The English poet Percy Shelley declared in Hellas, “We are all Greeks,” meaning that “Our laws, our literature, our religion, our arts, have their root in Greece.” Today, we are all Greeks in the economic sense, in that what ruined the Greek economy is happening in much of the rest of the world, including the USA. Governments are borrowing to finance a welfare state, something that everyone knows is unsustainable, yet the politics is unable to change course. Like the Greeks, we are all floating down a river of no return to a waterfall crash.
Governments are borrowing to finance a welfare state, something that everyone knows is unsustainable, yet the politics is unable to change course. Like the Greeks, we are all floating down a river of no return to a waterfall crash.
Greece declared independence from the Ottoman Empire in 1821, and many progressive Europeans cheered the resurrection of Greek self-government. Unfortunately, the citizen democracy of ancient Greece was not adopted by modern Greece, which instead copied the European parliamentary system. Modern Greek democracy was not rooted in a local democratic culture. One of the problems of mass democracy, the election of chiefs by many voters, is that the top can be taken over by a military coup. That happened in Greece in 1967.
Parliamentary democracy was restored in 1974. The Panhellenic Socialist party won the elections in 1981, entrenching the welfare-state programs that would ruin the Greek economy. Greece joined the European Union in 1981 and converted to the euro in 2001.
One of the problems of a common market is tax competition. The elimination of tariffs among economies makes more powerful the internal economic barriers, the taxes and restrictions that democracies perversely impose on themselves. That creates tax competition, as governments know they can increase production and exports by reducing taxes. But governments need revenue to pay for welfare benefits, so the members of an economic union form a tax cartel.
In the United States, the tax cartel is the federal income tax. The federal government distributes revenues to the states, in addition to providing public goods that the states could otherwise provide, enabling the states to have lower tax rates.
In the European Union, the cartel is partly revenue sharing, but mainly the value-added tax (VAT). The minimum standard VAT rate, based on the Article 97 VAT Directive, is 15% (COUNCIL DIRECTIVE 2006/112/EC of 28 November 2006 on the common system of value added tax). See http://eur-lex.europa.eu/legal-content/EN/ALL/?uri...
The current (July 2015) VAT rate in Greece is 23%, in addition to the corporate tax rate of 26%, a top personal income tax rate of 46%, and a combined social security tax of 42%.
The fundamental problem is a vicious negative-feedback loop of spending and taxes. The high taxes in Greece and elsewhere induce tax evasion and reduced production and employment. Unemployment and low after-tax incomes create a demand for the governmental provision of welfare. The political parties attract votes by providing welfare benefits: pensions and social security, early retirement, medical services, “free” education, and child subsidies.
Because the tax system punishes production, investment, and employment, the path of least political resistance is to borrow the funds. Borrowing to pay for welfare is unsustainable, but at first, default seems far off in the future, and it will be a problem for a future parliament, not those in office now. Then the welfare payments get entrenched in the plans of families, and become politically impossible to remove. When lenders, including the IMF, insist on higher taxes to reduce the budget deficits, this inflicts even greater punishment on the economy. Cuts in welfare spending then hurt the poor who have become dependent on government money.
The only way out is radical tax reform: replace VAT and all other taxes with LVT—land value taxation.
The only way out is radical tax reform: replace VAT and all other taxes with LVT—land value taxation. Land does not flee, shrink, or hide when taxed. Since land is not produced, its rent is a surplus that can be collected without economic harm. After the transition, LVT replaces what would otherwise be paid as mortgage interest. The only economic problem is the transition, a one-time cost more than compensated from the future benefits. Compensation to those with net losses could make this tax shift politically feasible.
The main obstacle to such radical reform is today’s malfunctioning mass democracy. The Greek parliament is elected by proportional representation. The provinces (regions) and municipalities depend on the national government for revenues, which makes them also subject to controls.
The alternative, closer to ancient Greek citizen-participation, is decentralized democracy, in which the people elect local councils, which then elect the regional legislatures, which then elect the parliament.
Even without democratic reform, the Greek government could adopt a prosperity tax shift, but it would have to leave the European Union and its tax and regulatory rules. Greece could then also bring back its currency, the drachma, to supplement the euro, and back up the currency by making it payable to taxes at a fixed ratio to the euro, and also making it payable for a service at a fixed rate, such as first-class postage to European countries.
We are all on an economic river streaming us towards a tragic crash. The most likely year of reckoning is 2026, when the real-estate cycle is scheduled to plunge the economy into the next big recession, 18 years after the Crash of 2008. We are all in a Greek play that everybody knows will have a tragic ending, but which nobody can change.
Mass democracy, controlled by economic and ideological powers, will not let governments shift to LVT. We are all on an economic river streaming us towards a tragic crash. The most likely year of reckoning is 2026, when the real-estate cycle is scheduled to plunge the economy into the next big recession, 18 years after the Crash of 2008. In the next depression, the government liabilities will no longer be payable by borrowing. High inflation will pay nominal but not real debts. We are all in a Greek play that everybody knows will have a tragic ending, but which nobody can change.
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FRED E. FOLDVARY, Ph.D., is an economist and has been writing weekly editorials for Progress.org since 1997. Foldvary's commentaries are well respected for their currency, sound logic, wit, and consistent devotion to human freedom. He received his B.A. in economics from the University of California at Berkeley, and his M.A. and Ph.D. in economics from George Mason University. He has taught economics at Virginia Tech, John F. Kennedy University, Santa Clara University, and currently teaches at San Jose State University.
Foldvary is the author of The Soul of Liberty, Public Goods and Private Communities, and Dictionary of Free Market Economics. He edited and contributed to Beyond Neoclassical Economics and, with Dan Klein, The Half-Life of Policy Rationales. Foldvary's areas of research include public finance, governance, ethical philosophy, and land economics.
Foldvary is notably known for going on record in the American Journal of Economics and Sociology in 1997 to predict the exact timing of the 2008 economic depression—eleven years before the event occurred. He was able to do so due to his extensive knowledge of the real-estate cycle.