I just had an email conversation with Greek macroeconomist Evi Pappa who is a Professor at EUI in Florence.
She made a point about tax collection that I had, for some reason, not grasped, even though it’s blindingly obvious.
Right now, in the throes of an aggregate demand death spiral, cranking up tax collection on the mass of the population is not going to help. Because it’s an increase in taxes! [That’s the mental leap I made today!] And will depress aggregate demand still further. And, since they are in a single currency, there will be no compensating monetary policy loosening for them.
In the longer term, tax evasion is obviously vital to sort out. But if that task has to be begun right now, the best thing would be to cut tax rates so that increased tax collection did not mean higher tax revenues. In fact, in the short-term, cutting tax rates might actually help spread the custom of collecting and paying taxes more widely. If think of tax evasion as a costly activity, then we might expect that, without changing the costs of tax evasion, cutting tax rates would lower the returns to tax evasion, and, hence increase taxes paid. [h/t Pontus Rendahl at Cambridge for pointing this second rather basic point out to me].
Of course, a lot of Syriza’s rhetorical focus on this has been about extracting more revenues from the rich and super-rich. Extracting that money would not depress demand much, because those individuals tend to have very low propensities to consume out of marginal income. But if that can’t be done without the collateral damage imposed by much wider tax collection on the weight of lower and middle-income individuals, then better to postpone until the trajectory of the economy is more certain.
But try telling this to Greek’s creditors.
And we can make similar arguments about G. That’s government spending. The pensions and civil servant salaries that are the focus of so much outrage are the Greeks digging Keynesian holes and filling them. And whatever the rights and wrongs of those payments six months ago, they are more needed now than before.
There’s an irony in the fact that the way the argument has played out between Syriza and the Eurogroup, which has led to renewed recession in Greece, and flight from Greek banks, has actually taken what is optimal from a politics-free perspective further away from what is politically feasible.
If there were no issues about sovereignty, moral hazard, tit for tat, credibility, etc, the best thing now would be for a much more generous package in the short-term, to counter the recession, relative to the situation last Summer. However, Syriza’s own tactics, the ‘do what I say or I will blow my own brains out’ strategy, and Eurogroup’s probable increased scepticism about the Greek’s capacity to stick to conditions that would go along with any deal, mean that what they are prepared to offer is probably not more generous than before, and perhaps harsher.