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Greece: Tax Cuts or Crackdown on Tax Cheats?

As the race for a new bailout for Greece continues, one of the main bones of contention between opposition politicians and the Greek government is tax.

Greece
Jorg Greuel | Getty Images
Greece

The government wants to keep the recently raised tax rate, and further increase tax revenues by cracking down on tax evasion, which costs the Greek economy up to 15 billion euros ($21.6 billion) annually.

The conservative opposition believes that lowering tax rates, ensuring that more people pay tax, is the answer.

Antonis Samaras, leader of the opposition, said on Monday that lower tax rates were a precondition for a consensus agreement with the government.

There is no question that tax evasion is a huge problem in Greece, with an estimated 25 to 35 percent of GDP hidden in the shadow economy, according to the government. It is not just back street dealers who neglect to declare their income to the taxman, but professionals like dentists, doctors and lawyers.

At the start of May, spurred on by the International Monetary Fund (IMF) and the EU, who have helped Greece with a 110 billion euro bailout package, the government launched a crackdown on tax evasion, and announced the appointment of former anti-terror prosecutor Ioannis Diotis to tackle fraud.

Finance Minister George Papaconstantinou said: "Tax evasion constitutes a crime against the country.

Greece hoped to garner an additional 9.2 billion euros from a spate of tax-related measures in 2010, but only managed 5.8 billion euros.

Is the best way to get higher tax revenues lowering taxes so that more people pay voluntarily, rather than rooting out the tax evaders?

“You don’t want to undermine the rule of law,” Chris Sanger, head of tax policy at Ernst & Young, told CNBC.com. “It’s fundamental to any tax system that taxpayers feel that other people are contributing the same to the economy. That’s the problem that faces governments introducing taxes.”

He believes that the government should focus on its crackdown.

A low flat tax rate could be a “straightforward” way of bringing tax evaders back into the fold, Bill Dodwell, head of tax policy at Deloitte, told CNBC.com.

Many of the former Soviet states used a low flat tax when they first became independent, as often they had no recent history of collecting tax and wanted a simple system.

Estonia has achieved particularly high levels of compliance after getting citizens to pay its flat tax rate online.

“Once you have those people in the system, making it harder for them to evade tax in future, you really would have more public money,” Dodwell said. “You can then change the system in years to come, once you have everyone in the system.”

“A lot of people do accept that tax is something you have to pay, and if you start it at that sort of level it’s pretty easy,” Dodwell added.

“In Greece, it does have some tax in place, and it’s relatively high. Some people do actually pay it, so if you reduce it you are giving up some money from what they are paying.

“If at the moment you’ve got close to half the population not doing the right thing, then a low flat tax would be the answer, so that no-one can say they’re going to lose their business because of high tax.”

However, it is more difficult to get tax incentives through the system if a flat tax is in place. There can also be problems among the population if it looks as though the rich aren’t paying enough tax, Dodwell said.

Contact Europe: Economy

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