Financial News: Shadow economy expert Schneider warns against further tax increases

Any further increase in Greek taxes, either direct or indirect, would be a major mistake that would counteract efforts to bring Greece's public debt under control, according to Austrian expert Dr. Friedrich Schneider, a leading authority on the global informal economy. In an interview with the ANA-MPA released on Friday, during his visit to Thessaloniki, Scheider said that any tax increase would drive an even greater proportion of the population into the informal economy and decimate its real purchasing power, ultimately reducing public revenues.

"Based on my calculations, the informal economy in Greece is forecast to reach 25.8 percent of the official GDP this year from 25.4 percent or 62.8 billion euro last year. This is the largest percentage among the 21 countries of the Organisation for Economic Cooperation and Development (OECD). If the recession continues, meanwhile, the informal economy will increase in size, especially if the Greek government is forced by the IMF and EU to proceed with another round of tax increases," Schneider warned.

The Austrian academic cited the results of 12 studies showing that the effect of raising taxes and social insurance contributions on the informal economy reached up to 35-38 percent.
"I think Greece has reached the point where there is no point in increasing taxes. If you increase taxes any more, people will start going to Skopje where taxation is much lower. From where we are, the Balkans are next door. In my opinion, all tax increases must stop," he added.

In fact, he asserted that a reduction of some taxes would actually bring in higher revenues for the government by increasing the purchasing power of Greeks.
According to Schneider, a return to growth could be achieved through privatisations, tax incentives and developing tourism.

He appeared upbeat about Greece's prospects of emerging from the crisis, noting that Greek people were creative, hard-working and that labour productivity in several areas was at the right level, such as in tourism, though a series of benefits in the public sector were not sustainable.
Based on his own research, Greece will be the only OECD country that will see its informal economy grow in 2011 compared with the previous year. The average size of the informal economy in OECD countries is not expected to exceed 13.4 percent this year.

In 2010, Greece shared 10th place with Poland among 31 European countries for the size of its informal economy relative to GDP (25.4 percent). Topping the list were Bulgaria (32.6 percent), with Romania and Croatia sharing second place (29.8 percent) and Lithuania third (29.7 percent).
Hotel, restaurant and catering services accounted for 13.8 billion euro of Greece's informal economy in 2009-2010, or 22 percent of the total, followed by construction (20 percent), vehicles/machinery trade (19 percent) and various services (18 percent).

Surprisingly, he suggested that the large shadow economy might even be acting as a stabilising factor for the Greek economy at present, since it was the only alternative for a large section of the population. He also played down the government's losses of revenue due to the shadow economy, since two thirds of the 'black' economy funds returned to the official economy through consumption.

Another thing stressed by the economist was the need to make a more precise calculation of the shadow economy's size in order to discover how much added value the Greek economy generates.
Macedonia University economists deplored a decision on Thursday to decline funding for precisely such a survey, supervised by Schneider, which would have had a budget of 450,000 euro over three years.
The Austrian academic has researched the phenomenon of the informal economy for over 30 years in 145 countries, acting as an advisor to the International Monetary Fund, the World Bank and the European Commission.

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