Over the weekend European nations and the International Monetary Fund (IMF) agreed to provide Greece with a 110 billion Euro loan over three years, or about $147 billion, to prevent it from defaulting on its national debt.
According to the agreement that was hammered out over the weekend, Greece’s value add tax would rise from 21 percent to 23 percent, the wages of civil servant would be frozen and the annual bonuses of two months’ wages for public sector workers would be eliminated. Also, bonuses would no longer be handed out to members of parliament. To help balance the budget, taxes will be increased 10 percent on tobacco, fuel and alcohol. Greece also is supposed to cut spending by $40 billion over the next three years.
Greece’s fiscal nightmare can be summed up succinctly: a comprehensive welfare state the Greek people are unwilling to pay for.
According to recent estimates 25% of the Greek economy is underground, that is, off the books and therefore untaxed. In other words, Greeks want a welfare state but they avoid the onerous taxes that are needed to pay for all the “goodies” the State provides them. The Greek government may not be collecting as much as $30 billion in taxes, a major factor in the country’s huge budget deficit.
Tax evasion is especially high among physicians who work for low salaries in the nationalized health care system, but earn substantial amountsof money by taking cash on the side to provide better service for their patients. In addition, tax evasion is very high among the self employed.
Raising taxes to help balance the budget will drive more of the economy underground. If the Greek people do not like to pay taxes on the income they earn now, why will they suddenly declare more of their income in order to be taxed at higher rates?
Another band aid has been applied by the Greek government, the IMF and European nations, primarily Germany, to prop up one of the most dysfunctional governments on the Continent.
The prescription for Greece is the same for all welfare states, nonprofitization. Management guru Peter Drucker laid out the argument as well as anybody for phasing out the welfare state in his Wall Street Journal essay nearly 19 years ago, “It profits us to strengthen nonprofits.” Regrettably, Drucker’s common sense advice has been ignored by all the world’s welfare states, and the results are evident all around us, collapsing welfare states and more bailouts.
Greece, the rest of Europe, Japan the United States and the other welfare states must heed Drucker’s warnings and implement his solutions–phasing out the welfare state will create more wealth and provide the social services every society needs to meet the needs of its people. Otherwise, the welfare state will continue to borrow, tax and spend to prop up unsustainable programs until they all come crashing down.