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we shouldn't be that surprised by anything anymore

Kitty Miv, Editor
24 November, 2016

Kitty's Country Rankings are below, with a description of how they are compiled. This week, as every week, I give out Encomiums to countries which have done Good Things, and award Execrations for countries which according to my highly personal and partial views have done Bad Things.

They say that a week is a long time in politics. It certainly seems to be in Hungary. We have gone from Prime Minister Viktor Orban telling us, on November 10, that he was in favor of cutting corporate tax here and there over the next few years, to Economy Minister Varga announcing, on the 17, a tax cut that will see Hungary out-compete even some traditional low-tax and offshore jurisdictions on corporate tax, with a proposed flat rate of just nine percent.

Brave? Certainly. The measure, if introduced, is bound to provoke the wrath of certain European governments, who will cry "unfair tax competition" and accuse Eastern European states of using development funding from Western Europe as a subsidy for low rates of corporate tax. Again — and you can imagine the reaction to the proposal in Brussels — It almost goes without saying that this will be seen by the EU as contradictory to everything that it is trying to achieve with its tax transparency and BEPS agendas.

However, on closer inspection, perhaps the move isn't quite as bold as it first appears. Companies in Hungary already pay just 10 percent tax on the first HUF500m (USD1.7m) of their income, so moving a relative handful of large companies on to a flat nine percent rate might not make a huge difference. Indeed, this measure is projected to cost the Hungarian Government around USD500m, which sounds quite low in the context of a 10 percent tax cut. Still, it's a very aggressive move, and while there is little the EU can do about it legally, assuming the cut does go ahead, I'm sure Hungary will be reminded of its duty to discourage profit shifting by the EU on a regular basis. At least one part of the EU might not be that bothered though. For Ireland, this development might mean that people stop going on about Irish corporate tax for a while.

Hungary's tax cut announcement was certainly one of the more eye-catching international tax developments of recent days. But then we shouldn't be that surprised by anything anymore should we? After all, the world continues to turn on its head politically. Just look at what's happening in the United States. A Republican president with a Keynesian New Deal? You bet! A USD4.4 trillion tax cut that stands a half-decent chance of passing? Bring it on! A postcard for a 1040? Somebody wake me!

The real significance here is not just that these things have been proposed – let's face it, on tax, we've heard it all before at the hustings, endless times – but that they have passed from the realms of the impossible to the eminently possible in the space of an election.

Previously it was thought that some establishment Republicans would join hands with Democrats in Congress to block president-elect Donald Trump's more controversial measures. This might still turn out to be the case on some issues. But tax reform doesn't seem to be one of them. Indeed, for House Ways and Means Chairman Kevin Brady, it's almost as if Christmas has come early. The fellow seems to be chomping at the bit to get started — which is understandable. The next couple of years might be the only opportunity in a long time for Republicans to do this.

So, for better or for worse, change is coming America's way on the tax front. Undeniably however, these changes will be good for corporate taxpayers. Tax reform legislation will likely combine elements of Trump's plan and the tax reform blueprint published by House speaker Paul Ryan in June, plus bits and pieces from the various Senate discussion papers on the matter. In which case, we are almost certain to see a corporate tax cut, and it will be just a question of how much. A move towards territorial taxation is by no means out of the question either. It is also probable that small, pass-through business, which make up the vast majority of all businesses in the US, will enjoy some sort of tax advantage too.

Putting aside the issue of who will benefit the most from a Republican tax reform bill, many will argue that at the very least, it is time for a clear out of the code, which, according to Ryan, has grown from 26,000 pages in 1986 – the last time a tax reform of any significance took place – to 70,000 pages today. If Congress gets close to the 1986 benchmark, it will have done very well I suspect. Not so much a tax reform, as a tax revolution.

Speaking of which, European Tax Commissioner Pierre Moscovici claimed last week that the EU is at the forefront of its own tax "revolution." A revolution in international tax transparency, that is, rather than tax reform. Which is true, and laudable. But with its heavy emphasis on tax avoidance, is the EU taking its eye off the competitiveness ball?

Europe is actually pretty competitive when it comes to corporate tax rates. According to the Washington-based Tax Foundation, the region has the lowest average corporate tax burden, at 18.88 percent. However, the European average has been dragged lower in recent years by some substantial corporate tax cuts in Eastern Europe. Total corporate tax rates in parts of Western Europe still exceed 30 percent. Indeed, The Tax Foundation says that the G7, which includes four European countries, has the highest average at 30.21 percent.

Despite falling corporate tax rates, Europe, and the EU specifically, still has a reputation for bureaucracy and regulatory inefficiency. But don't just take my word for it. The World Bank's Doing Business Index shows that the US outperforms the EU15 (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom) in seven of the ten Ease of Doing Business components. Frighteningly for the EU, given the large flaws in the US tax code, the "paying taxes" segment is the area where the EU15 performs worst of all.

In some ways, it is unfair to place the blame for this competitiveness gap at the EU's door, as most of these things are the responsibility of member states. Still, the EU as an institution seems to have done little of substance to try and close the gap, which only looks set to grow. Perhaps this is why Hungary feels the need to take matters into its own hands.

 

Kitty's Encomiums and Execrations

Methodology: each week (this is the 147th) one or more countries are given encomiums and one or more are given execrations. Those are the entries below with descriptive links. In the following week, each encomium counts as + 1 for that country, and each execration counts as – 1, being added to that country's existing score. Over time, therefore, a ranking will build up for each country, and further countries will join the listing. Germany is at minus 2, since in the second week it had an execration and in the first week it had an encomium, leaving it at neutral; then it had an execration in week four, thus dropping to – 1, and another one in week six, dropping to – 2; finally in week 13 it got something right, so it went back up to – 1; then in week 16 it gained a further star, so then it was in neutral territory until week 23 when it dropped back to minus one, but reverting to neutral territory in the following week, then dropping to minus one in week 50, and back up to plus one in week 51, then to plus two in week 52. Some weeks ago it dropped a place, but then quickly recovered one step. Etc etc.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but as time goes by they are becoming useful for decision-making. For any country in negative territory, you should think carefully before starting a business there.

Kitty's Encomiums

Hungary hungry

United States good for business

Kitty's Execrations

European Union mind the gap


Ciao

Kitty



About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net

 

 

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