The Political Economist

Over the past year many commentators on the Greek political situation have claimed that Syriza, the radical left party that surprisingly won the Greek elections in 2015 (twice!), drew much of its support from tax-evasion areas. In other words the tax-evading upper-middle class voted for Syriza as they wanted to continue with their tax evasion (an endemic problem in Greece) and didn't want to accept the EU-imposed bailout deal which necessitates that Greek authorities clamp down on tax evasion.  In a long overdue post I will briefly look into whether or not there is any evidence to back this claim. Below I show two sets of maps. The upper map shows results of the 2015 general elections held in January (right), and the bailout referendum (left) held in July, while the lower map shows the share of tax evasion per municipality ( I've used this map before from a paper by Artavanis et al .).  Before we make the visual comparison, a quick reminder on the tax evasion ...

Last week the FT brought the story that a certain Swiss canton, Zug , is asking its taxpayers to delay paying their taxes and their bills. Surely to anyone this piece of news sounds astonishing. The authorities are asking their taxpayers not to pay their taxes on time? What an atrocity! What is to make of this?  First a few words on the specifics of the Swiss tax system. The authorities of the canton are simply asking their taxpayers not to pay their taxes early . A policy of the Zug canton has been to reward early payments of tax bills by giving discounts to those who do. This means that a taxpayer can lower its tax bill by paying early. It is a great encouragement for both the authorities to maximize their fiscal capacity and tax collection, and for the taxpayers to pay their taxes (the alternative of not paying - tax evasion - carries a greater opportunity cost once you are given an incentive to lower your tax bill. The policies of tax amnesty are similar in its incentiv...

It's been a rough few weeks, but Europe and Greece have finally reached an agreement . Or to be more precise, the Greeks have caved in to the demands of the financial markets, just as I predicted they would in my last blog post . Again, I hate to blow my own horn (but let's be honest, I need to); I was right once again in predicting the outcome in Greece. This aligns well with my track record of being correct on Greece in 2011 , 2012 , 2013 and, well, 2015 . Just saying.  So what was in the new deal? In a nutshell here is what the Greek government has pledged to do in return for the extension of the Eurogroup bailout program (much needed to maintain solvency of the Greek government): Combat tax evasion (new tax policies) : broadening the definition of tax evasion and fraud, while disbanding tax immunity. This includes reforming the collection of VAT (introducing technology), modernizing the income tax code, and altogether creating a new culture of tax compliance. Keep in...

Flying back home from my honeymoon, I had to catch a connecting flight in Istanbul where at the airport I noticed a very interesting billboard. Here's what it said:  "Want to cut costs? Invest in Macedonia! 0% tax on retained earnings / competitive labour costs / access to 650 million customer base / foreign entities buy property freely / skilled workforce" These are just some of the many benefits the " Invest in Macedonia " campaign is promoting. They offer a 10% personal and corporate income tax rate, an 18% VAT (lower than anywhere else in Europe with the exception of Luxembourg's 15%), and a series of low property, sales, and inheritance taxes declaring themselves the new business heaven in Europe . The 650 million customer outreach is based on trade agreements Macedonia has with the EU, CEFTA and EFTA plus two bilateral free trade agreements with Ukraine and Turkey. It has set up a One-Stop-Shop that enables registering a company for ...

From the Financial Times  (it's an interactive feature so you can click on the country to see its specific rates) It is interesting to note that corporate tax rates have decreased on average by 3 percentage points in the last couple of years for the OECD countries. However the biggest decrease was done just before the onset of the crisis, by 2008. Afterwards corporate taxes slightly increased (due to an immediate response to the crisis) and have, on average, started to decrease slowly since 2010. Some would say this was evidence of austerity, at least the "good" type of austerity where taxes go down combined with spending cuts. However spending cuts in OECD economies were scarce , to say the least, while tax cuts were only applied to corporate taxes while personal income taxes, along with all other forms of taxes like VAT, shot up in some countries. As an effect personal consumption was hit hard, since prices were going up, while people were earning less.  Inte...

How effective has British austerity been so far? This graph from Ryan Avent  during the budget debates (taken away from the Spectator ) might shed some more light on the story ( I was meaning to comment on this before, but anytime is a good time ). It is entitled "Not what they had in mind" (click to enlarge) Source: The Spectator   I've written about European countries' austerity measures quite often and have almost every time emphasized the faulty of their tax-based consolidation approach. More and more research papers from both camps (the pro - and against - austerity) are stressing the failure of an approach focused on increasing the tax burden and keeping spending high at the same time.  Alongside the UK (which was the focus of the graph), we can see Ireland, Spain, Greece, the US (among others); all countries which had large government stimuli and more importantly large bank bailouts in the years in before the crisis. From an earlier post (and in...

Even though the focal point of attention this week was Cyprus, in Britain the central issue was the 2013 Budget , for which I found some policies encouraging but some of them deeply disappointing  implying that there Osborne still hasn't got a clue as to how to initiate the recovery.  Anyway, from the Budget and the OBR report I found a couple of interesting graphs, some good, some bad. I start off with tax competitiveness and how the UK has significantly increased its competitiveness vis-a-vis the corporate tax rate cuts on KPMG's survey (the survey is based on businesses responding to the changes):  Even in comparison the 20% announced corporate tax rate (in 2015) is beginning to look very good: On this list, among the lower rates, the UK has by far the strongest institutional system and rule of law, thereby triggering positive signals to attract new investments. It's unfortunate for the US and Japan not to follow upon ...

Similar to what I did last year , this year I will once again analyze the new UK budget announced yesterday by the (downgraded) Chancellor George Osborne.  The initial reaction is actually better than last year, except for some policies which haven't changed and some new woeful ideas. You can read summaries of the budget from a variety of sources: Financial Times , BBC , Telegraph , Guardian , CityAM , think tanks ( ASI , IEA , CPS ) or watch this interesting video from the FT: Before we move on the budget itself, the UK Office for Budget Responsibility  issued their revised growth forecasts, and things still look rather gloom for the UK. Growth was revised to 0.6% this year and 1.8% in 2014. (Last year the prediction was 0.8% in 2012 and 2% in 2013 - so take the prediction for the recovery in 2014 with slight suspicion, as it always is with growth forecasts). Employment figures still seem to be increasing (even above forecasts), and with stagnating GDP this...

This week the negotiations in Cyprus over its fragile banking system reached a new low. Cyprus was given a  € 10bn bailout (they desired  € 17bn initially) from the Eurozone to recapitalize its banking system, with the price they have to pay for this being dire. This radical bailout plan forces a 9.9% tax on deposits over  € 100,000, and 6.7% on deposits under  € 100,000. Unlike previous bailouts in Greece, Portugal or Spain where bond-holders took a big cut, this is the first time a bailout proposal will fund itself from peoples' savings. The signal this is sending is that small savers (not responsible for the crisis) should be punished while the bond-holders who willingly took risks should be protected. Needless to say such a bailout proposal is very likely to turn into a disaster for the domestic economy. Investors were spooked, the people went to the streets, mainly to  pull out their money from banks , while  markets dropped  at the sight of such...

From a report done by KPMG that came out last week, comes the following chart on "the highest effective personal tax rates in the world": (click to enlarge)  Source: KPMG HT:  Business Insider   The chart shows only the top 40 countries with high income tax rates. The US is 55th on the list, while the UK made it in the top 40 (it's 37th). Click here to see the rest of the rankings.  Let's focus only on the international competitiveness side of the story, setting aside the fact that high income tax rates demotivate successful and talented individuals from staying in the country (yes, by talent I also imply acting and the case of Gerard Depardieu).  When talking about international competitiveness income tax rates also play an important role, sometimes even more important than corporate tax rates. I'm particularly happy with this graph as it included employee social security rates to calculate the overall burden, which ar...

The fiscal cliff has been averted , for now. It appears that the commitment device I was referring to in the previous text was strong enough after all. My argument was that the Nash equilibrium of the bargaining game will prevent an outcome and force the US down the cliff. I modeled it as a weak commitment device, without time discounting, and without having written down any of the parties' utility functions. Having included these parameters, the game would have given a scope for a cooperative equilibrium, however with a lower probability than a non-cooperative equilibrium. This can be extended in a lot of ways.  Anyway, I wasn't all that wrong, since the budget cuts deal was put off for two months (so no deal was reached here - the model didn't account for extending the deadline), there were no reforms to entitlement spending and there were no reforms of the complex tax code. The tax rate deal was reached , taxing only individuals earning more than $400,000 p/y (at...

The negotiations over the fiscal cliff in the US are entering its final stages . The current situation is a stand-still, where both sides know the concessions they need to make, but neither is willing to make the first move and loose leverage. The Republicans are unwilling to make concessions on tax increases to high-income earners, while the Democrats are refusing to reign in the welfare system and finally reform it. The situation is close to a classical hawk-dove game (or even better a game of deterrence  in which neither of the two actors are willing to back off. We've heard arguments from both sides claiming that if no agreement is reached the other side is willing to “push” the US over the fiscal cliff. In particular if either of the sides is unwilling to back off from cutting spending or raising taxes , then both will have to agree to a status quo level of automatic deep spending cuts and big tax hikes. Only then will we experience the full effects of a comple...