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A Triumph of Treasury Arithmetic Over Economic Good Sense

Kitty Miv, Editor
28 March, 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.

Like a curate's egg, they say, meaning good in parts, is how to describe the UK budget, which has to be given high marks for reducing some taxes and not increasing any of the main ones, although continuing with the Air Passenger Duty is a triumph of Treasury arithmetic over economic good sense – they just don't dare to believe that scrapping it will generate far more than is lost in terms of income from tourism. Or perhaps the house rules don't allow speculative accounting: I can easily believe that without the GBP8bn the books just won't balance. This is an election budget, in case you hadn't noticed: it's two years away, but it is already casting a long shadow over British politics. That's the reason for the worst feature of the budget, which is the insane plan to prop up the housing market with loan guarantees. It's scarcely credible that when they haven't even finished cleaning up the mess from the debt crisis, they are eagerly going about creating the next destructive housing market bubble. It's like the first injection of morphine: you can always come off it afterwards, you tell yourself, and it's wonderful without the pain. But any watching doctor knows that it's the beginning of the end.

Curate's egg applies also to the other main budget this week, the one in Canada. Business welcomed it, as did most individual taxpayers; and the economic good sense of this government will deliver a budget surplus within two years. But I don't like all this harping on about "fairness", and the constant tightening of the screw in terms of tax evasion. Are people more evasive or businesses more manipulative than they were yesterday? The answer coming from the tax authority will be "Yes!" but that's not what's going on – it's that every revenue agency always wants more, and perceives new loopholes to close all the time. They were there before, but unnoticed. The consequence is a creeping criminalization of the populace and growing complexity of the tax code. Everyone remarks about this in the USA, but it's true of all the main advanced economies. "Major new powers of oversight and information collection," harrumphs the Finance Minister. Major new chapters of dense verbiage I think to myself. And major lip-smacking on the part of tax advisers. And publishers. Think I'll ask for a rise!

The world of tax throws up all kinds of improbabilities. Whenever I see some inexplicable piece of economic behaviour, I think to myself, never mind "Cherchez la femme," just "Cherchez l'impot," and you'll understand. So no prizes for guessing why a law firm from a small island in the Caribbean went to a patch of desert in the Arabian Gulf to organize financing for an oil refinery outside Cairo. That's the BVI and Dubai, of course. The future of "offshore" lies with corporate transactions, it has been obvious for a while: this week the last of the UK's offshore dependencies, Jersey, threw in the towel and along with Guernsey and the Isle of Man will sign mini-FATCA IGAs with the UK as well as with the IRS. All three of those places are pretty much finished as tax havens for individuals, and they don't care: they want fund managers, insurance companies, corporate IP holding companies, SPV flotations on AIM and the like. It will be interesting to see how the "fairness" merchants set about trying to stop them. Perhaps they won't even try, for all their public rhetoric?

What is going on in the Turks and Caicos islands? In the spat between the islands' elected Prime Minister and the UK's Foreign Office, the islands seem to be getting it all wrong. Battered by a fall in tourism, their main meal-ticket, and hamstrung by bureaucracy, and as it turned out, corruption, the islands were in a mess in 2009 when the UK took over and tried to clean things up. Far from being grateful, the new administration is behaving like a surly child, and you have to wonder whether the UK has really extirpated the culture that brought the islands to their knees in the first place. As William Hague says, the TCI is welcome to become independent; but that is impossible, given that they are heavily in debt and not yet recovered from the tourist downturn, although visitor figures have begun to climb back. Grow up! is my advice.

Here's another tax authority boss showing where his priorities lie, and demonstrating his belief that all businesspeople are criminals: " . . . does not regard it as legitimate for international businesses to be left alone to adopt very aggressive structures." It could have been in any one of a number of English-speaking countries, not that they have any monopoly of anti-business sentiment, but in this case it was in Australia. The tax authority is presumably a-political, but the country's socialist government will no doubt be very happy to hear this gentleman's remarks. For a tax collector "aggressive" simply means "tending to reduce the tax payable in my bailiwick." One after another, these people miss the point, which is that any company has a duty towards its shareholders to minimize costs, and tax is a cost. If the person in question doesn't think that the MNCs are breaking the law, and indeed he does not claim that they are, then he should concentrate on trying to create a business-friendly tax system and stop peddling such inimical tripe.

Poor old Cyprus. There is plenty about the crisis earlier on in this week's issue, and by the time you read this they will all presumably have worked out a solution, so I won't go on about the actual deal any further. Inevitably it will lessen the island's attractiveness as a business destination, if only for a while. Cyprus will recover; but the point I want to draw out of this affair is that the EU-wide despositors' guarantee creates a gigantic mountain of moral hazard, both for banks and for depositors, and therefore it increases risk and reduces competition, which is the opposite of what any government should want to achieve. Of course I am not against deposit insurance, but it should be provided against assets that are sufficient to cover 100% of any likely level of claims, which if you think about it is the case with any normal, private insurance company. It was completely wrong of the EU to say at a stroke that all deposits under EUR100,000 were covered. Covered by whom? Covered by what? Not by the banks, who were not required to pay into an asset pool, but were let off the hook by a bland statement that individual countries would "stand behind the guarantee." Suppose that Cyprus had accepted the haircut as originally proposed, being 7% or so of insured deposits, which equals about half of the EUR5.8bn that was to be provided. That EUR3bn or so is insured, right? So the government, which hasn't got any money, has to pay it back to the people it has just robbed. Ah, no, says the government, we are going to give you shares in that oil and gas instead. What a joke! What kind of insurance is that?


Kitty's Encomiums and Execrations

Methodology: each week (this is the 45th) 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 neutral ranking, 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..

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:

The BVI ties the knot with Dubai

Canada to be in surplus

United Kingdom balancing things

And Kitty's Execrations:

Australia on the band-waggon

Cyprus meets its nemesis

Turks & Caicos not winning



Tags: Dubai

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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