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A Region which is Subject to Multiple Cross-Border Tensions

Kitty Miv, Editor
07 February, 2013

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

If the long-lasting and far-from-resolved enmity between Mainland China and Taiwan is a cup half empty, the progress being made with their ECFA (Economic Cooperation Framework Agreement) is a cup half-full. The thing itself was quite surprising when it happened, and subsequent attempts by both parties to implement it and even extend it have been quite reassuring, especially in a region which is subject to multiple cross-border tensions, second perhaps only to the mid-East in terms of scariness. Between them, China, Japan, the Koreas, Myanmar, Vietnam, Laos and Thailand have more hatchets than you can shake a stick at. In fact, it has been a good week on that front, with Japan actually sidling up to China in a more-or-less friendly fashion. Chinese Taiwan, almost-Chinese Singapore and even more so, Chinese Hong Kong stand out for being focused on business rather than national rivalry. I know it's heresy to say so, but wouldn't Taiwan be better off if it had Hong Kong's freedoms within a Chinese envelope, so to speak? The Mainland is moving at a glacial pace towards permitting full democracy for Hong Kong; wouldn't it make sense for Taiwan to agree to say a 20-year process of re-integration into China, with all the reassurances that Hong Kong has of economic independence? Taiwan's economy would benefit enormously. So what stops it?

Also nearby, and not quite without its own cross-border disputes, the Philippines has shown itself a good world citizen with its submission to WTO requirements on alcohol taxation. There was a certain amount of foot-dragging, it's true; and one could ask why the Philippines had to be dragged reluctantly before the WTO in the first place, but at least it has accepted the inevitable with good grace, unlike some larger countries I won't mention, to spare their blushes. In fact the Philippines is under generally good management at present, with President Benigno Aquino and what seems to be a competent finance team. This is a happy contrast to some previous incumbents; don't those shoes seem a long time ago? Hardly the same country, although we must not forget that Benigno's politician father was assassinated, probably at the behest of the Marcos regime, and that his mother then became President. So he is not exactly an outsider. The Philippines is the 12th most populous nation, worldwide, and its adoption of the English language (thank you, America) gives it a leg up in the world, although that is also presumably the reason for the 12 million diaspora Filipinos, many working as maids for sometimes harsh and ungrateful foreign masters. Although when I am in Cyprus, I see them gathering in the parks on Sunday, their day off, twittering away happily.

The UK seems determined to go ahead with its GAAR, and perhaps one shouldn't pay too much attention to the chorus of disapproval coming from the professionals who will have to cope with it. Still, at least insofar as it will apply to corporate tax, it does seem an unnecessary turn of the screw which is likely to add cost to the tax-gathering process without increasing the take. There is really nothing the UK government or any other government can do about multinational taxation short of a wholesale reorganization of the international system, which is not going to happen any time soon, and they must know this, so they are being opportunistic, climbing aboard the current anti-Starbucks bandwaggon in order to slide in a measure which is aimed squarely at domestic corporates, who are over-taxed already. It's not the actual rate of corporation tax, which is relatively low, and heading for 20%; it's the combination of income tax with payroll taxes, property taxes and the rest. Sure, there are doubtless many companies which push the envelope in an attempt to reduce the tax burden; the issue is whether the GAAR will be an effective way of clawing back the "lost" tax, and most independent commentators seem to doubt it.

Across the Channel in France there is more evidence that the level of taxation in Europe has reached its natural limit of effectiveness, with the news that the Financial Transactions Tax imposed since last August has reaped less than one third of the amount expected by the government. And that's before the victims of the tax have fully learnt how to avoid it. The failure of this tax won't stop Commissioner Šemeta from powering ahead with his European version of the FTT, but it ought to give him pause. As many critics have pointed out, an FTT, even an extra-territorial one as is planned by Brussels, is fairly easy to evade for larger companies with world-wide networks of subsidiaries and competent tax departments, leaving the tax to be paid by the small fry who are not so nimble. Thus, the "speculators", the mythical enemy of President Hollande and just about every other eurozone chief, will escape, and the small investor, who should be treasured, will be hurt. The tax will act as a disincentive to desirable economic activity, without cramping the "speculators" (aka corporate treasury managers), thus achieving precisely the opposite of what was intended.

To complete this week's trio of over-taxing, over-spending European countries there is Italy, where technocrat turned politician Mario Monti is waving the magic tax wand ahead of elections, now just a matter of weeks away. No point spending time on trying to predict the outcome of the election in tax terms, except to say that Italy is just as boxed-in as France and the UK. Cameron and Osborne at least had the honesty to say last week that there wouldn't be any tax cuts until just before the next election (well, we knew that!). These countries' budget deficits in 2012 were 3.9% (Italy), 4.5% (France) and 6.5% (UK), and all three countries have high and rising national debts. One has to be really worried about the course of interest rates: just a small uptick in today's historically low rates would have a catastrophic effect on the sustainability of these debt mountains. For that reason, these governments, like Washington's, will continue to print money, under various disguises such as quantitative easing, with inflation as a result, while pensioners and savers pay the penalty. For political and electoral reasons, they all remain in denial of the true situation. So I want to know: where are the spending cuts? Becuase that is the only way in which these countries can save themselves.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 38th) three countries are given encomiums and three 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 has a ranking of – 1, 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, falling back again in week 24 to minus two.

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:

China is Chinese and so is Taiwan

The Philippines obeys

And Kitty's Execrations:

France and diminishing returns

Italy ready to vote

United Kingdom on the warpath




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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