Final Spasm: Greco-Teutonic Tax Wrestling

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In Germany, the top personal income tax rate of 45% kicks in at €250,000 ($330,000). The next step down, 42%, kicks in at only €54,000 ($71,000). It’s squarely aimed at the middle class. People who belong to a religious organization pay an additional “church tax” that the Ministry of Finance redistributes. Other taxes are piled on top. And when the hapless German taxpayer spends money, the value added tax of 19% comes due. Not surprisingly, tax fraud is a national sport. Yet, the German budget is nearly balanced.

In Greece, three-quarters of the independent professionals, such as doctors, lawyers, and engineers, declare taxable income below the existential minimum, according to a leaked paper by the EU Commission. Tax fraud amounts to about €20 billion per year (8.5% of GDP), and unpaid taxes amount to €63 billion (27% of GDP). Only a series of bailouts keep the country afloat: first €110 billion, now €130 billion, plus the debt swap of €107 billion. In total €347 billion—150% of GDP! And Germany is by far the largest contributor.

Both countries are also linked by some troubling polls. In Greece, 79% of the respondents said that Germany had a negative impact on Europe, 76% said that Germany was “rather hostile” toward Greece, and a third associated Germany with the words, Hitler, Nazism, or the Third Reich. A poll taken in Germany at the same time showed that 62% of Germans opposed the second bailout package, up from 53% in September, and two-thirds thought insolvency would be unavoidable.

So, in a bitter confluence of ironies, Germany will send 160 employees of its Ministry of Finance to Athens to help the government establish a more effective revenue collection system. Which is going to endear them even more to the Greeks. But as one of the conditions for the bailout billions, Greece must reform tax collections, and the Greek government made an effort to appear serious: with much media hoopla, it rounded up 100 tax evaders. Immediately, the effort smacked into reality: the court system.

The paper Kathimerini laid out the astounding problems. If you get wrapped up in a misdemeanor case, you would pay a portion of the amount owed before you can get an administrative court to hear your case, but it’s waived upon appeal. Then you proceed to a first instance court—where a monumental backlog delays the hearing by three to four years. Once the court makes its decision, you can appeal it. Three years delay. Then the appeals court ruling can be appealed to the Council of State. Two years delay. Total time elapsed: a decade. In a misdemeanor case.

You can get up to three years in prison if amounts owed exceed €150,000. But you don’t need to go to prison if you don’t want to. You can instead pay some money and be done with it.

If it’s a criminal offense, a prosecutor takes the case to a criminal appeals court. If the court is not in session at that moment, you’re freed after paying a portion of the tax debt. A court date is set for 6-10 months down the road. If your lawyer can’t make it—and why should he or she be able to make it?—the date is moved out a year. The law doesn’t allow two such suspensions, but they occur. Eventually, there may be a trial, and you may get five or more years in jail. But if you have no criminal record, the sentence is suspended. Just pay court costs. If you’re condemned to pay a fine, it’s usually quite small. And it “is passed on for collection to the tax authority, where it is paid, if it is paid, in installments,” said law expert Takis Kousais.

Most defendants settle with the tax authority and pay the first installment to get out from jail. So, not exactly a deterrent. How 160 German tax experts would reform this system, if they can’t even get their own tax-fraud issues under control, remains a mystery. But reforming the system is one of the many conditions attached to the actual bailout payments, and these conditions are the crux.

Luxembourg’s Finance Minister Luc Frieden said it out loud: “If the Greek people or the Greek political elite do not apply all of these conditions, they exclude themselves from the Eurozone.” Then he added crucial words: “The impact on other countries now will be less important than a year ago.” And that has been the strategy all along.

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