The Double Trap: Taxes and Subsidies as Determinants of Economic Growth and the End of the Downward Growth Spiral in Greece

We empirically examine the potential relationship between the size of the government in Greece—as approached by indirect taxes and subsidies—and economic growth. Our results suggest that a negative relationship does exist between taxes and growth, confirming a large part of the existing literature. We estimate a variety of models that illustrate how and when policymakers can take action in order to boost growth and end the downward spiral in the Greek economy. Tax-based fiscal action arises as the most efficient strategy, targeting the disposable income of the Greek household by reducing taxation and boosting employment. Most importantly, according to our analysis, the government’s budget constraints are not threatened and fiscal prudence is not to be derailed, a prerequisite under the signed memoranda of understanding and bailout programs.