Lower VAT can tackle tax evasion

Nikolaos Artavanis (Isenberg School of Management – UMass Amherst) argues, in a timely article given the current proposed increases in VAT, that VAT increases do not go hand in hand with tax revenue increases in the presence of tax evasion

In industries, where tax enforcement is challenging, the increase of tax rates does not necessarily correspond to an increase in public revenues. The reason is that these firms tend to “adjust” the magnitude of tax evasion to new policies. The increase of the VAT rate in the restaurant industry in September 2011 increased evasion by at least 9%, while the reduction of the rate in August 2011 reduced sales under-reporting by at least 9.6%. Taking into account the effect of the additional reported sales on direct taxes, the final fiscal outcome of the VAT rate reduction becomes minimal.  Read the article.

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In addition to “Today”, there is also “Tomorrow”

Professor Thanasis Stengos (University of Guelph, Canada) published an article in Naftemporiki on the current negotiations with the European partners.

The root of the problem is that the whole negotiation “game” has been approached by the Greek government as a static “once and for all” game. However, it is anything but that. The last four years have shown that a crisis of such magnitude is an ongoing dynamic process with memory. It will be to our advantage to recognise that even as late as now, since a mediocre agreement is always better that no agreement at all. It is a pity that we have come so far in the process as to not recognize the fact that the system has “memory” and there is also “tomorrow” and not just “today” in how one conducts negotiations especially if you find yourself on the “asking” side.

Read full article here (in Greek).

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A careful look at Greece’s options and why YES is the only one

Costas Meghir (Yale University) published a post in Huffington Post Greece that reviews Greece’s options and includes a rebuttal of positions recently voiced by Paul Krugman and Joseph Stiglitz.

You can read the post here (in Greek).

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Yes to the Euro!

30 internationally recognized Greek economists issued a clear declaration in favor of YES in the referendum of July 5, 2015 (published on the front page in Kathimerini, 30.6.15)

The referendum on July 5 is NOT for or against a specific agreement. It is for or against the European perspective of the country. A ‘Yes’ vote means “Yes” to Greece, and to staying in the euro zone and the European Union. A “Yes” vote guarantees that Greece will continue its effort to improve the economy and its institutions in order to bridge the gap to more developed European countries. “Yes” is the right choice! A ‘No’ vote would push Greece out of the Eurozone and possibly even out of the European Union.

This would have devastating consequences, both immediate and long-term. The immediate effects of a ‘No’ vote have already started to be visible in the closure of banks. After a “No” outcome in the referendum, the conversion of bank deposits into drachmas and the concomitant halving of their value, to say the least, will be a matter of little time. The ensuing turmoil in the banking system can be expected to lead many businesses to bankruptcy, and unemployment out of control. The new drachma would be strongly undervalued relative to the euro, and salaries and pensions would lose at least half of their value. The government, powerless to balance revenues and expenditures, will print inflationary money, destroying competitiveness of the weak currency. Both exports and imports will be reduced, and without humanitarian aid from Europe, there will be shortages of essential goods such as medicines and fuel. Austerity will be far worse than any agreement to stay in the euro, and it will mostly impact the weakest population segments.

The long-term consequences of a “No” vote will be equally important. Modern, prosperous economies in Europe and the world are based on the market and on healthy competition, and they use part of their wealth to fund a strong welfare state. They also have an efficient public sector, which operates independently of the current government and thus limits partisan influences. Greece’s participation in the core of Europe fosters long-term convergence to European institutions. By contrast, a Greek exit from the euro would strengthen the tendency to clientelist structures and aggravate the timeless pathologies of the Greek economy. This inevitably leads to a closed and impoverished economy with high corruption levels.

The last minute agreement will be mediocre, without many of the necessary structural reforms or the necessary debt and tax relief. However, it maintains the European perspective of the country, giving us also the opportunity to continue to negotiate with our European partners for better conditions, measures to promote growth, and ways to manage the debt. In this context, European institutions and the strong European economies must also respond quickly, assuming their fair share of responsibility for supporting the growth trajectory of Greece.

The Greek people should vote YES in the referendum. YES to the Eurozone and to Europe!

Marios Angeletos, MIT
Costas Azariadis, Washington University at St Louis
George Constantinides, 
University of Chicago
Harris Dellas, Universität Bern
Manthos Dellis,
University of Surrey
Nikos Economides, 
New York University
Manolis Galenianos,
Royal Holloway, University of London
Michael Haliassos, Goethe University Frankfurt
Yiannis Ioannidis, Tufts University
Lucas Karabarbounis, University of Chicago
Yannis Katsoulacos, Athens University of Economics and Business
Christos Kotsogiannis, University of Exeter
Miltos Makris, University of Southampton
Costas Meghir, Yale University
Stelios Michalopoulos, Brown University
Theodoros Palyvos, Athens University of Economics and Business
Stavros Panageas, University of Chicago
Elias Papaioannou, London Business School
Dimitris Papanikolaou, Northwestern University
Evi Pappa, European University Institute
Stylianos Perrakis, Concordia University
Manolis Petrakis, University of Crete
Christopher Pissarides, London School of Economics and University of Cyprus, Nobel Prize in Economics
Vassiliki Skreta, University College London
Thanassis Stengos, University of Guelph
Nickolaos Travlos, ALBA
Dimitris Vayanos, London School of Economics
Nikos Vettas, IOBE and Athens University of Economics and Business 
Tasos Xepapadeas, Athens University of Economics and Business
Nikos Yannelis, 
University of Iowa

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Enough is Enough!

Marios Angeletos, MIT, published a post in Huffington Post Greece, in which he explains the reasons why Greeks should vote YES in the referendum on July 5.

Read the post here (in Greek).

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Greece: Are we missing the reform opportunities of the crisis?

On June 20, 2015, Michael Haliassos published a  CEPR Vox post on the Greek crisis and the key failure of the adjustment program

The Greek adjustment programme failed. This column argues that the problem lay in the programme’s design. By focusing on deficit reductions and the wrong type of reform, it failed to build up the only thing that could provide the basis for debt repayment – namely a dynamic, export-oriented productive base. A broader reform agenda that creates hope would be accepted by Greeks and it would make eventual repayment more likely. The need for some patience in reaching the final destination of this journey should no longer be an excuse for not taking the first step.

Read the Vox post here.

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The solution for the Greek sovereign debt

Nicholas Economides, Stern School of Business, NYU

We are at the most critical phase of the negotiation, and it is imperative that Greece signs an agreement with the Europeans avoiding bankruptcy and the disaster of the New Drachma. The government says that it will accept an agreement only if it contains a solution on the debt. Before the elections, Syriza had proposed wiping out a large percentage of nominal value the debt (over 50%) to European countries and the European Stability Mechanism. This is practically impossible because every euro that Greece would win would have to be paid immediately by the European tax payers. The Greek parliament would not be willing to gift billions to the Finns, the Dutch, the French, etc.; likewise they would not be willing to give such a gift to Greece.

However, there exists another way to restructure the debt that I have proposed three years ago. Read full article

Posted in Macroeconomics, Public finance, Uncategorized | 1 Comment

A mediocre agreement is better than no agreement

Thanasis Stengos (University of Guelph, Canada) posted an article (in Greek) in Huffington Post Greece. We present it here, in the original Greek text and in English translation.

There have been five months since the January election in Greece and four months from the February agreement for the extension of the current program until the end of June. The negotiations between the Greek government and the lending partners (European institutions and IMF) have led nowhere as there has been a widespread belief in Greece that the Greek elections by themselves constituted a “game changer” and the other side sooner or later would have to compromise on its demands for additional fiscal adjustment measures needed to cover the existing revenue shortfall as well as necessary reforms that would facilitate future growth.

At the end of November the fiscal shortfall was of the order of less than a billion Euros (around 900 million), while currently its exact figure hovers over 5 billion. Read the full article.

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The new and the recurring mistake

Article by Elias Papaioannou, published in Kathimerini on 14.6.15 (in Greek).

The article draws on ideas expounded in a joint article with Richard Portes and Lucrezia Reichlin published by Project Syndicate.

Posted in Political economy, Uncategorized | 1 Comment

Sign the agreement now!

We have reached the end of a negotiation that took several months and was associated with a debilitating lack of liquidity for the Greek State and for the private sector and with enormous uncertainty. If an agreement with the Europeans is not immediately reached, Greece will default, inside or outside the Eurozone. Grexit would be a total disaster, involving collapse of the banking system due to massive withdrawals, high inflation, tremendous loss of purchasing power for the Greek population, shortages of basic goods, and marginalisation of the country. Even a default within the Eurozone would soon lead to Grexit since it would be extremely difficult for any Greek government to handle it. It would require enormous support from the ECB, which would not be forthcoming.  In a short time, the Greek government — voluntarily or under pressure — would transition to the new Drachma. Thus, both types of default (inside and outside the Eurozone) lead to the total disaster associated with the new Drachma.

A last-minute agreement will be far from perfect and without the necessary structural reforms. However, it will be much better compared to the chaos of default and Drachma. The Greek government must sign this agreement now!

• Marios Angeletos, ΜΙΤ
• Costas Azariadis, Washington University in St. Louis
• George Constantinides, University of Chicago
• Haris Dellas, Universitat Bern
• Nikos Economides, New York University
• Michael Haliassos, Goethe University Frankfurt
• Yannis Ioannides, Tufts University
• Costas Meghir, Yale University
• Stylianos Perrakis, Concordia University
• Manolis Petrakis, University of Crete
• Chris Pissarides, Nobel Laureate, London School of Economics and University of Cyprus
• Thanasis Stengos, University of Guelph
• Dimitris Vayanos, London School of Economics

Note: This declaration was published on the cover of the Sunday Edition of the Greek newspaper Kathimerini on June 14, 2015.

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