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Obstacles and incentives for Entrepreneurship: The case of taxation policy and Bureaucracy Red Tape

Speakers of the panel:

Ulysses Kyriacopoulos, Chairman, S&B Industrial Minerals

Nikos Karavitis, Professor of Public Finance, Panteion University, Athens

Marios Kyriacou, Senior Partner, KPMG Greece, Athens

Chair: Stamatis Zacharos, Managing Editor, Capital.gr/”Kefalaio” Newspaper

 

Ulysses Kyriacopoulos, Chairman, S&B Industrial Minerals

Entrepreneurship in any activity is needed for starting up business activity. This can also be self employment. Despite this broad definition, it includes creativity: to create something new which did not exist before.

Businesses which exist for a long time in the market may start a new marketing strategy.

Entrepreneurship is linked to risks and responsibilities. Your expectations may be prove to be wrong.

If policy fails, need to rethink what allows people to develop their potentials much better than before.

Obstacles are uncertainties which can be reduced by policy.

Since entrepreneurship is linked to experimentation but requires certainties.

Today we heard from Tsiparas who might want to take over government but this can create uncertainty, and yet if both sides agree on most points, so why do not they work together to achieve this aim?

Why do they say always no and disagree so that it creates uncertainties. Why?

Foreign investors see this and will not come to our country.

Greeks have the highest fear of failure and this does not allow them to become entrepreneurs. This is because our country does not give them a second chance. Other countries see people try over and again. We don't give a second chance.

Over and beyond ordinary risks for an entrepreneur we have to see what contributes to this fear of failure.

Obstacles:

Recovery of the Greek economy requires the entrepreneurial talents.

 

Nikos Karavitis, Professor of Public Finance, Panteion University, Athens

(when the chairman introduced him, it was mentioned that he has been accused for the tax uncertainty or failure to reform the tax system).

We might be tired and we might have heard things twice.

It has just been asked since the two parties agree, why should they not join, but there are points with which we should not agree with so easily.

Tsipras says common place wisdoms, for everyone wants a stable tax system.

I did not see that a constitutional revision is necessary, in order to have a stable tax system.

They (the politicians) don't say how they will face the voters for any tax system.

A key and very problematic area are intergroup transactions – who controls it and how – someone from the public administration?

Here I would like to hear solutions.

Fast and effective ruling. Does this mean other courts.

What is the financial crime squad do? It sends the controls to the IRS and there are the obstacles.

Tax system – should not impede business, and if we wish to exit, we need to finance the productive future of the country.

But if this is done by a national plan, then it is a centralized Soviet type of economic governance.

You need a tax system which does not bring about distortions. We cannot have a tax system full of exceptions.

The system works on a natural assumption: why pay taxes if I can pay less and if I can hide profits, I will do so.

When the tax system has to be fair, then no exemptions should be allowed. But which are incentives to pay taxes? If exemptions are granted, then they should not be given to an entire sector but only to a specific activity. It should not be resolved by exempting you because you are in Northern Greece, or you are in Southern Greece etc. ..this is holding us back.

Non salary costs – contribution to social security – but how can you do it by reducing the coefficient – in public not the same as in the private but no one says a word because the future pensioners of the utility works are behind this silence.

You have a population which is ageing.

Reinforce the second pillar: auxiliary funds. They have become a prime pillar but that is a very difficult solution.

Need a clear picture. One centre for collection for public sector which has a full picture.

What we need to think of how the other countries have brought this problem to a proper dimension?

Comment:

1.Tax system and tax evasion

After the session I had the brief opportunity to talk a bit on a personal basis with Nikos Karavitis. I said to him while he said several things which make immediately sense, for example, there should not be any exemption, then why does he state there is no need for a constitutional change to reform the tax system, if the constitution of 1975 exempts ship owners from the need to pay taxes? His answer was quite indicative, for he admitted that is true, but on the other hand if you tax shipowners, they can easily change the flag of their ships. To this statement I responded, does this mean that the Greek state can be coerced by a simple threat? He replied immediately with a sort of proud gestures, that "we Greeks can never be coerced into anything!" (1)

About social justice, I wondered if he does not see the problem while the weak and especially those depending upon a salary from the state are taxes, others are not. He replied as a professor he has experienced himself a 40% cut in his wage. He did not extend his thoughts beyond that point.

Asked about the political culture and the possible level of honesty as prerequisite for everyone paying their taxes, he repeated what he had said already in his speech as to what is the assumption under which especially the Greek tax system works. That is to say, everyone tries to pay as little as possible and take their profit where no taxes have to be paid. (2)

When then asked about the political parties sifoning off taxes at the regional level of tax collecting agencies, that is before the money reaches the central or national level, his answer was this is something which should not happen and which is not even allowed, legally speaking. But then why does it happen in practice? More so there is the increasing problem due to the two major ones being deeply in debt. It can be explained while in a phase of expanding power, they may hire more people and enlarge their party organisation; however, it is much more difficult for them to make the necessary cuts when being down sized in Parliament by the voter. This is especially the case with PASOK. (3)

Finally, I asked what he had to say about a youth contemplating but two options: suicide or emigration, he replied assertively, that suicidal tendencies will never happen, generally speaking, since "we Greeks will find a way out of the crisis!"

2. Corruption

Corruption according to Transparency International is a way to influence decision making in such a way that it leads only to making bad decisions.

About corruption a lot more needs to be said, for if there is a systematic way of exercising coercion so that people give in to what has been decided in advance, then not counter opinions are listened to, but something is enforced. Most revealing was when Jorgios Papandreou proposed in November 2011 to put what had been agreed upon at the European Summit in Brussels to salvage Greece from defaulting to a referendum, a storm broke lose. In the end, Jorgios Papandreou had to step down as Prime Minister. He was replaced by the non elected technocrat Papademos who then acted as Prime Minister until general elections were held in May and June 2012.

Thus a simple comment in Kathimerini underlines that coercion does exist, and besides bribery there are many other ways for politicians to be persuaded to vote in a certain way, for otherwise they face explusion from the system of privileges and special treatments. Hence it is not at all easy for any politician to keep a clean shirt as the demands contrary to keeping a clear conscience are obviously there. They are made often in a hidden way, but also in a most obvious way that they are easily over looked. Hence caution should apply to those who advocate going beyond the obvious as did most recently Culture Action Europe in its conference held in Newcastle, Oct. 14, 2014.

"The system is headed straight for collapse when the political battle is being fought for the sake of show, aimed at either placating or agitating the citizens. This was clearly the case in the debate on the confidence vote in Parliament last week. The result was that instead of rallying the majority, which was what the government intended, the process unleashed a barrage of accusations and counter-accusations: Claims were made that MPs’ phones are being tapped, that politicians are being swayed by big financial interests and that deputies were being bribed in order to secure the super-majority of 180 seats in the 300-seat House that the government needs to see its presidential candidate elected and snap polls averted." (Source: Costas Iordanidis (2014) „Coalition shooting itself in the foot“. Kathimerini http://www.ekathimerini.com/4dcgi/_w_articles_wsite3_1_16/10/2014_543760)

Ioanna Zikakou (2014) „Two Out of Three Greeks Commits Tax Evasion“ greek reporter.com 2014/10/12 http://greece.greekreporter.com/2014/10/12/two-out-of-three-greeks-commits-tax-evasion

"Even in the current climate of economic reform overtaking Athens, tax evasion rates remain startlingly high in Greece, with an estimated one in four economic transactions going unrecorded. In fact, a recent report conducted by Stephen Hall, an adviser to the Bank of Greece, finds that two out of three Greek employees are declaring figures less than their actual incomes – and, in some instances, aren’t declaring anything at all......based on research dating back to the 1990s, “tax morality” among Greeks is particularly low – the 22nd lowest among 26 European countries. Furthermore, Transparency International finds that the Greek public sector is more corrupt than that of any other European Union member state. Unsurprisingly, Greeks are reluctant to blindly fulfill their tax obligations.

Greece has a remarkably high percentage of self-employed citizens – a key facilitator of tax evasion. The incentive for Greeks to remain self-employed is self-evident; the Greek government collects a staggering 43% of total labor costs, compared to a 26% average in other countries of the developed world. The shadow economy helps Greeks profit individually, but it also severely limits the state’s ability to properly collect taxes and provide public services."

3. Parties in debt, see

In the 16/10/2014 edition: A Gael in Greece - Damian Mac Con Uladh

"Coalition parties New Democracy and Pasok, which combined owe over €270m to the country’s banks, on Wednesday successfully tabled an amendment that will ringfence 40% of state funding to political parties from seizure.

In a last-minute intervention, the heavily indebted parties introduced the amendment to a draft bill on political funding on the grounds that it was to safeguard the “minimum guaranteed revenue for and the sustainability of parties”.

The opposition voted against the amendment, arguing that it was specifically tailored to serve the needs of the heavily indebted coalition parties. However, none of the opposition parties called for a roll-call vote on the amendment."

4. Tax evasion by Greek companies - report by Gael in Greece, 6.11.2014

"The EFG Group, in which the powerful Latsis family is involved, and Weather Investments, which operates in Greece as Wind Hellas, are among a number of companies associated with Greece are among thousands of international corporations that have multi-million euro agreements with the Luxembourg authorities that help them reduce their tax bills.

Copies of the agreements are among almost 28,000 pages of leaked correspondence between PricewaterhouseCoopers in Luxembourg and the tax authorities there which have been shared by the Washington DC-based International Consortium of Investigative Journalists (ICIJ) with more than 40 media groups around the world.

The documents show that nine companies with Greek links have had secret tax deals approved by the Luxembourg authorities. Of the nine Greece-associated companies, five have been named. Others include Babock & Brown, Macquarie Group and Olayan Investments Company Establishment. The four remaining companies will be named between November 7 and 30 on the ICIJ website.

Eurobank was part of the EFG Group when the deals were signed in 2009 and 2010. Spiro Latsis, whose net worth of some $3.2bn earned him 506th place in the last Forbes billionaires list, is chairman of EFG International, which is 55% owned by EFG Group. In 2012, when it owned 44.7% of Eurobank, the EFG group announced it was transferring 43.55% to nine younger members of the Latsis family and would retain 1.15%..

While these private deals are legal in Luxembourg, the Guardian described the tax deals as painting “a damning picture of an EU state which is quietly rubber-stamping tax avoidance on an industrial scale”.

Luxembourg’s huge tax avoidance industry was developed during the years when the new president of the European Commission, Jean-Claude Juncker, was the finance minister and then the prime minister of the tiny EU member-state.

Some 340 other international companies like Pepsi, Ikea and FedEx have secured the secret tax deals from Luxembourg, allowing many of them to slash their global tax bills while maintaining little presence in the tiny central European duchy, the documents show.

The confidential PwC documents are so-called “advanced tax agreements” (ATAs) that allow companies loan hundreds of millions of euro to fellow group companies in Luxembourg, before the money is loaned back again to group companies elsewhere. These Luxembourg companies usually have no employees."

Source: Damian Mac Con Uladh (2014) Greek companies among those with secret Luxembourg tax dealsin: Gael in Greece, 6 Nov 2014

 

Marios Kyriacou, Senior Partner, KPMG Greece, Athens

I am perplexed to say the least. What I have heard, I am not sure what to tell you. I had the same problem last evening. I got tired. Then I asked my wife what to do which makes both happy and sad. His wife replied don't worry you do good sex. I was not offended.

If I have a problem, I might go to a doctor.

My company made a merger 30 years ago. We were both happy since we got what we agreed upon.

(comment: it seems that he favours a unity government, but then only if both parties agree on what they do not wish to change, and hence a kind of continuity in discontinuity.)

We want investors – local and global capitalism stands above us – there is no belief that they will go to a country which offers uncertainty – need an attractive environment – and a core element which is stable – you need to nurture entrepreneurship.

What is the situation today – all the politicians have left us, thanks God! Greece continues as a bankrupt country. The only reason is that these foreigners did give us money. Without them we could not live. We live on borrowed time. We need to be able to pay our debts and have enough money to pay for our investments.

In the short term, the foreign investor will look at the situation in Greece, what is there in the internal environment. If companies close the door, then no one will come.

Most companies are micro companies which need support but each can employ one more person. If this would help to reduce unemployment.

How to identify companies which can move forward compared to those which cannot? Need a way of collecting money from foreign programmes and give it to the companies with future.

In the long term we need to reduce our disadvantages. Give more incentives to investors so that we show that we are serious.

The only persons who can make investments are private business people who should be given incentives, otherwise we will repeat what we were saying already five years ago and nothing has changed.

If nothing is clear, it should be allowed to say to the service (tax office) please explain, but then the answer is we will take that into consideration and let you know.

We need a strategic plan and someone to tell us where to invest in which sector.

 

Comment:

Everything seems to end in a beautiful contradiction, especially if the call for a strategic plan ends up being but a willingness to listen to just someone who can tell in which direction one should go. The latter signifies an over dependency upon the kind of super leader which can emerge suddenly if political conditions reproduce again something like the military dictatorship which ruled in Greece 1967-74. It is not a mere matter of projecting fears derived from the past upon ongoing developments marked by an uneasiness of mediation between past, present and future. For the problem of over dependency is more complex that merely an anti democratic solution as being propagated by forces like Chrysi Avgi. There is already the key term of 'leader of the market', and which for a long time have been the United States of America.

In turn, the willingness to be imitate the one who leads means a political subjegation under a kind of rulership not really known out of own experiences. Hence the counter position can become easily the kind of Nationalism making themselves be heard and felt throughout Europe, and which has found its way into the Economic Forum. After all the previous panel discussion had as working title 'National reconstruction', even though in substance some of the contributing panelists referred to the problem of the Greek economy being not really competitive as long as it is over protected and state fed.

Yet no one goes so far to ask why there are no significant international institutions located in Greece? The latter would set other standards not only in terms of payment and qualifications, but also what would be required in terms of schools for the children of those who work for these institutions. But as long as eduction remains in Greece highly orthodox and even regressive - the reduced hours for foreign languages while Math teachers a reshuffled for lack of hours and then end up teaching art for two hours a week although they have no training in such a field - there is no way that someone would be willing to bring his or her family to Greece even if offered a good job.

However, the topic was much more double fold: entrepreneurship and bureaucracy. Both have secondary problems, namely obstacles to change and a tax system which is not only unfair and unjust, but which has not hardly any basis in a society which does not believe in paying taxes. The latter is as much a cultural feature as it is an expression of the hardships imposed on some while others go scot free, so to speak. It may amount to a lack of honesty throughout society since there prevails something like a honest form of corruption in which almost all have participated in, and still do. It starts with paying in cash for the car repair but not demanding any receipt so as to avoid the need to pay VAT tax and the need to pay more taxes due to higher income than declared or shown officially to be the case alone on the basis of receipts which have been given. Alone out of this practice can be easily created the imagine of an economy under performing when in reality the activities in the realm of the black market are quite high. Some further explanations as to why Greek businessmen prefer to sell their products only on the internal market is precisely because of having these possibilities of other financial arrangements. Once these products are exported, the tax invasion is no longer that easy, if at all possible. Yet that has to be checked before making it into a validated point.

More critical in terms of a general discussion is the readiness to blame bureaucracy for everything which has and is going wrong in the Greek economy. It is a negative sign of how easily everyone can slip into a 'blame culture' rather than challenge there the system where wrong practices define the mode of doing business. Since almost everything is subject to negotiations, there is no stable prize system or even an organisation like the Consumer Protection Society in Germany, which could put public pressure on how not only prizes are set, but also what constitutes the quality and safety of products / goods being put onto the market. The very absence thereof is also an indication that civil society is very weak in Greece. Instead society is composed of different networks and connections which end up becoming obstacles to one another as there is no consensus about what should replace the practice of negotiation within the realms of the black market.

It might be said that such an analysis is weak since most of the concepts have some socio-psychological implication, and therefore are most difficult to ascertain, never mind hardly ever possible to be affected by policy measures. Although some attempts have been made to reinforce the practice of giving receipts, there prevails still in street markets, car repair shops, workers doing house repairs etc. the form of payment without receipt. In that sense, it is important to recognize that the basic principle is not a market orientated exchange. Rather flexibility means here for a friend a different price exists when compared with a stranger. There is always a readiness to exploit the stranger for a lack of knowledge on how things work locally, internally and within the realms of the black market. Yet it would be a mistake to label this as a negative characteristic since everybody does it and therefore has become the social norm.

As to the bureaucracy, many more problems have been created than were resolved by making sharp cut backs. Many with huge experiences have left the administration so that the state has lost a lot of invaluable human resources. Likewise administrations have become one centred with only those at the top left in so called secure jobs while the 'foot soldiers' have thinned out, if not gone completely. It means there are more leaders but who have no one to lead. The structure of administration tends to reproduce furthermore mere dogmatic truths as if it is in the nature of public administration to create permanent or non changeable truths. It has led in Greek society to an irrational fear of anything written since it is equated with an absolute truth which cannot therefore be changed. In part this may be true since civil servants usually know politicians come and go while they stay in the same department for more than thirty years.

To give, however, a clearer picture of the state of affairs within the bureaucracy, the following aspects can be mentioned.

It should be noted that In Greece, the Second Programme of Economic Adjustment, agreed between the Commission, the ECB and IMF and the Greek government in March 2012, stipulated that public administration would shed 150,000 jobs (from the 2010 level) by the end of 2015, and do this by implementing already the ratio, only one new appointment for every five departures ratio.

Moreover, Greece does not rank as a country with the highest share of public servants in relation to the rest of the economy. It is known that Denmark, for example, has a much higher proportion of people depending upon the state for their lifelihood.

Table : EU countries according to public sector share of total employment Public sector share on total employment

Countries

Over 29%

Norway, Denmark, Sweden, Belgium, France, Luxembourg, UK, Netherlands.

25%–27%

Finland, Germany, Malta, Ireland.

20%–23%

Lithuania, Hungary, Austria, Estonia, Latvia, Slovakia, Greece, Italy, Spain.

Below 20%

Portugal, Poland, Slovenia, Czech Republic, Cyprus, Bulgaria, Romania.

Source: LFS Eurostat. NACE Rev.2. Sections O, P, Q ;

Bordogna and Pedersini, 2012

In Greece, on top of employment cuts and restructuring, many public employees with fixed-term agreements are trapped in repeated annual or eight-month contract renewals, with this situation being referred to by the media and unions as ‘employment captivity’.

In Greece, article 41 of Law 3979/2011 has resulted in an increase of the weekly working time in the public sector from 37.5 to 40 hours since 2011.

In Greece, public workers have been affected by basic salary cuts, as well as by the introduction of a single pay scale. This means that employees in equivalent positions and with equivalent qualifications receive the same pay irrespective of the ministry in which they operate (in practice, this single pay scale has meant further wage cuts for many public employees. This means also loss of the 13th and 14th payment (for Christmas and Easter).

Without any efficient and honest public administration, no state can really function. The tax evasion is one of the single largest issues not really faced. For its complementary side is corruption.

 

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