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A price worth paying for progress

Kitty Miv, Editor
21 April, 2015

Kitty's Kountry Rankings are below, with a description of how they are kompiled. 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.

When measured against its competitors, the Australian tax system isn't actually that bad. PwC ranks Australia 39th out of 189 countries in terms of how easy it is for a medium-sized company to discharge its tax obligations, which isn't a brilliant score, but it's by no means the worst. Yet the Government is determined to make improvements. It can't help that the Tax White Paper, the pithily titled "Re:think," has come so soon after the last government's failed attempt at comprehensive tax reform. Indeed, the Labor administration's "Future Tax" review was just one of a long line of tax system assessments that must be putting taxpayers in Australia, especially corporate investors with long planning horizons, on a near-constant state of alert about the risks of legislative change. The Government must also be mindful of promising, or appearing to promise, things it can't deliver. Governments all over the world are guilty of pledging radical, growth-boosting changes to tax legislation and administration, envisioning such fantasies as tax returns that can be completed in minutes as opposed to hours, but falling drastically short of initial objectives when it comes to the crunch. And Australia, straitjacketed as it is by a huge fiscal hole, is hardly in a position to begin slashing taxes. The Government's inability to deliver even the most modest of corporate tax cuts – a planned 1.5 percent reduction was canceled last week – is evidence of that. The Government's heart is in the right place, but I wouldn't be getting my hopes up if I were an Australian taxpayer.

It's a rare occasion that I agree with something the OECD says. So when it does happen, mostly begrudgingly, it's probably worth a mention. In this instance, there are some qualifications, and while I concur with the broad thrust of the OECD's report on Japan, I don't necessarily agree with all its proposed remedies. It's an inescapable reality that Japan is going to need to collect a lot more tax revenue if it is going to face the future with confidence about its ability to pay its way. And it will be a delicate balancing act between growth and austerity-type policies. But perhaps it's time to end the world's fixation on Japan's consumption tax. We've seen in the past how the Japanese economy responds to tax hikes – not very well as it turns out – and we were given more evidence of this just last year, when consumption tax increased from five percent to eight percent and economic growth took a worrying dive into the red in the subsequent quarter. Given that the consumption tax is a political toxin in Japan, Prime Minister Shinzo Abe seems to have got away lightly as a result of last year's hike. But there is no doubt he is handling the issue with kid gloves, as demonstrated by the decision to postpone the next hike to 10 percent, which had been due in October 2015. Given that previous consumption tax hikes, or just the mere suggestion of an increase in this tax, has ended the career of more than one prime minister early, it is perhaps unrealistic for the OECD to suggest that there is scope to raise consumption tax to the average OECD consumption tax rate of nearly 20 percent. That just isn't going to happen. Even in an age when the tax burden is shifting from direct to indirect taxation, as numerous tax studies tells us, it could be very counterproductive in Japan, with the country's notoriously price-sensitive consumers likely to clasp shut their wallets and purses after a sales tax increase of such magnitude. A more holistic approach to Japan's fiscal problem, and one that will encourage growth rather than throttle the economy, is surely needed. Looking in from the outside at least, it seems that measures far more radical than the modest corporate tax cuts currently in the pipeline (which are actually going to be canceled out by changes to loss carry backs) are required. That's easier said than done though.

Mexico has extended a hand of economic cooperation towards Cuba with its proposal for a bilateral FTA, another sign that the long-isolated Caribbean nation is being welcomed back into the fold of trading nations. Mexico's gesture follows the removal of Cuba from America's list of nations that sponsor terrorism and the lifting of travel restrictions to the country by US citizens. Given the length of time which has elapsed since Fidel Castro was replaced by his more liberal and reform-minded younger brother Raul, President Obama's move was arguably long overdue, although it remains controversial in some quarters of America; while allowing capitalism in small but increasing doses, Cuba is still an unapologetically socialist country. There is a long way for Cuba to travel before its inhabitants can hope to enjoy the sort of economic and political freedoms that people take for granted just 70 miles away in Florida – including many of Cuban heritage who fled in search of a better life (and still they flee - over 14,000 Cubans risked life to cross into the US in 2013). The country never really recovered from an economic crisis in the 1990s, which was largely the result of the collapse of the Soviet Union and the termination of around USD5bn in annual economic support from Moscow. Yes, as many people who visited Cuba in the Fidel Castro era will no doubt agree, Cuba will lose much of its charm when fast food joints start springing up all over Havana, the billboards of Cuba's political heroes are replaced with adverts for soft drinks, and the 1950s Cadillacs which have come to epitomize Cuba for so long are outnumbered by Fords, Volkswagens, and Toyotas. But the Cuban people would probably accept that as a price worth paying for progress.

So silly season – aka, the general election campaign – has officially commenced in the United Kingdom. All the significant parties have now released their manifestos, but to be truthful there's nothing really radical or scary in any of them. The Labour Party, whose leader has been dubbed "Red" Ed Miliband by the right-wing press, won't exactly soak the rich with its tax plans, which are fairly predictable: the restoration of the 50 percent top rate, a so-called "Mansion Tax," a levy on tobacco firms, a vague promise to restrict "non-dom" tax status, and a crackdown on offshore tax havens, including an unworkable proposal for public beneficial ownership registries. On the fringe, the UK Independence Party wants, of course, to cancel the UK's EU membership, and it also promises to abolish inheritance tax, but as popular as the party seems, it probably won't get enough seats to influence anything. What's more worrying is that the election is likely to result in a hung parliament, and so the fringe parties are probably going to have a major say on who the next Prime Minister will be. Unless, that is, one of the main parties attempts to have a stab at minority government, which raises the prospect of watching either Cameron or Miliband stagger from one crisis to the next. Hardly a recipe for stability. And there is evidence to suggest that companies are holding back their investment plans accordingly. If he does lose the election, Cameron could be forgiven for wondering what he did wrong, having reduced the budget deficit, cut taxes, and overseen a growing economy. Indeed, IMF chief Christine Lagarde was recently heard praising UK economic policies. Not everyone is so enamored with the Coalition's track record though. In a somewhat amusing, yet quite alarming, piece of analysis quoted in the press, Albert Edwards, who heads Société Générale's global strategy team, observed in a note to the bank that, following five years of the Con/Lib's policies, the UK economy looks like a "ticking time bomb" waiting to explode after the election, with the country "up to its eyeballs in macro manure." According to Edwards, this is largely because Cameron's Government has failed to deal with two key deficits, the fiscal one and the trade one — the latter is at its widest for 60 years. Eventually, Edwards predicts, "the stench will fill the nostrils of currency markets with the inevitable result – another sterling crisis." So, with voters' choice essentially boiling down to a Conservative-led Government which talks a lot tougher than it acts on the deficit, and a Labour Party with a reputation for fiscal irresponsibility, possibly in coalition with the free-spending SNP, perhaps the really scary thing is not what the parties intend to do, but what they're going to avoid doing: shoveling the muck.


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:

Australia good intentions

Mexico helping hand

And Kitty's Execrations:

Japan consumed by tax

United Kingdom up to its neck



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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