Can a country tax itself into economic oblivion? An outside observer might well conclude that Greece is running an experiment to find out. The Greek government imposed another big tax increase Saturday to appease the European Union and the International Monetary Fund. The latest measures will raise the corporate income tax to 26% from 20% and push the top individual rate to 42% from 40%.
Nearly three years after Athens was first bailed out, it remains dependent on the EU and IMF to fund its budget deficits and roll over existing debt. That debt, by the way, has gone to 170% of gross domestic product from about 120% when the EU first intervened. Nearly all of the debt is owed to Greece’s European neighbors and the IMF.
Understandably, those creditors expect and want to be paid back. They have repeatedly eased the repayment terms and lowered the interest rates on those loans. But their insistence on ever-higher taxes won’t improve their odds of seeing their money again. The Greek economy has been shrinking for five years straight, and Athens started out with a huge budget deficit and bloated government when the crisis first erupted.
One of the measures passed Saturday is a requirement that nearly every Greek citizen fill out a tax return, in a bid to cut down on tax evasion. But those who feel no compunction about not filing a return today are unlikely to shrink from filing a false or incomplete return under even higher tax rates. Athens says it expects the new taxes to raise €2.3 billion euros this year. Here’s betting that these latest measures, like Greece’s earlier rounds of tax hikes, come up short.
Meantime, Greece’s neighbors seem to understand the benefits of lower rates. Bulgaria has a 10% corporate income tax and a 10% personal-income tax, and it expects 1.5% growth this year—not thriving, but not in free-fall, either. Turkey’s standard corporate income-tax rate is 20%. Growth there is expected to come in at around 4% this year.
We keep hearing that Greece needs to make its economy more competitive, which is true. But it won’t do that by making its tax code more punitive. Greece needs to break out of the EU-IMF austerity trap, and one way to do that would be with a flat-tax reform. Its current road will only lead to more hardship.