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An uncharacteristic bout of bipartisanship

Kitty Miv, Editor
07 July, 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.

I never thought I'd see the day, at least in the remainder of President Barack Obama's second term, when Democrats and Republicans would agree on a piece of legislation vital to the United States' economic interests. But there was an uncharacteristic bout of bipartisanship in Washington last week as Congress passed the long-awaited renewal of trade promotion authority (TPA) legislation. Without TPA, also known as fast-track, contentious free trade agreements could be filibustered in Congress, so there would probably be no Trans-Pacific Partnership. Actually, it is stretching the truth somewhat to suggest that TPA was approved in a spirit of total political harmony. For many months, senior Democrats in the Senate put up a good fight against a bill they argued would allow unbalanced free trade deals to be rammed through Congress without adequate scrutiny. Indeed, the real acrimony here was between Democrats and their own President rather than the usual Democrat versus Republican, left wing versus right wing narrative we have become so used to. In fact, I'm struggling to remember an occasion during President Obama's two terms when the White House and the GOP were so closely aligned. Given the President's protectionist utterings in the early phase of his presidency, it is also remarkable how far he has moved on the issue of free trade. He has therefore proved that he can be flexible. Perhaps it's now time he softened his stance on other issues, like tax reform, so he could be remembered as a President who got things done, instead of a leader paralyzed by his own stubbornness. Probably too late for that now though.

Staying on the issue of trade, Brazil made the news again recently with its announcement that import tariffs would be cut on more than 160 items. A good thing, no? On the face of it yes, I suppose it is. Except that when it comes to trade and tax policy in Brazil, one doesn't know whether one's coming or going anymore! It's barely more than one month ago that the Brazilian Senate approved a bill that will raise taxes on a number of imported products, including automotive parts, beer, and pharmaceuticals. And about one month before that, CAMEX, Brazil's Chamber of Foreign Trade, announced that import tariffs would be reduced on certain automotive components. In 2014, Brazil's Government claimed to be a champion of trade liberalization in Latin America, yet it has been locked in trade disputes with Mexico and the EU, and has been handing out anti-dumping duties like confetti. If you run a business in Brazil, you could probably spend months attempting to stay abreast of the latest developments in trade and tax policy. Indeed, when it comes to tax compliance, that is almost quite literally the case, if PwC's Paying Taxes Index is to be believed. Governments in emerging nations like to justify tariff increases on the basis that they are protecting their economies. However, they must be serving as a hindrance to economic growth as much as a help. And ironically, high tariff and other trade barriers are said to undermine governments' attempts to reduce poverty, as observed in a new joint report by the World Trade Organization and the World Bank, which was published last week. Unfortunately, progress in this area will depend on whether the deadlock entrenching the Doha Round of world trade talks can be broken, and that doesn't look like happening anytime soon.

Another area where developing nations in particular tend to thwart themselves economically is through import and other taxes on high-tech products like computers, laptops, and smartphones. So it made a refreshing change to read that the Government of the Ivory Coast is slashing taxes on imported computers, phones, and tablets, to encourage the adoption of technology in the country. According to the findings of a 2014 study by the Information Technology and Innovation Foundation, this could turn out to be a smart move by the Ivorian Government. This report says that taxes on hi-tech goods are having a major impact on economic productivity. In India, for instance, for every dollar raised from taxes, USD1.30 is lost as a result of lower productivity. Yet, of the 125 nations examined in the study, 31 impose combined ICT tax and tariff rates of over five percent of product or service costs, with several countries adding more than 20 percent to costs. Bangladesh, one of the poorest countries in the world in terms of GDP per capita, imposes the highest taxes on the industry, averaging tax of 57.8 percent in addition to the country's 15 percent value-added tax. In second and third place are Turkey and the Democratic Republic of Congo, which add taxes and tariffs of 26.1 percent and 23.8 percent, respectively. The report concludes that taxes have a noteworthy impact on the adoption of ICT goods and services, lowering demand by as much as 20 percent in Bangladesh, DR Congo, and one other nation – yes, you've guessed it – Brazil!

How much tax is too much tax? The answer to that will depend very much on your political beliefs, although I suspect it would take quite a while before you spoke to somebody who professed to be paying not enough tax, unless, that is, you happen to bump into Warren Buffett in the near future. Still, a consensus seems to have emerged that once a government starts taking the best part of a half or more of a person's income, then tax rates are punitive. Indeed, 50 percent seems to have become something of a psychological boundary in many countries in tax terms. A key battle ground in British politics of late has been whether the top rate of income tax should be 50 percent or slightly less than that. The Labour Party recently lost an election with its policy to restore taxation to 50 percent for those earning GBP150,000 (USD235,000) per year or more, while the Conservatives won after having nudged that rate down to 45 percent while in coalition with the Liberal Democrats. This of course isn't the only reason why Labour was punished by voters in May, but it says something that the party recently dropped its 50 percent tax policy. However, it is Italy I really want to write about. Although Italy's top personal tax rate is 43 percent, according to CGIA of Mestre, Italy's association of sole traders and small businesses, "tax freedom day," the notional day when individuals stop effectively working for the government and begin to pocket their income, only arrived on June 23 this year. So, in reality, the tax burden for a person earning the equivalent of USD50,000 in Italy is more than 50 percent. But businesses have it even worse. They won't see tax freedom day until August 14, says CAN, the national association of artisans and small and medium-sized enterprises. This is going to be six days earlier than last year, which I guess represents a modicum of progress. And at least the Government is trying to turn things round; earlier this year Prime Minister Matteo Renzi pledged that Italy will not raise taxes for three years. The CGIA suggests that this promise will be very difficult to keep however. The association claims that the Government faces a choice between increasing taxes by more than EUR16bn or making drastic and unpopular spending cuts to reach its fiscal targets. A politician making promises on tax (s)he can't keep? Will wonders never cease!


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:

United States fast track

Brazil cuts tariffs

Ivory Coast tech-focused

And Kitty's Execrations:

Italy overtaxed



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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