An enforceable tax on wealth, a serious clampdown on tax evasion, combatting the public sector payroll and improving the minimum pay system are all crucial
Income inequalities are dominated by large differences between the incomes of public sector employees and private sector employees with the gross earnings of the former averaging over €3,000 per month in 2022, twice the level of the average incomes of private sector employees.
And even in the private sector striking inequalities exist with employee incomes in the leading retail, tourism and construction sectors averaging less than half of corresponding incomes in the finance, and the information and communications technology (ICT) sectors. Indeed, with most private sector employees being paid pitiful incomes Cyprus has become a low wage economy.
In virtually all countries including Cyprus wealth inequality is much more severe than income inequality, with tiny portions of the populations owning most of their country’s wealth. This is the case in Cyprus with the latest detailed data for 2017 showing that the wealthiest 10 per cent of households held 62.8 per cent of total net wealth (mainly real property and financial assets less debt), much higher than the euro area average of 51.9 per cent.
Income and wealth inequalities between the older and younger generations of Cyprus, together with the surge in housing prices since the 1990s, are causing profound consequences for the younger generation. Demographically, with low incomes and job security and being confronted with high housing and childcare costs, many young couples in Cyprus cannot afford to raise a family. In fact, the population of Cypriots is declining and Cypriot children now constitute a minority in some primary schools.
In addition, many less-wealthy persons including young couples have tried to bridge the gap between their meagre incomes and high housing prices by resorting to housing loans. But, unfortunately, with the imposition of much higher interest rates the net wealth of these borrowers is being substantially reduced, making many more vulnerable to losing their properties through questionable foreclosure procedures. Indeed, Cyprus banks are exacerbating wealth inequality by selling foreclosed properties at very large discounts to wealthy entities including equity funds.
What can be done?
Personal income tax rates
The tax system is not sufficiently progressive, with high-income earners being subject to a top marginal rate of just 35 per cent. This is much lower than top marginal rates in northern European countries and even well below the corresponding rates of over 44 per cent in Greece and 53 per cent in Spain.
And the impact of the recent rapid inflation on incomes has brought many lower and middle-income earners into higher tax brackets in most countries including Cyprus. In response states such as Austria, Belgium and Luxemburg in Europe have adjusted upwards the income levels on which tax-free thresholds and higher tax rates apply.
Surely, in Cyprus there is a need to raise the tax-free threshold from the current level of annual personal income of €19,500 to say €22,000 to take account of the effects of inflation, and to increase the top marginal rate to at least 45 per cent for annual incomes above €75,000 so as to bring about a more equitable taxation of personal incomes.
Taxes on wealth
The absence of taxes on wealth, including a progressive central government tax on immovable property and on inheritances and gifts, have contributed importantly to the high and increasing concentration of wealth among a small portion of households in Cyprus.
Accordingly, a central government progressive tax on immovable properties, including commercial establishments such as hotels, needs to be reintroduced as well as the levying of an inheritance tax to counteract widening inequality within the Cyprus population and its transmission across generations.
Despite the generous tax treatment of the property sector in Cyprus there is a growing housing crisis in Cyprus with much of the younger generation and students unable to afford decent housing. With investments in property being increasingly directed to attract foreign tourists, high income professionals, and investors/speculators, there is a need to tax owners of second homes used for Airbnb and non-resident owners of immovable property valued over €200,000 more heavily. It is ridiculous that municipal council taxes in Cyprus range roughly from only €90 or less to €300 annually, depending on the size of the property.
Combatting massive tax evasion
Despite the huge amount of tax evasion in Cyprus with official tax arrears of around three billion euros and statements that tax evasion will not be tolerated, no government has shown any serious intent to tackle tax evasion. It can’t be over-stressed that this crime not only cheats the government out of revenue that could be used for assisting lower-income households and the vulnerable, but allows the devious rich and the politically connected to accumulate wealth faster and at the expense of honest tax-paying ordinary citizens. And tax evasion makes it harder for compliant businesses to be profitable when they are competing with businesses that do not bear the expense of paying their fair share of taxes.
Inefficient tax administration in Cyprus is most strikingly reflected in the huge time lag of around five years between the punctual lodging of personal income tax returns and receipt of their processing by the tax department stating the amount of taxes due. Reducing such long-time lags, accurately processing and auditing tax returns, and capturing more persons and corporations in the taxation net, will require fundamental reforms in tax policies and administration.
Much greater efficiency in the processing and auditing of tax returns will require the recruitment of competent and moral personnel to be employed as tax administrators. In addition, the Cyprus authorities should use e-government and available technology tools to fight types of tax evasion
such as electronic sales suppression as well as taking measures to reduce the very large cash-based underground economy.
Furthermore, a simplification of tax forms and procedures for paying taxes should contribute to greater tax compliance and a boost of the tax base.
Other government policies
To narrow the large gap between the compensation of public and private sector employees it will be necessary to contain the salaries and wages of government employees, especially of those with higher salaries, by confining cost of living and regular incremental adjustments to employees with monthly gross incomes below €3,000.
Furthermore, increased exploitation of labour by private sector employers over the past few decades has suppressed the incomes and benefits of private sector employees and contributed to the old/young wealth divide in Cyprus. In this connection the government needs to ensure that employers pay minimum wages in line with hours worked. Also, the government needs to take initiatives to assess whether minimum wages are adequate for eking out a decent standard of living, that is a “living wage”, and in extending eligibility for minimum wage and cost of living adjustments to private sector employees in all sectors.
Government budgets should allocate more resources for the construction and staffing of childcare facilities, for tax rebates to young families depending on the number of children, for providing more welfare support to poorer families to catch-up with surging rents, and for the training of younger persons so that they can acquire jobs where skilled labour shortages exist such as in the ICT sector.
With the public in Cyprus complaining about unaffordable housing costs, which are leading to some dire consequences as outlined above, the government needs to formulate a housing policy. Tax incentives, government contracts and expenditure policies need to be geared to constructing and renovating housing for lower income families as against promoting and facilitating the construction of luxury apartments and villas with generous tax breaks and granting of building permits, often corruptly allowing property developers to violate environmental and other regulations in the process.
On bank policies as argued for some time housing loans valued at under €350,000 for prime residences and which are now categorised as non-performing should be written off, allowing less wealthy indebted households to retain their properties. And resultant bank losses in excess of provisions should be amortised over many years.
Leslie G Manison is an economist and financial analyst. He is a former senior economist at the International Monetary Fund and an ex-advisor in the Cyprus finance ministry and at the Central Bank of Cyprus