Saturday, July 11, 2015

Tsipras' Proposal: Who is he kidding?

I was impressed by Tsipras' political maneuver in the bail out negotiations, that I was surprised and shocked by his U-turn. Reading through his proposal, I'm more than disappointed to find nothing new. In other words, the proposal is almost the same as was demanded by the Troika. To make things worse, the parliament jumped in with him, today.

Greece's proposal for EU bail-out aims at attaining a fiscal surplus of 3.5% of GDP by 2018. An ambitious target, nonetheless achievable. However, I strongly doubt if the proposal put forth could ever achieve it. It fails to recognize the driver behind the fundamental problem that led Greece to this debacle in the first place. I'm confident that the creditors are wise, but wants Greece to swallow its one poison, so that they can make bucks of the market.

To start with the proposed VAT reform, Greece aims at taxing restaurants and catering services at 23%. This would mean that franchise outlets like McDonald's and KFC could lose it attraction, pushing the unemployment rate higher, which would only reduce government income. Further, operating business would tend to highly under-report their income, leading to loss of revenue. The proposal, elsewhere, mentions of strengthening the enforcement agencies by criminalizing tax evasion. Won't that increase the overhead cost for tax collection?

The VAT reforms put forth by Greece also aims at reducing tax for theaters whose tax would now stand at 6%. I wonder, why is this preferential treatment to the theaters. First of all, in a tough economy, not many would have enough disposable income to enjoy the comforts of theaters. Second, it would encourage youngsters to look forward to theaters as sustainable sources of employment, which is not the case as one could observe from all over the world.

Another thing in the VAT reforms that I couldn't quite understand is, why the basic food should cost more than the pharmaceuticals? Basic food, along with energy and water, is to be taxed at 13% while pharmaceuticals are to be taxed at 6%. So, is Tsipras encouraging Greece to an unhealthy lifestyle? Or is he favouring the pharmas? This is akin to asking Greece to fall sick as it is cheaper to have medicines than to have food. Would sick population contribute to economy?

Further, the proposal put forth aims at tightening the definition of farmers to bring more people in the tax ambit. However, I think this proposal is made to target either small farmers or large farmers. Who is going to be targeted, we have to wait until Tsipras "defines" who is a farmer? Further reforms to Fiscal structural measures, aims at increasing corporate tax to 28% from 26%. I'm not sure, if Tsipras and his finance minister are in their own perceived state of Greece superiority. While, most of the population is unemployed, the hike in corporate tax would only increase in flight of capital and jobs. Further, those corporations who remain to operate in Greece would not be able to compete globally, again leading to loss of jobs and government revenue. I would like to draw attention to the Laffer Curve on taxation. This study is highly controversial and in some cases disproved. However, I think in the case of Greece, it may hold good as it may encourage foreign investments and corporations to operate from Greece.

The put-forth proposal proposes to provide disincentives for early retirement. However, I think it is infringing upon one's personal rights. Smart youngsters, would most likely take undeclared works and stash the money in some foreign accounts to cash during retirement. Of course, the proposal aims at identifying undeclared works. But how is Tsipras going to make that work? The law enforcement agencies as well as those who undertake those jobs are going to benefit from such works. The former through bribes and the later through additional untaxed income. I think Tsipras and his finance ministers are in the era of "barter system". Now the youth can take jobs from anywhere and earn from anywhere, store their revenue as bitcoins and cash them when they require. How is Tsipras going to address this issue? Ban Internet? Or create an agency to investigate and enforce compliance? Where is he going to pay the overhead cost of setting up the infrastructure from? From more debt?

The proposal also aims to hire more managers to make the system efficient. Even the Tories in Canada do the same. At least they have a hidden agenda, their meaning for efficiency is shutting down services and cutting federal jobs. So, does Tsipras have the same in his mind? If so, unlike Canada, Greece unemployment will rise leading to social and economic backlash. Is he prepared to deal with that? More importantly, does he have enough money (required to pay severance, unemployment benefits, etc.) to deal with that?

The proposal aims at adjusting zonal property taxes, preventing fuel smuggling, etc., but fails to provide any incentives to encourage declaration of true income, increase employment, attractive industries, attract foreign investments and lacks a sustainable path to compete in global market. At the most the proposed measures would aggravate Greece's debt and unemployment crisis. Grexit may have been a better alternative.

It seems Tsipras out maneuvered not only the EU but also successfully fooled the Greece electorate. 

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