This is my second post on a topic of my choice for The Prospect‘s writing test. The first is here.
If you had asked me last week what lessons the US can learn from the Greek crisis, I would have only said, “don’t ask Goldman for debt advice.” Then over the weekend I read an insightful dispatch from Suzanne Daley in Athens:
In the wealthy, northern suburbs of this city, where summer temperatures often hit the high 90s, just 324 residents checked the box on their tax returns admitting that they owned pools.
So tax investigators studied satellite photos of the area—a sprawling collection of expensive villas tucked behind tall gates—and came back with a decidedly different number: 16,974 pools.
That kind of wholesale lying about assets, and other eye-popping cases that are surfacing in the news media here, points to the staggering breadth of tax dodging that has long been a way of life here.
It sounds like Greece is finally beginning to address the corrosive influence tax evasion and loopholes have had on both its battered budget and frayed social contract.
Tax evasion—long a favorite pastime in parts of southern Europe—is essentially an abdication of an individual’s commitment to society. Taxpayers provide revenue to the government, which in return provides public goods and services that markets fail to adequately produce. For example, most governments create transportation infrastructure and regulate water utilities. In Athens, the wealthiest citizens have upset this equation. They drive home along winding suburban streets and bask in pools filled with clean, subsidized municipal water—both of which are paid for in larger part by more honest (or audited) Greeks. The remainder of the balance has been paid for with unsustainable loads of foreign debt. As Daley notes, Greece “may be losing as much as $30 billion a year to tax evasion—a figure that would have gone a long way to solving its debt problems.”
Loopholes in Greece are less insidious, but also problematic. They exempt politicians’ favored constituencies from paying the full cost of the federal services they receive. Easily and inconspicuously slipped into law as an amendment to an unrelated bill, a tax giveaway then becomes maddeningly difficult to repeal. The beneficiaries will go all out to defend a targeted advantage most taxpayers are not even aware had been granted. Daley highlights one successfully repealed license to steal: Greek newsstand owners could avoid auditing by simply declaring an income of 12,000 euros (about $15,900). Any additional income was essentially tax-free.
All this lost tax revenue has added up. As Will Hutton reported in February, “uncollected tax runs at 13.6% of national output per year—more than the deficit.” No longer able to cheaply finance their growing sovereign debt on the skittish bond markets, Greek leaders have been forced to strengthen the country’s tax code. Unlike the cuts to wages, pensions, and public services that Prime Minister Papandreou’s Socialist government has been forced to make, this politically unpopular move will broadly benefit Greek society.
Although it may not be as flagrant or pervasive, America also suffers from tax evasion and a gamed tax code. In 2008, the Senate Permanent Subcommittee on Investigation found that the US loses some $100 billion annually to offshore tax evasion. If that sum had found its way into IRS coffers this year instead of Cayman Island holding companies, it could have reduced the 2010 budget deficit of $1.3 trillion by some 8 percent. To name but one egregious example of Washington’s harmful habit of legislating via loopholes, in January the Democratic-controlled Congress somehow let the estate tax lapse for the duration of 2010. This moment of fiscal inaction passed with nary a peep of protest from Republican deficit hawks, Tea Partiers, or corporate-front groups like Defeat the Debt. On March 28, this temporary giveaway caused the IRS to miss out on up to $4 billion, causing the heirs of the world’s 74th richest man to win what Scott Martin of the Trust Advisors blog referred to as the “2010 estate tax jackpot.”
Protected from the wrath of the bond market by the status of the dollar as the world’s reserve currency, US leaders feel less urgency to reform this country’s dysfunctional tax system. Avoiding politically difficult but broadly beneficially reforms is to miss an important lesson from the Greek sovereign debt crisis: No matter what right-wingers may promise, it is clear that America cannot “defeat the debt” until it tackles its tax problems.
Photo credit: JF Sebastian (via Flickr)