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| Dimitri Menexis |
A common economic problem, which arises when persistent
austerity measures are inflicted in a country, is the lack of
local demand for the services and products that a country
offers, which may leave it with low economic growth and high
unemployment for longer periods of time than may be initially
anticipated.
Other factors that can be viewed as "cultural driven
reactions" to such austerity measures is the effect that such
measures have on the level of confidence and uncertainty that
is borne in the country burdened with such measures, which can
further deepen an economic crisis.
In an economy, one person's spending is another person's
income and if everyone is trying to reduce their spending they
can be trapped in what economists call "the paradox of thrift",
which can worsen a recession.
It has been acknowledged by the competent institutions that
forecasts for countries that implemented austerity programmes
have been consistently overoptimistic, suggesting that
increasing taxes combined with a reduction in government
spending result in more damage being done than expected, and
the countries that implemented fiscal stimulus did better than
expected.
One major factor that influences demand, and therefore
growth, in an economy is the level of disposable income that
individuals have to spend after the deduction of direct
employment taxes, such as social security and personal income
taxes, etc. when considering employment income.
Greece has a progressive income tax scale. The maximum
income tax rate is 45% on taxable incomes of €40,000
($40,400) or more. Furthermore, a progressive solidarity tax is
also applied on all income declared at a maximum of 10% for
declared income of €220,000.
Table 1 shows the total tax and social security on
employment income for various levels of gross income, valid
from January 1 2017.
For example, for a gross income of €42,051, which falls
within the bracket between €40,000 and €82,051 (under
which Greek social security ceases to apply), the effective tax
rate and social security rate amounts to 60.36%, leaving a net
income of €16.671.
| Table 1 |
|
Gross income (€) |
Total tax and SS (€) |
Net disposable income
(€) |
Effective tax and SS rate |
| 40,000 |
14,074.98 |
25,925.02 |
35.19% |
| 60,000 |
25,578.74 |
34,421.26 |
42.63% |
| 80,000 |
37,861.12 |
42,138.88 |
47.33% |
| 100,000 |
48,695.76 |
51,304.24 |
48.70% |
| 120,000 |
59,717.89 |
60,282.11 |
49.76% |
| 140,000 |
70,185.89 |
69,814.11 |
50.13% |
| 160,000 |
81,281.76 |
78,718.24 |
50.80% |
| 220,000 |
113,898.58 |
106,101.42 |
51.77% |
| 280,000 |
146,362.30 |
133,637.70 |
52.27% |
| 500,000 |
265,877.30 |
234,122.70 |
53.18% |
Furthermore, increased taxation in a shrinking economy may
lead to increased tax evasion as low levels of confidence in a
country clouded with high uncertainty can push the people into
"survival mode".
Indirect taxes include a VAT sales tax rate of 24%, applied
on most goods and services. Furthermore, Greek consumers are
burdened with one of the highest gas retail prices in the EU in
addition to real estate property taxes, which further
diminishes real disposable income and aggregate spending.
When is it the right time for fiscal stimulus? The answer is
now.
Dimitri Menexis (dimitri.menexis@gr.ey.com)
EY
Website: www.ey.com