Europe's Crisis, Europe's Future

2. Greece: Tax Anything That Moves!

21 “I should note, as we have said before, the government that came into office last year was in a different position. There was no more scope for relying on revenue measures. It had to focus on expenditure measures and difficult expenditure measures. It did so, and it has implemented this program as agreed, and there was only need for a minor adjustment of fiscal policy to keep it on track”—Poul Thomsen, July 30, 20131 Open markets with clear and properly enforced rules support competition and the growth of productivity. Recent works, such as that of Cacciatore, Duval, and Fiori (2012), now indicate that product market reforms can also create growth with minimal downside, especially in depressed economies. Their results seem to confirm the more intuitive suggestion made by Mitsopoulos and Pelagidis (2012) that product market Greece: Tax Anything That Moves! michael mitsopoulos and theodore pelagidis 2 We thank Guillermo Vuletin and the participants in the Brookings-ESADE workshop in Madrid, March 12–14, 2013, and the Brookings–Robert Bosch Stiftung workshop and conference , Berlin, May 23–25, 2013, especially Kemal Derviş, Jacques Mistral, Javier Solana, Domenico Lombardi, and Karl-Heinz Paqué, for comments and suggestions on an earlier draft of this chapter. The usual disclaimers apply. 1. From “Transcript of a Conference Call on Greece,” Washington, July 30, 2013 (www.imf. org/external/np/tr/2013/tr073013a.htm). Poul Thomsen is deputy director of the IMF’s European Department, in charge of programs with Greece and Portugal. 22 michael mitsopoulos and theodore pelagidis reforms in Greece should have taken precedence over labor market reforms, especially since there is strong evidence that Greece has much to gain from such reforms.2 Furthermore, available research suggests that, for heavily indebted countries , fiscal consolidation through large and untargeted tax increases seems to entail more risks and fewer rewards than a strategy based on a well-targeted reduction of expenditure. New research and debate on fiscal consolidation have contributed both evidence and arguments. While discussions about the size of the overall fiscal multiplier have received the most public attention,3 the issue of the composition of any fiscal adjustment effort also benefits from the insights provided by high-quality research. Such research deals with (1) the definition of such adjustments, (2) whether announced or implemented adjustments should be assessed, (3) the timing of announcements, (4) the credibility of the announced policies, (5) the formation of expectations, (6) the composition and accuracy of the data measuring tax increases or expenditure cuts, (7) the qualitative details of both announced and implemented policies, (8) the level of government debt, (9) the perceived condition of the economy at the time of the consolidation effort,4 (10) the evolution of interest rates in view of monetary policy, and numerous other methodological and conceptual issues. This increasing body of work indicates that the expenditure-control side of fiscal consolidation, and more significantly , the composition thereof (for example, expenditure items marked for government consumption as opposed to public investment), is of great significance for the success and durability of fiscal consolidation efforts.5 The World Economic Outlook (IMF 2010c) empirically determined that spendingbased deficit cuts had smaller contractionary effects than tax-based adjustments . And among expenditure cuts, those that reduced government transfer programs had a more benign detrimental impact on economic performance in the short run than did expenditure cuts on government consumption or 2. See, for example, Arnold, Nicoletti, and Scarpetta (2008); Conway and others (2006); and similar studies by numerous other authors. 3. See, for example, Batini, Callegari, and Melina (2012); Delong and Summers (2012); Blanchard and Leigh (2012, 2013); and European Commission (2012). 4. See Taylor (2013). 5. See, among others, Alesina (2010); Alesina, Favero, and Giavazzi (2012); Alesina and Ardagna (2012); Auerbach and Gorodnichenko (2012); ECB (2009, 2010); Guichard and others (2007); IMF (2010a); and Tsibouris and others (2006). greece: tax anything that moves! 23 investment of matching magnitude.6 In contrast, revenue increasing austerity achieved by increasing indirect taxes has markedly large immediate and secondary costs.7 This chapter investigates the effectiveness of the policy prescription as suggested and approved by the official lenders of the Greek government (the “troika,” consisting of the European Central Bank (ECB), the International Monetary Fund (IMF), and the European Commission (EC), as well as its implementation by the Greek government. We do not argue that measures to increase tax revenue should not have been part of...