is filled with economists exactly trained to avoid such problems.

Sotiris Georganas is a Reader (Associate Professor) in Economics at City University London.