IMF’s useless politicians

The IMF released yesterday its 2013 Article IV consultation Concluding Statement i.e. the “report” of its Mission to Greece. As politics supersede sound judgement the IMF report leaves a lot unsaid.

In point 3 the report discusses insufficient structural reforms particularly in the tax system where “Very little progress has been made in tackling Greece’s notorious tax evasion. The rich and self-employed are simply not paying their fair share, which has forced an excessive reliance on across-the-board expenditure cuts and higher taxes on those earning a salary or a pension”. The real problem, however, is not tax evasion but the tax system itself that heavily relies on heavy property and indirect taxes irrespectively of income. A system whose very high rates and burden practically force those who can evade taxes, to do so in order to survive. A system under which shipowners, the richest of the Greeks, are constitutionally shielded from any taxation. With 30% of taxpayers currently unable to meet their tax burden and with taxation practically killing the economy there is no mention in the report of the urgent need to reform the tax system itself and not just the tax collection mechanism, which is the only priority for the IMF.

In order to reform the tax system the government should streamline expenditure and improve the dismal productivity of the public sector. The IMF report stresses the need for “limited mandatory redundancies” in the public sector noting that “while projections suggest that attrition will be just about enough to meet medium-term staffing targets, the provision of important public services is already hampered by lack of qualified staff in key areas, like banking supervision and tax administration. Mandatory redundancies that provide room to hire new, well-qualified and motivated staff will thus need to be a key component of the plan for modernization of the public sector, and in the process lend credibility to the policy of relying primarily on attrition. The taboo against mandatory dismissals must be overcome.”

This would have been an excellent idea if the word “limited” was changed with “extensive” in regards to mandatory redundancies. With more that 1.500.000 unemployed in the private sector the IMF is afraid to tell the truth. While it says that the “taboo” should be overcome it dampens its own conclusions by asking for “limited” redundancies while everyone knows that sweeping redundancies are needed.

Similarly the report contains the following politically correct statement about improving the business environment “The government’s welcome public commitment to improving the business environment and accelerating privatization now needs to be matched with results.” This is the IMF way of saying that the government has does absolutely nothing to improve the business environment even in cases where reforms would be revenue neutral. And that is simply because the government does not care about the private sector as its’ priority is to protect the bloated inefficient public sector that is dragging us down.

Also, one of the biggest problems lies with the tragically inefficient justice system that scares away all potential investors and, with them, any hope of recovery. This critical issue does not appear anywhere in IMF's report and is only casually mentioned in other EU reports on Greece.

The current fiscal “progress” is based on non sustainable taxation and any future hopes of growth are killed by the lack of structural reforms.

Greece is very sick and in need of a doctor. This is the role the IMF should play and not that of a politician. We already have too many of those.

Mrs. Lagarde’s dangerous myopia

I find Mrs. Lagarde, whom I had the chance to meet in the past when she was serving as France’s export minister, competent, smart and charming. That is why I am surprised by the fact the she doesn’t “see it”.

In an interview today the IMF head urged Greeks to pay taxes, saying she worries more about the plight of children in sub-Saharan Africa than the people of the crisis-hit European nation. I will not linger on the second part of this callous statement, which bears the question why did the IMF help Greece in the first place when, with the same amount of money, they could, at least in theory, do much more for the children in sub-Saharan Africa. After all Greece imported more than 1.000.000 smart phones last year with an economy in tatters. But again, this is beside the point I want to make.

The troika and most politicians in Greece focus on tax evasion as one of Greece’s major problems. Battling tax evasion has been touted as the government’s first priority for more than two decades now. But is tax evasion actually the problem?

In 1991 the great thinker Panayiotis Kondylis wrote “The fact that most public servants at all levels hailed from culturally retarded social strata, had serious consequences on the nature of the state apparatus, whose functioning stumbled upon their illiteracy, narrow-mindedness, guile and inhibitions, as well as the insurmountable inability of the average employee to base his work on impersonal, and abstract principles, as long as his mentality was grounded upon the values of a patriarchal society, i.e. his primary loyalty to his homeland,  his relatives,  his friends,  the friends of his friends, to his patrons and protégées”.

Kondylis argues that Greece never evolved into a bourgeois society and still remains, by and large, a patriarchal one. “When the patriarchal relationship moves to politics it evolves into what we call today a customer relationship, while retaining its fundamental characteristics of obedience and protection”. In this context taxpayers are unhappy to contribute to the benefit of people outside their “patriarchal” circle but more than happy to do so to a politician, or friend, who will “take care of their affairs” when in need. Outside Kondylis’ philosophical parlance this phenomenon will be plainly described as “corruption”. This, and not the tax system, should be the object of the troika’s attentions.

I do not think that anyone involved in the tax system, whether as a taxpayer, as a firm, or even as a tax collector for the Ministry of Finance will argue that the existing framework is simple, fair or effective. Decades of piecemeal interventions and efforts to circumvent the problematic (i.e. corrupt-patriarchal) state revenue services in a canvas of growing corruption and black/political money have resulted in an intricate, formalistic, dysfunctional, inefficient, and grossly unfair system (the tax burden is mainly from indirect and property taxes that are largely independent of income) that hampers economic growth.

Although everyone agrees that the tax system is in itself unworkable, its sorry state has more to do with function rather than design. Even the most elegantly designed tax system will fail if the interests and therefore the behavior of all stakeholders including politicians, revenue service officials, companies and taxpayers are not aligned. The biggest obstacle today towards such an alignment is corruption. Widespread tax evasion is only one side of a very complex phenomenon that includes off the books financing of political parties and widespread bribe giving and bribe-taking. The economic behavior of citizens and businesses, be it legal or illegal, is in fact always rational. Therefore tax evasion and corruption simply exist because they benefit those engaged in them.

So if Mrs. Lagarde wants Greeks to pay taxes she should work on a national program against corruption. Obviously a well designed and fair* tax system will be an integral part of such a program. Another would be to review today's highly hypocritical system of political party funding from businesses and citizens by applying transparency standards e.g. like in the U.S. and redefining spending limits for election campaigns to realistic levels. Dividing electoral districts into smaller ones and reforming the electoral system based e.g. on the German model will reduce the investment required to be elected as an MP and therefore the need for dirty money.

The major effort of a national program against corruption should be focused on public servants, especially those employed in the revenue service. The establishment of an independent auditing authority with well-paid, un-tenured staff, who may serve for a limited time and whose income and wealth will be carefully monitored, will be an important step. The aim of such a mechanism should not be to increase revenue per se, but to reach a very high level of compliance of businesses and citizens with the new simple and fair tax framework. The Ministry of Finance today does not really promote compliance when, by setting revenue targets to its directors an auditors, each company is, at the end, forced to pay an unofficial percentage of its revenue in additional taxes, pretty much regardless of the extent to which it has evaded taxes. This percentage is shared between the state and various recipients (mainly public servants and politicians) in the grey money chain.

Ironically the troika achieved the same thing by imposing tax revenue targets and allowing the Greek government, after arduous negotiations, to impose the wrong kind of taxes thereby practically killing the economy instead of targeted measures that would have revived it.

The National Programme against corruption should include carefully designed checks and balances. Last year the Ministry of Finance set up its own Internal Affairs department despite of the fact that the respective police department (that had hitherto authority over tax auditors) had an excellent track record and was part of a different ministry. No one, for any reason should be exempt from audits including political parties, the church, local authorities, the army, politicians, trade unionists, banks, media and those who now, in practice, enjoy special treatment. Last year’s audit of commercial banks by and independent and competent entity (Blackrock) was an excellent example of a decision in the right direction.

Corruption can be useful to politicians in financing their campaigns and lifestyle, but brings them and Mrs. Lagarde to despair when it depresses tax revenues. But unlike cholesterol there us no such thing as good and bad corruption. If we want to deal with the catastrophic effects of tax evasion we should decide first, as a society, if we will continue to tolerate “patriarchal” corruption or not.

* Mr. Venizelos, the disastrous finance minister, personally wrote a tax exemption clause for Greek ship-owners into the country’s constitution when it was last amended.