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Asking governments to look beyond their own narrow self-interest

Kitty Miv, Editor
06 June, 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.

Many newly elected leaders are permitted a honeymoon period – that grace period following the election when they can seemingly do or say nothing wrong. Or, more accurately, the brief time that the public is more forgiving than it otherwise would be when feet get shoved in mouths. The honeymoon period tends to vary from country to country, depending on how gaffe-prone a particular politician is, and the general level of esteem (or cynicism) the people have towards their elected officials. Inevitably, however, honeymoons must come to an end, even for the hitherto untouchable Justin Trudeau, who has spent much of the time since he was elected as Canada's Prime Minister dazzling the world with his good looks and charm. In his case, the honeymoon period came to an abrupt hiatus when he showed us his ugly side, an incident involving fellow members of parliament and a pair of sharp elbows, used in a rush to commence a Commons vote. He has since apologized of course. Twice. But a rather unedifying episode for the young PM.

Nevertheless, his problems may be compounding, because there are signs that his core fiscal policies – middle class tax cuts and "modest" deficit financed infrastructure expenditure – may be beginning to unravel before they've got off the ground, after the Finance Department revealed a slump in tax revenues and an ominous increase in the deficit.

Trudeau sounds like a man in a hurry, and one who doesn't readily accept disappointment in his political endeavors. But as many an embattled premier might say, welcome to the harsh realities of government, Justin! Get ready to disappoint, and be disappointed…

And it's another step backwards for India this week, following the publication of the details of its new "equalization levy." This is India's version of the "digital taxes" we are seeing spring into place all over the world in response to the OECD's BEPS recommendations, which in essence seek to tax imports of digitally supplied goods and services. Except that in India's case, its own digital tax diverges from these recommendations, as well as from international practice in this area, and could lead to instances of double taxation according to the International Chamber of Commerce. Indeed, the ICC is worried generally about the international response to BEPS, noting that a number of prominent economies have deviated from the recommendations in one way or another. It has urged governments to consider the broader implications of their actions on global trade and investment, mindful that an inconsistent response to BEPS would undermine the whole principle of the project. Asking governments to look beyond their own narrow self-interest, you mean? Good luck with that!

For those of us who watch global tax developments, it is quite common to learn that one government or another has decided to allocate substantial sums of public money to the tax authority to help it fight against tax avoidance and tax evasion. For example, in 2010, the UK Government, which at the time was heavily in the red, gave HM Revenue and Customs almost GBP1bn (USD1.44bn) to spend on compliance activities. This is all well and good I suppose, if the ultimate rewards in terms of tax revenue outstrips the initial "investment." However, sometimes governments can take these compliance campaigns too far, and a balance must be struck against the needs of the exchequer and preserving the rights of taxpayers. The UK is one example where the Government is getting it wrong, as we have seen with the controversial Advanced Payment Notices (APNs) regime, which, mercifully, has been successfully challenged by a recent judicial review (if only in part). It also has proposed measures allowing the tax man to take owed tax straight from people's banks accounts, and all with very limited rights of appeal.

Notably, New Zealand is another country investing heavily in its tax authority, to the tune of more than NZD500m (USD340m). But for a different reason. This infusion of cash is not being used to arm the Inland Revenue Department (IRD). Rather, it is intended to improve the tax system for both taxpayers and the Revenue, a strategy designed to in turn boost compliance rates. I'm sure the IRD has had its fair share of compliance campaigns in the recent past too. And I'm not suggesting that we should let tax evaders off the hook, but a shiver does travel down my spine whenever I hear about governments wielding APN-shaped sticks at their citizens. So New Zealand's approach is somewhat refreshing to hear.

Ending on a slightly upbeat note, congratulations go to Italy's taxpayers for celebrating "tax freedom day" a little earlier this year. For those of you unfamiliar with the concept, let me fill you in: tax freedom day is the theoretical day in the year when you stop working to pay the government, and start keeping what you earn for yourself. And in that sense, I suppose it is a good indicator of just how much of a country's income is taxed in one form or another.

Although most Americans are heard to grumble about their taxes, in the United States tax freedom day normally arrives well before summer (in the northern hemisphere), usually towards the end of April. But if you think things in Italy are bad, try living in Belgium, where, shockingly, last year you had to work into August before pocketing your own money!

For Italy however, a tax freedom day of June 3 represents at least some progress in the Government's attempt to reduce the country's tax burden, coming three days earlier than in 2015. And it's encouraging to see that Prime Minister Matteo Renzi appears determined to cut income tax rates, with the Government having proposed to reduce corporate tax from 27.5 percent to 24 percent and also pushing for personal income tax reductions in 2018. That is, if Italy can keep the party pooper that is the EU at bay long enough to execute these tax cuts. It has managed to wangle some leeway in its budget plans this year, but the EU's patience over the deficit won't last forever. How appropriate it would be if Brussels, home to some of the world's highest taxes, threw a wrench in Italy's tax cut plans!


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

New Zealand refreshing

Italy celebration

Kitty's Execrations

Canada unedifying

United Kingdom chilling

India divergent




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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