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Tax Competitiveness is on the Agenda in Greece

7 min readBy: Daniel Bunn

Greece has gone through various fiscal reforms over the past several years as it has dealt with challenges associated with recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. and over-indebtedness. However, things are now at a point where the new government is considering ways to improve its taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. system. Greece ranks 30th out of 36 on our International Tax Competitiveness Index this year and has several opportunities for improving its ranking.

Last week, I had the privilege to visit Athens and participate in a discussion on Greece’s Index ranking and reform options for the Greek tax system. During the discussion, the Deputy Finance Minister for Fiscal Policy, Theodoros Skylakakis, said that he would like to make reforms that would move Greece to 22nd place or even better in the Index.

The discussion was well-timed because the Greek budget for 2020 had just received approval from the European Commission. That budget contains several reforms that will improve Greece’s ranking on the Index which can be seen as the first stage in a broader reform agenda that the current government is planning to implement over the next several years.

In total, the government expects the tax policy changes for 2020 to result in a revenue reduction of approximately €1.2 billion or about 0.7 percent of GDP. These tax cuts are being proposed in the context of economic growth and spending reforms that have helped to stabilize Greece’s debt to GDP ratio.

Table 1. Tax Reductions in 2020 Greek Budget

Source: “Draft Budgetary Plan 2020,” Hellenic Republic Ministry of Finance, October 2019,

Tax Reduction in Millions of Euros
€2,000 allowance for newborns 123
Value-added Tax (VAT) rate decrease on baby use and care articles and on safety helmets (13 percent reduced rate) 12
Reform of PIT tax scale including introductory tax rate of 9% and increase of tax-free amount for each child 281
Reduction of social security contributions for full-time employees by approximately 1% 123
Reduction of the CIT tax rate from 28% to 24% 541
Reduction of dividends tax rate from 10% to 5% 75
Suspension of VAT on new buildings for 3 years 26

The key items on the agenda that will have a direct impact on Greece’s ranking on the Index are the corporate rate reduction from 28 percent to 24 percent and the halving of the dividends tax rate from 10 percent to 5 percent. The temporary suspension of VAT on new buildings (alongside the suspension of capital gains taxA capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. These taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment. on property sales) could be classified a reduction in property transfer taxes. Taken together, these policies would improve Greece’s ranking on the Index from 30th to 27th, with a significant improvement in its ranking on corporate and individual taxation.

Table 2. The Impact of Reforms on Greece’s ITCI Rank

Includes reduction in corporate tax rate, dividends tax rate, and suspension of VAT on new buildings and capital gains on property sales.

Source: Author’s calculations using the methodology in Daniel Bunn and Elke Asen, 2019 International Tax Competitiveness Index, Tax Foundation, October 2019,

Category Overall Rank Corporate Tax Rank Individual Taxes Rank Consumption Taxes Rank Property Taxes Rank International Tax Rules Rank
2019 Index Rank 30 29 18 31 28 26
Rank with Reforms 27 20 12 31 25 26

Business Tax Reform

Greece’s corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rate has been on a bit of a bumpy ride over the last several years. After hitting a low point of 20 percent in 2011, the rate was hiked in two stages until it reached 29 percent in 2015. Bringing the corporate rate down from the current level of 28 percent to 24 percent would move Greece closer to the current OECD average of 23.6 percent.

Greece tax cuts, Greece tax reform Greece tax competitiveness, Greece corporate tax rate, Greece corporate tax cut

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The corporate rate is certainly an important feature of business taxation, but the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. is also important. Greece’s allowances for capital expenditures and restrictions on deducting past losses make the current corporate tax base uncompetitive. On measures of cost recoveryCost recovery is the ability of businesses to recover (deduct) the costs of their investments. It plays an important role in defining a business’ tax base and can impact investment decisions. When businesses cannot fully deduct capital expenditures, they spend less on capital, which reduces worker’s productivity and wages. (including provisions on business investment, losses, and inventory), Greece ranks 27th out of the 36 OECD countries.

Currently, losses can only be carried forward for five years. This means that many businesses that accrued heavy losses during the economic crisis may not be able to deduct all those losses against current or future earnings. This is especially true for those businesses that have only recently become profitable again.

DepreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. schedules can mean that the costs of investing are not fully deductible against income. Current policy in Greece means that when businesses buy new equipment, they will only be able to deduct 74 percent of those costs in net present value terms. If a firm wants to invest in a new building or structure, they will be able to deduct just 48 percent of those costs. Both the United States and Canada have recently adopted provisions to allow 100 percent deductions for investments in assets like machinery, equipment, and software. Greece could follow their lead to improve the local climate for business investment.

Allowing businesses to immediately deduct the full cost of equipment purchases and have a longer time horizon to deduct past losses would be significant improvements to the corporate tax base.

Personal Income Tax Reform

The proposed changes in personal income taxation and the benefits connected to children will impact the tax wedgeA tax wedge is the difference between total labor costs to the employer and the corresponding net take-home pay of the employee. It is also an economic term that refers to the economic inefficiency resulting from taxes. that workers with families face. In Greece, a one-earner married worker with two children who is making the average wage faces a tax wedge of 38 percent, 11 percentage points higher than the OECD average of 27 percent. Reducing social security contributions for full-time workers by approximately 1 percent and providing the €2,000 allowance for newborns will reduce some of this gap. In general, though, policies that reduce the tax wedge faced by all workers, and not just those with families, would be more neutral and competitive.

VAT Changes

The proposal outlines two changes to the VAT, one impacting baby-related items and helmets and another that would suspend the VAT on new buildings. VAT reductions are often seen as ways to alleviate costs faced by lower-income individuals or to boost demand, but they can also create complexity and distortions. It may seem like an attractive tool to use the VAT system to spur investment in new buildings or lower costs for young families, but both proposals would narrow the VAT base in a country where the base is already narrow (VAT is levied on only 43.7 percent of final consumption). The temporary nature of the VAT suspension on new buildings could also create political challenges when the government faces the expiration of that provision in a few years.

Base BroadeningBase broadening is the expansion of the amount of economic activity subject to tax, usually by eliminating exemptions, exclusions, deductions, credits, and other preferences. Narrow tax bases are non-neutral, favoring one product or industry over another, and can undermine revenue stability. and Compliance

In addition to the plans for cutting taxes, the government is working to implement rules that should decrease opportunities for evading personal income taxes and VAT. In 2017, Greece had the second highest VAT gap among EU countries at 33.6 percent, resulting in a revenue loss of €7.3 billion in tax revenues. Addressing this issue through requiring more digital transactions could take some time, but there is significant revenue potential with higher rates of compliance.

To that end, the proposal specifies that taxpayers will be required to conduct more transactions via electronic payment. In 2020, electronic payments should make up 30 percent of transactions (as a share of individual income). This is pitched by the government as a base-broadening measure that, if successful in increasing compliance rates, could lead to further tax reductions.


The government is optimistic about the reforms and their potential to impact economic growth. But while the Greek government projects GDP growth in 2020 of 2.8 percent (partially due to the proposed reforms), the European Commission projects 2.2 percent and the IMF projects just 2 percent growth. Reaching that higher growth rate will be critical for the Greek government to continue with its reform project.

The government’s proposals are a good step forward for Greece and will improve its competitiveness, moving from 30th to 27th in the Index rankings. The Greek government will need to adopt reforms that improve not only tax rates but also the tax base if the Greek system is to become more competitive. The government should recognize how the current system creates distortions and chart a course for a more neutral and competitive policy.

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