How to Finance a Tax Wedge Cut in a Way That Supports Work and Families

Greece’s economy has a disproportionally large number of self-employed, a small average size of companies, a small number of private sector employees when compared to public sector employment (Pelagidis and Mitsopoulos, Greece: From Exit to Recovery? Washington, DC: Brookings Institution Press, 2014), and a low level of private sector average wages (Pelagidis and Mitsopoulos, Who is to Blame for Greece. Austerity in Charge of Fixing a Broken Economy. London: Palgrave Macmillan, 2015). At the same time, the tax income taken as a percentage of GDP is low, which is due to the shortfall in income taxes in spite of the high and very progressive tax wedge, when compared, mutatis mutandis, to other similar countries and the OECD average as presented by the OECD taxing wages publication. All these observations are directly related and reflect the fact that private sector salaried labor is taxed highly and very progressively, both when compared internationally and when compared to other wage and pension income earners and self-employment (Mitsopoulos and Pelagidis, Understanding the Crisis in Greece. 2nd rev. paperback ed. London: Palgrave Macmillan, 2012; Mitsopoulos, Taxation in Crisis: Tax Policies, the Fallacies of Redistribution and the Quest for Economic Growth. Springer—Palgrave, 2017). As salaried labor, especially at above-average wages, is a key input to larger, and better organized, companies (Pelagidis and Mitsopoulos, The Moment of Turning for the Greek Economy. How Progressive Pragmatism May put it Back on Track. 1st ed. in Greek. Athens: Papazisis Publications, 2010; Gibson and Stillman, Why Do Big Firms Pay Higher Wages? Evidence from an International Database. The Review of Economics and Statistics 91 (1): 213–218, 2009), the structure of the tax rates effectively introduces a disincentive for companies to grow in size, given in addition that, in all countries, smaller companies and self-employed have a larger flexibility to shift part of their activities in the shadow economy, where they can avoid to an increased extent exposure to the high tax wedge through the use of clandestine employment, moon shining part-time employment, or the under-reporting of actual wages. This is, as a matter of fact, the case especially in the food and beverage, retail, and hotel sectors (Davis and Henrekson, Tax Effects on Work Activity, Industry Mix and Shadow Economy Size: Evidence from Rich-Country Comparisons (NBER Working Paper No. 10509), 2004) that are significant sectors in Greece.