Back in the bleak days of the Vietnam war, Peter Arnett reported that some US Army officer, in a desperate bid to defend the destruction of a Vietnamese village, commented that “to save the village from the communists we had to destroy it.” While the quote has been disputed, it resonates nicely with that which the Greek government has said yesterday in defence of its new tax on property owners.
To paraphrase, Greece’s PM and his Finance Minister effectively conceded that the Greek economy, or what is left of it, must be destroyed in order to be saved from… bankruptcy. This is a large claim, so allow me to explain: Greece’s GDP is in free fall. -7.3% and counting. Each month sees a new tax being imposed on those who cannot avoid it while the rest, who can, send their money to Swiss and German bank accounts. Thus, while public investment has followed private investment to negative territory (in the sense that not even replacement capital is on offer), the Greek macroeconomy is increasingly strangled by the cruel combination of falling demand, crumbling banks and rising public debt.
In the midst of this downward spiral, and with the debt-to-GDP ratio gaining further momentum, the EU-IMF-ECB troika’s demand that new taxes are raised to plug the emerging chasms in the government’s finances led the Papandreou-Venizelos government into the arms of sheer desperation. To placate the troika, in order to secure the next loan instalment, the government resorted to a tax on property owners.
Taxes on property have a long, progressive tradition since the days of David Ricardo railed against rentiers (like himself). The problem is that when much of economic activity has been flushed out of an economy, the market value of property has collapsed (as no one is buying), then a flat tax on property will lead many propertied Greeks into not just a liquidity crisis but, indeed, into insolvency.
Falling asset prices, the euthanasia of the rentier and a shift from property related activities to industrial production and innovation is surely a good thing for an economy that makes strides into a better future. But a property tax that falls on an impoverished middle class in the midst of a recession is the peacetime financial equivalent to carpetbombing the proverbial Vietnamese village in order to… save it.