Bell Curve The Law Talking Guy Raised by Republicans U.S. West
Well, he's kind of had it in for me ever since I accidentally ran over his dog. Actually, replace "accidentally" with "repeatedly," and replace "dog" with "son."

Wednesday, June 29, 2011

Where Greece Should Go From Here

First, let me get to the big point first. Kicking Greece out of the Euro won't fix anything. German and French banks are still heavily exposed to bad Greek debt (both public and private). If Greece were kicked out of the Euro (or left on their own), all they would do is start printing their currency in enough quantity to pay off their debts (and make that currency increasingly worthless). The effect would be a de facto restructuring of the debt. The northern European Euro states may as well bail Greece out and let them restructure the debt while staying within the Euro. Letting Greece stay in the Euro would be about as costly as kicking them out but would prevent the nasty political crisis that such a move would probably impose on the EU as a whole.

So what should Greece do? In the short run they should do what they've just done today, namely pass a harsh austerity package that dramatically cuts government spending. They have no choice. They've been spending money they didn't have and, worse, couldn't raise for decades and it's time to pay the piper. In the long run, Greece should get serious about administrative reform. The real cause of this crisis is the Greek government's inability to collect the taxes it is owed. The reason the Greeks can't fix their debt problems without enormous outside help is because they do not have an internal revenue service worthy of the name. That needs to change as quickly as possible. The problem is that it cannot change in time to fix the current crisis. But it could change in time to prevent the next crisis.

And this administrative incapacity is the key reason why the US IS NOT LIKE GREECE. The US can fix its deficit problems by returning its tax rates to where they were in the 1990s. That would be a relatively minor adjustment all things considered. Because our government is competent (yes, I said the government is competent), when we raise the tax rate, more tax money comes in. That's not the case in Greece.


Norma said...

When we raise the tax rate, more wealthy people hide their income. When we lower the rate, the government gets more income, but then continues to spend more. So it doesn't really make any difference. The answer is to cut spending. Under Democrats that won't happen--and probably wouldn't under Republicans either, but it's worth a try.

Raised By Republicans said...


I believe you are over simplifying the tax situation in the United States. It is pretty clear from historical evidence that if we raise the tax rates, revenue goes up. The only exception would be a slight decrease in tax rates coinciding with a substantial economic boom - in which case overall revenues might go up as a the economy grows. But such a coincidence of events (tax cuts + economic boom) is not guaranteed. And in any case, the topic of this thread is about the Greek crisis where the government's ability to enforce its own tax code is far below that of the United States.

The Law Talking Guy said...

Republicans made a good game of claiming that there was lots of "waste" in government which could be cut, so no need to ever raise taxes to battle deficits. But they can never find all that waste. When they do, it turns out the "waste" is medicare (see Paul Ryan's plan) or social security. In short, while there are governmental inefficiencies, most of your money is not being spent on waste. So we can't just cut spending. We need to cancel the foolish 2001 Bush tax cuts and return to the tax levels that we had in the 1990s when the budget was balanced, which was - incidentally - an economic boom time. We also need to stop spending money on Iraq and Afghanistan - that Bush never paid for with tax increases - and to pay for Medicare Part D, which Bush also never paid for.

USWest said...

Actually, a recent New Yorker article pointed out that one major problem in Greece is tax collection. It is estimated that the underground economy in Greece is about 24-27% of GDP. This compares to an average of about 9% in the US and other developed nations.

As part of its reform, Greece is trying to toughen up tax collection procedures.

The problem with tax evasion is that those who do pay end up having to pay more. The government has to raise taxes on those to who do pay to make up for those who don't. Furthermore, enforcement ends up costing quite a bit of money.This cuts into each Euro being collected. So it's a double bind.

Greece needs to fundamentally change its tax evasion culture. That is a difficult task because it means enforcement without leaving the impression of government thuggery.

Raised By Republicans said...

US West, I think that was my point. But I wouldn't say it's a "culture" issue. It's a almost purely administrative deficiency. The Greek government simply has not invested in a professional staff capable of enforcing tax laws and collecting the taxes owed. That can't be fixed over night. So in the short run Greece MUST engage in the kind of painful cuts the Republicans are advocating here. The difference is that the USA DOES have a professional staff on hand capable of collecting taxes effectively and we can solve our problems simply by doing what LTG suggests, repealing the Bush era tax cuts and getting out of Iraq/Afghanistan.