Forty-Four

The Wikipedia page for forty-four warns it may contain poor or irrelevant examples—as indeed it does. It could for instance have mentioned that in China it’s considered a very unlucky number, to the extent the forty-fourth floor is absent from many skyscrapers.

Of course the floor is there, but it’s a case of ‘one, two, skip a few.’ Shut your eyes and pretend. Much like the Portuguese government and its current paymasters, the ECB, IMF, and European Commission. Forty-four billion euros, around fifty-seven billion dollars, is the estimated size of the informal economy in Portugal.

That’s twenty-six percent of GDP, and half the bailout package. The ten year sovereign bond yield is persistently above seven percent, largely due to the antics of the junior coalition partner, a new bailout seems inevitable, and the government is about to get hammered tomorrow in the local elections.

It’s difficult to relate the informal economy to occupation, but the numbers are, by this country’s standards, huge. The workforce was estimated in 2009 as five and a half million (China has a mere three-quarters of a billion); unemployment is about seventeen percent, which puts close to a million people out of work.

If all of the jobless were engaged in informal activity, that would still leave more than three-quarters of the forty-four billion unaccounted for. So either the estimate is wrong, or a great deal of people who are employed, and that means corporations, are not paying tax.

The latter conclusion is visible even to the blind—the economy is self-regulating—it compensates reduced purchasing power by providing a cheaper offer, possible through lower labor and product costs. The signs of austerity are now obvious throughout the middle class, and at the scale of the country, no one believes in economic recovery.

In some ways, it’s similar to wartime, but without the horrific bloodshed and destruction that wars bring. However in war you fight to win, whereas here no one’s fighting for anything except survival.

Paul Theroux analysed the parallel economy in sub-Saharan Africa in ‘Dark Star Safari.’ He concludes that in nations where cash crops have disappeared, families have returned to subsistence agriculture. In a good year, they eat. In a bad year they die.

Because the tobacco, cotton, and jute have disappeared, so have the trade flows, and with them the tax base. Whole communities are left without schooling, medical services, or basic utilities. They don’t make money, they make food.

Value Added Tax (Sales Tax) receipts in Portugal over the fifteen years

Value Added Tax (Sales Tax) receipts in Portugal over the last fifteen years

I worked up this graph based on national statistical data. The blue line is the income from VAT. Graphs like this tend to be noisy so I added a smoothing line. It looks suspiciously like the law of diminishing returns. The year axis is a proxy for the ever increasing VAT rate, shown in the red squares. I’m looking forward to adding an extra point at the end of 2013. With forty-four billion and counting in parallel income, I’m pretty sure where that point will lie.

Yesterday I was told about a guy who owned a horticulture business, specializing in olive trees and other traditional local flora. He died of a heart attack two months back, aged forty-four. His widow has three kids to bring up, and she’s taken over the business. Four of the staff just got fired. Off to the informal economy. Three remain to prop up the tax base.

The Portuguese National Institute of Statistics reports that the tax burden in 2011 was 33.2% of GDP. Although it will be higher now, the informal economy is getting dangerously close. This puts the country in the extraordinary situation where one third of the economy is conventional income, one third is parallel income, and one third is tax.

Furthermore, increased public sector cuts will reduce the conventional income, the tax base it generates, and the ability to collect tax. It’s not hard to see where this is going. And the only way to reverse it is to reduce the tax burden.

In the fifteenth century, Portugal headed for Africa to seek wealth. Now, in post-colonial times, we’re slowly waving goodbye to the tax base. A lot of Europe is, perhaps one hundred-fifty million people. Back to subsistence.

I think I’ll go buy an olive tree.

Atmos Fear and The India Road. Quick links for smartphones.

Atmos Fear and The India Road. Quick links for smartphones.

 

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