Greece Reality Check: The Answer Is Taxing Tourist Property
Economics / Taxes Sep 10, 2011 - 12:27 PM GMTBy: Andrew_Butter
The Greek Government owes 320 Billion Euros, her partners in Europe are now considering letting her fall, cheaper to bail-out German and French banks (mainly) than throwing good money after bad at the basket-case.
The Dutch Prime Minister recently started talking openly about “the ultimate sanction”, the argument is simple, “they cooked their books and brazenly got around the terms of the “marriage contract”; so the contract should be declared null and void”.
The problem is that there is no mechanism for kicking anyone out of the EU or the Euro, which with the luxury of hindsight might have been a good idea; the most important part of any contract is the clause on termination, it seems they didn’t even have a clause to cover that.
Leaving aside the inherent dangers of any country borrowing money denominated in a currency that they can’t print if push-comes-to shove, Greece is in a hole (a) because debt was not securitized (that’s non-recourse, the stuff they got now is recourse), and (b) because the creation of the Euro-zone provided a perfect mechanism for avoiding paying tax on Greece’s main foreign-exchange earner, tourism.
How that works is that when a German buys a holiday in Greece, he/she pays for the main costs of the holiday in Germany. How much of that money gets into Greece, and more important how much gets into the pockets of the Greek tax-man is up to the seller of the holiday (in Germany) to decide.
If the seller owns the hotel or villa in Greece, even better, they ship the minimum across to Greece (typically enough to service debt and pay utilities), and they keep the rest in Germany, where the tax-rate is much lower and they can “employ” themselves doing “marketing”, the fact that there are no controls on money going backwards and forwards makes that easy.
Greece needs to raise more tax, but taxing what trickle-down ends up in Greece (like the recent hike in taxes for restaurants), is counter-productive.
The solution is simple, tax the property directly, not based on declared income or cash-flow, based on an assessment of value of any property that is not permanently occupied; and if the taxes don’t get paid, seize the property and sell it. Not nice, but sometimes you have to make hard choices.
Longer-term; look for ways to replace sovereign debt, with securitized debt.
In the mean-time, whether the rich countries in Europe step up to the plate is in the balance, chances are they will, but if they are smart they need to get some sensible ground rules in place rather than just handing out cash, and it has to be more specific than the Greeks promising not to cook their books anymore.
In the first instance the rules must be simple, when Finland asks for collateral say, “sure – we are imposing a 5% per year “value-tax” on all hotels and holiday villas, we expect 10% will not pay, so there’s your collateral”.
By Andrew Butter
Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe; currently writing a book about BubbleOmics. Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( hbutter@eim.ae ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.
© 2011 Copyright Andrew Butter- All Rights Reserved
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