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State Budget Deficits Grow as Millions of People Continue to Evade Taxes

Politics / Taxes Nov 02, 2012 - 08:21 AM GMT

By: InvestmentContrarian


Sasha Cekerevac writes: One of the common themes around the world is the growing level of government debt due to high budget deficits. Budget deficits occur when spending is greater than revenue. Taxes are the main source of revenue for governments; taxes decrease with a slow economy. A slow economy means fewer employees, which means less revenue from income taxes and lower taxes on goods purchased. This increases budget deficits, which then adds to the rising total of the government debt.

This is not a problem that exists solely on American shores. A big issue around the world is how to tax the wealthy. While many in America believe that increasing taxes for the wealthy will decrease the budget deficits and, in turn, eventually decrease the government debt, the problem is more severe in some nations.

In a recent study to determine the number of Greek citizens who pay taxes, approximately 70% of Greeks were found to underreport their income. The results from the study showed that undeclared income totaled in excess of 10% of Greece’s gross domestic product (GDP) for 2009, or 28.0 billion euros. Because this income was not declared, the Greek government lost 11.2 billion euros in taxes, or approximately four percent of GDP. (Source: “Wealthy Greeks Still Don’t Pay Taxes,” Der Spiegel, November 1, 2012.)

That is a truly staggering amount relative to GDP, which is exacerbating the budget deficits and the growing government debt. This lack of revenue is pushing the government to enact further spending cuts, of which the average citizen is feeling the full effects, including massive pension cuts. Reducing budget deficits is extremely important for the government to balance its books, but this type of illegal activity hurts the entire economy and a large percentage of the population.

In the report, a glaring example of the pervasiveness of undeclared income is that only 200 people earn over 500,000 euros in Greece. The public’s calls to raise taxes on the rich would do nothing, as they don’t pay many taxes at all.

Of course, not all of the people evading taxes are super rich. The report cited lawyers, journalists, entertainers, and doctors as being the biggest culprits. The more the public believes tax evasion is normal, the more people will engage in hiding their income. This creates a snowball effect, which leads to higher budget deficits and higher government debt. The lack of revenue from income taxes means more cuts, which means less jobs and even lower revenue.

What can be done about this problem? Simply raising taxes won’t do much if approximately 70% of the public already doesn’t disclose their full income. Obviously, the tax evasion has to end. I hate to recommend such a draconian idea, but for many countries with tax evasion problems, having a system in which there is only electronic currency would help solve the problem. If there is no paper and every transaction occurs electronically, then the government can track every dollar earned within the economy. With the debit system becoming more prevalent, we’re already moving toward this route.

Of course, this would raise various privacy issues. Do citizens want the government to know everything they do? The final determinant is to understand what is most important in a society. In countries such as Greece where budget deficits are out of control and government debt is skyrocketing, simply having 100% of the public report their actual earnings would be a big step in helping the country’s economic situation. This would mean fewer austerity cuts, as revenue would increase without raising the tax rate. The U.S. also has out-of-control budget deficits, but our problems are quite different. We have too many loopholes and deductions that need to be eliminated and structural changes that need to be made to reduce the budget deficits and begin paying down the government debt.


By Sasha Cekerevac, BA

Investment Contrarians is our daily financial e-letter dedicated to helping investors make money by going against the “herd mentality.”

Copyright © 2012 Investment Contrarians- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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