Tuesday, July 10, 2012

Maybe America has a Greek Problem After All

I was asked recently if I was worried that the US was turning into Greece.  "I'm not worried about that at all," I said.  I gave the standard economist's explanation: the crucial difference is that the US government is borrowing in its own currency, and the primary evidence that markets aren't worried is the low yield on long-term Treasuries. 

However, reading Paul Krugman's column today about Mitt Romney's taxes, I realized that the US-Greece parallel may be valid in one unfortunate respect: both countries appear to have a serious tax-avoidance problem on the part of their elites. 

Wonkblog's Brad Plumer wrote about a study of tax evasion in Greece:
A bigger question is why Greece hasn’t been able to crack down on tax evasion. The authors note that Greek officials seem to have a very good idea of who’s avoiding taxes: In 2010, the parliament took up a bill that specifically targeted doctors, dentists, lawyers, architects, engineers and so forth. As the authors note, these are precisely the groups evading the most taxes (largely because they receive much of their income in bribes). But the crackdown bill failed — possibly because, as the authors discover, these are the professions best represented within the Greek parliament.
In the US, we have a problem of illegal tax evasion - the "tax gap" - which, while significant, may not be on the same scale as Greece's.  The bigger problem in the US is the ability - and willingness - by corporations and very high-earners to legally avoid taxes. 

Though its hard to know for sure what's going on without more information, Mitt Romney's IRA might be an example. According to Krugman:
I.R.A.’s are supposed to be a tax-advantaged vehicle for middle-class savers, with annual contributions limited to a few thousand dollars a year. Yet somehow Mr. Romney ended up with an account worth between $20 million and $101 million. 
I doubt Romney did anything illegal by the letter of the law, but the complexity of our tax system provides lots of ways for people and corporations that can muster legal and accounting firepower to minimize their taxes.  Moreover, the same people and corporations who benefit from the messiness of the tax code have disproportionate influence in Washington which may help them keep their loopholes open, and perhaps get them widened a little here and there.

The obvious policy answer is a simpler, and better-enforced tax code.  But, given the political economy, that's probably not realistic.  And focusing on the tax rules may miss the real issue, both here, and perhaps in Greece, that there is not a strong enough sense that taxes are a duty (one might even say noblesse oblige) and some attempts to avoid them - even if legal - might be wrong. 

Krugman noted that, in contrast to his son, George Romney was notably transparent about his finances:
Those returns also reveal that he paid a lot of taxes — 36 percent of his income in 1960, 37 percent over the whole period. This was in part because, as one report at the time put it, he “seldom took advantage of loopholes to escape his tax obligations.” 
There probably always have been and will be "loopholes", but what matters is the willingness to take advantage of them.  That depends, in part, on how socially acceptable it is to do so.  While the details are different (and the macroeconomics is very different), the US and Greece seem to share a significant failing in the "social norms" department.

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