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The slippery road to Greece

July 15, 2011|By GEORGE MICHAEL

There is an ad I see occasionally where a guy playing the role of an auto mechanic, holding an oil filter for a car, dryly says, “Pay me now or pay me later.” Meaning, of course, that it is a lot smarter to buy a filter and get an oil change now rather than replacing your engine down the road due to neglect.

Does the news out of Greece foreshadow what might happen in America in a decade or two? We can “pay the piper” now and possibly forestall an economic meltdown. Or we can continue the path we are on, as far too many Americans seem inclined to do, in a state of denial about the debt and our unsustainable entitlement programs, and end up with a crisis of the Greek magnitude.  

Following last week’s austerity vote, the Greek people are facing big changes. All public sector wages will be cut by 15 percent. There will be severe cuts in education, including the merging or closing of 1,976 schools and that’s with a population at 3 percent of ours. The Social Security age will be raised from 61 to 65 with cuts of $1.5 billion from the program this year and even more next year. Only one of 10 civil servants retiring this year will be replaced.  

Many government-run business will be privatized, including telecommunications, airports, land and mining rights agencies, and the petroleum and water companies. Spending on health care will be cut by half a billion dollars now with $2 billion in additional cuts each of the next four years. Again this is a country with 10.5 million people. On a percentage basis, it would be hundreds of billions of dollars if we did the same thing here.

Significant tax increases are included in this plan. Luxury taxes on yachts, pools and cars and special levies on profitable businesses and high-value properties are part of the deal. Income taxes are to increase by $3 billion to $4 billion over the next two years. Excise taxes on fuel, cigarettes, and alcohol will be raised by 33 percent. And their national sales tax (VAT) will increase by 21 percent.

Good luck on getting the expected money on those tax increases. These plans usually don’t produce the projected revenues. They are based on static economic analysis. It assumes that even with the higher taxes, everyone will cooperate and continue to do the same thing they did last year. That proposition is very unrealistic.

Do you remember in Maryland, we passed the so-called “millionaire’s tax” back in 2008? About a thousand millionaires with their businesses disappeared. By the following year, $100 million less in taxes was collected from this group than the year before.

It is a fanciful idea, even foolish, to place special levies on profitable businesses, those successful at providing jobs and producing goods. An analogy might be to suggest that people would be happy if our doctors would just take healthy patients and make them sick in order to share the pain. How does that help make things better?

Raising taxes on individuals is not likely to produce the projected revenues either. It is an economic axiom that if you tax something, you get less of it. If you subsidize something you get more of it. Creating disincentives for investment, risk taking, and work has already contributed to the crisis in Greece and other countries in Europe.  

Then, there are the so-called “sin” taxes, likely to fall short in the same way. Higher taxes on alcohol and cigarettes pretty much guarantee an increase in “black market” activity with citizens bypassing the tax collector, smuggling their goodies in from somewhere else. In addition to being a big drag on the economy, sales and “sin” taxes are very regressive, falling heaviest on the ones at the bottom of the socio-economic ladder.

Are there any lessons here for us? Should we continue along our merry way, making irrational attacks on leaders like U.S. Rep. Paul Ryan? He has suggested that if we work on a solution now and make some adjustments, we can protect Social Security and Medicare for those retired or nearing retirement and still have benefits for the next generation. Or will we as a nation follow the siren song of demagogic politicians who really offer no solutions of their own? They are content just to throw bricks at those trying to solve the problem.

These brick-throwers seem more intent on re-election or increasing their party’s power base by arguing that there is really no problem or by insisting on tax increases for the rich. They resort to class warfare and resentment as tools to manipulate citizens. If that is the path we follow, it will be a slippery slope into a miry pit not unlike Greece.

George Michael, who lives in Williamsport, is a former principal of Grace Academy. His email address is skythorn33@aol.com.

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