Above board.

Photographer: Kostas Tsironis/Bloomberg

Greece's Paper Trail Eventually Leads to Reform

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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Every place is full of metaphors that beckon the unwary foreign journalist. America’s huge cars are a metaphor for our people: brash, rich, more than a little heedless of our effect on the rest of the world. Before Britain got rich again, the dilapidated buildings were a metaphor for the decline of empire. French baked goods were a metaphor for everything liberal Americans imagined was better there.

Athens right now is full of such metaphors, except that it’s hard to know what makes for a good symbol, and what you’re taking too far.

Thursday in Kolonaki Square, I came across a pile of cushions and clothes inside a little park area roofed over with vines, suggesting that someone was sleeping there. Metaphor, random pile of discarded junk, or signs that Athens, just like my hometown of Washington, has homeless people who sleep on the streets?

Near the upscale hotel where I am staying, there is an old cafe, closed, its brick patio empty of chairs, the torn fringes of its awning flapping gently in the breeze. Metaphor? Or is it just another closed restaurant, like dozens I could find within a few miles of my own house?

There is one metaphor here that I'm willing to interpret: the receipt. And that’s because it’s not just a metaphor. It's also the tool the government is trying to use to close its tax gap.

I was last in Greece in 2006, during the twilight years of the boom that peaked during the Athens Olympics. Back then, Greece was notable to Americans for its lack of receipts. This is convenient for the shoppers, who don’t have to hunt around for somewhere to toss yet another piece of unwanted paper. But it was also convenient for vendors who wanted to underpay the tax authorities.

The inability of the Greek government to collect the taxes it is owed is one of the recurring themes of coverage of the financial crisis. This problem is sometimes exaggerated, but everyone agrees that it’s very real. And since the burden of structural adjustment is falling on fiscal reforms -- rather than, say, firing unproductive members of the vast government workforce -- that’s a big problem.

Widespread evasion narrows the tax base, forcing the government to set higher rates. If the evasion were spread evenly across all sectors of the economy, then these two things would roughly cancel out. Unfortunately, it’s not. Some sorts of taxes are easier to evade than others. Employment taxes are hard to evade, while self-employed professionals like doctors and lawyers have found it relatively easy to shelter most of their incomes. As a result, the cost of employing a new staff worker is quite high (especially since those workers are incredibly difficult to fire). The value-added tax here is now 23 percent, close to the EU maximum rate. (Thank God for that maximum, joked one journalist I met; otherwise, who knows how high they’d have raised it.) That’s making up for taxes that aren’t collected elsewhere.

The good news is that Greece has at least made progress on collecting sales tax. They’re hardly at the level that our Internal Revenue Service would accept, but most of the places I’ve gone have automatically given me a receipt, printed out by a cash register. The taxi drivers mostly offer printed receipts. One did ask me how much he should make it out for. (Note to boss: I told him to make it out for the amount of the fare.) I’m told that on the islands, collection is less sure. But here in Athens, they are slowly but surely improving their collection apparatus.

Greece is attempting to do in the space of a few years what other economies did over the course of decades. Most people think of a cash register primarily as a way to add up the value of the sale, but in fact, that is the least of its functions. Its most attractive feature to the merchants who adopted them back in the late 19th century was that they made it harder for clerks to steal. (That’s why old registers made a noise every time the cash drawer opened; that prevented employees from stealthily recording sales and then pocketing the money, or alternatively, giving goods to their friends without being paid.) Over time, of course, revenue authorities realized that cash register tickers were also a good way to ensure that employers gave the state its due.

The Greek government has gotten very, very serious about receipts, to the extent of saying that people who are refused one do not have to pay. This hasn’t gone entirely smoothly. One raid on an Athens nightclub turned up an elaborate fake receipt system. But most people I’ve talked to agree it’s improving.

However, they’re also worried that the successive rounds of tax hikes threaten to undo this frail progress. The higher the tax rates go, the more tempting it is to evade the law. The more people evade, the higher the rates have to go—always, always, hitting hardest the sectors that are easiest for the government to see.

And this itself is something of a metaphor for the struggles that Greece is having. Corruption, tax evasion and all the other problems that are cited as contributing to the crisis are not some sort of unique Greek sickness that superior countries somehow avoided. It took centuries to build the modern state, to tamp down on corruption and cronyism and generate the administrative capacity to do things like collect taxes and make sure government employees regularly showed up to do their jobs. And it’s not as if we’re done. At least in the U.S., the news still regularly features stories of tax cheats and public workers who aren't earning their pay.

The paper trail is at least the first step. The risk is that the burden of adjustment will fall too hard on the sectors where it is easiest to generate a paper trail, stunting recovery and making future reforms even harder. The shift toward credit cards and electronic payments will help (at least, unless it’s retarded by the desire to evade taxes by staying in cash).

Ultimately, the government still needs to build a lot more administrative capacity, to ensure the tax burden is spread more evenly across sectors. It took us a long time to do that. They’re not going to manage it overnight either.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor responsible for this story:
Philip Gray at philipgray@bloomberg.net