Greek Opposition Party Proposes Tax Decreases to Reduce Deficit

Why Does That News Have a Familiar Ring to It?

The European Plan to fix the Greek economy has five major components, higher taxes, lower government spending, sale of government assets, ending of tax evasion and regulatory reform that will free up constraints on investment and growth.

The opposition party leader in Greece, Antonis Samaras is saying

he agrees with government plans to cut spending and sell €50 billion of state-owned assets. But he argued the latest tax increases will only compound Greece's economic and fiscal woes.

The solution, he said, is to slash corporate taxes rates to 15% from 24% now, while also lowering taxes on everything from personal income to tourist lodgings to fuel.

Sharply lower tax rates, Mr. Samaras said, would produce a "creative shock" that would stimulate business investment and consumer demand, while also reducing incentives for tax evasion, a chronic problem in Greece.

"Part of economics is psychology, and you need a demonstration effect to show investors that this is an economy that you can invest in—whereas right now money is being taken out of the economy and supply is being killed," he said.

Now the major reason that Europe and the IMF have had to intervene in Greece has been the massive deficit, so cutting taxes hardly seems the way to go.  But yes, the Conservative Mr. Samaras believes in the Confidence Fairy, that if you just cut taxes the Confidence Fairy will visit all the good little business boys and girls and inspire them to invest.

He is correct, of course, that cutting taxes will reduce tax evasion.  It has to mathematically.  If a taxpayer is evading $8,000 in taxes and that tax liability is cut to $6,000 the taxpayer is now evading $6,000 instead of $8,000.  This is a 25% drop in tax evasion!

The best solution to Greece’s problem is to completely reform the economy so that regulated capitalism, instead of protectionist socialism is the driving force.  For the Europeans, that apparently is just not as much fun as strangling the Greek economy with austerity.