Tax Analysts Blog

Greece's Inability to Tax Itself

Posted on Nov 17, 2011

The papers say we're on the verge of an economic meltdown because numerous EU member states can't get their fiscal house in order, and the contagion will inevitably spread to all corners of the globe. The sovereign debt crisis is rapidly becoming a liquidity crisis as the cost of borrowing has recently escalated for the governments of Greece, Portugal, Italy, and Spain. That means the trouble isn't limited to projected future debt -- which is obviously alarming. A more immediate concern is that the cost of carrying current debt will soon become unsustainable.

The past months have seen so many austerity measures across Europe that it's difficult to keep track of them all. Each package seeks to increase taxes and cut public spending; neither of which goes over too well with the citizenry. But what's the point of raising taxes when the culture tolerates cheating on your taxes?

You've probably heard the old cliche: 'In Greece, tax evasion is the second most popular sport after soccer.'

The joke is now reality. A new paper from an EU task force estimates that unpaid taxes in Greece -- that is, tax liabilities currently due and owing -- total 25 percent of the country's GDP. You read that correctly. Unpaid taxes represent one-quarter of their entire economy. What's the point of adding new taxes when you can't collect the ones already in place?

We hope that Greece pulls through this bleak period, for their sake and everyone else's. But until their underlying societal attitude changes, it seems like their participation in the Euro-Zone is doomed to fail.

The take away here can be summed up in two lessons: First, a culture that cannot effectively tax itself will not long endure no matter how many bailouts you toss at it. Second, we are all economic slaves to the bond market, regardless of whether you reside in Athens or Washington. I hope the members of the U.S. Joint Select Committee on Deficit Reduction keep that in mind this weekend.

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