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Burning Banknotes In The Street

Kitty Miv, Editor
27 September, 2012

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.

India's decision to give tax relief on 50% of the value of listed share purchases is brave, and let's hope that it is not sunk by bureaucratic obstacles. Many countries have tried such measures to increase saving and mobilize resources through stock markets. Perhaps most famously, the French Loi Monory in the 1970s allowed 100% of stock market investments to be deductible, but only up to FFr5,000, which was too little (say EUR500) and was anyway whittled away in the 1980s. The problem in India is that ordinary people quite rightly don't trust government, and with perhaps less reason don't trust the stock market, which they may feel is at the mercy of events that are beyond their ken, and can fall prey to the very governmental incoherence they fear. It's this disconnect between what people feel they can control or understand on the one hand and the great economic forces washing back and forth on the other which makes all such schemes eventually ineffective. Examples are the laudable attempts to create shareholder capitalism in the UK in the 1980s and voucher privatization in Russia in the 1990s. In both cases individuals sold at a profit as soon as they could, and the fat cats got fatter. What governments should do is to allow investment into small business to be tax deductible, but ironically they don't do it for reasons that are the exact converse: they understand (sometimes) only what goes on at the level of the State, while the behaviour of ordinary people is a closed book to them. Finance ministries in particular, which rule the tax universe, consider all citizens to be actually or potentially criminal, so that they would regard giving tax credits for entrepreneurial investment as roughly equivalent to burning banknotes in the street.

In a welcome revival of the process of the systematic destruction of corporation tax, Sweden is implementing quite a large cut for 2013, from 26.3% to 22%, which is where the UK hopes to arrive by 2014. The financial crisis (it has been going on so long that crisis now seems to be our permanent condition) had put a stop to the copycat reductions which have seen the average level of corporate tax fall by more than 10 points in the last ten years. It's a stupid tax: not only is it quite easy to evade, as recent publicity for large US corporations has shown, but it has engendered a vast and wholly unproductive industry of tax advisers and consultants. I suppose I should be the last one to complain since I am part of it. Now that Japan has joined the game, it is really only the USA which remains outside, with 1980s style corporate tax rates above 40% in most states of the Union, and that's not because anyone wants the rate so high, it's just a consequence of the broken state of the Congress. By 2030 rates of corporate tax will be so low that abolishing it altogether will become feasible, and my shade will say: Good riddance!

Then Cyprus, like Ireland, is grimly clinging on to its 10% corporate tax rate while the deathly avengers of the Troika wheel and circle about its head. Well if only they were wheeling and circling around Comrade Cristofias, as he is known on the island, although he is now only the second-ranking Marxist in the EU after Comrade Hollande's accession to power in France. But Cristofias is enjoying his moment in the sun during Cyprus's presidency of the Union, so he is immune from attack. If I was Cypriot Finance Minister, I would announce a phased programme of corporate tax cuts arriving at a nil rate by 2022 and stick two fingers up to Brussels and the IMF. With all that sun and gas, Cyprus really hasn't got anything to worry about, so the ritual dance over its banking shortfalls is just a scene from the Theatre of the Absurd.

Senator Carl Levin (Dem. - Michigan) is having another go at US companies which quite legally take advantage of the Byzantine US tax code to minimize their taxes. Of course he knows that there is no chance of passing the legislation he wants in this Congress, and we know he is electioneering. In the same week, and showing just slightly more grasp of reality, the House of Representatives held a hearing on capital gains taxes. It's difficult to see why: everyone knows there will be no legislation this side of the election. I suppose they have to do something with their time. The real problem that America has got is not the high tax rate as such, or even the Tax Code, laughably complicated though it is, it's the Congress itself. How has this august and once near perfect institution got itself into such a state that it is simply incapable of dealing with the nation's problems? I'm not going to try to answer that question; I am not competent. All I can do is to lament the situation, point out that this kind of ineffective, adversarial political buffoonery is doing nothing to help American companies or the economy, and beg the Congress to reform itself, even if it means a revised Constitution. The situation must not be allowed to continue, especially since the likely result of the November elections is a continuation of the Obama presidency and a hung Congress for at least another two years.

They don't get it in Madrid. This is a supposedly right-wing government, but all they do is talk about more control-freakery in full-on Socialist mode. This week it was hate object no. 2, the oil companies (hate object no. 1 is of course the banks). They would like to increase taxes on the oil companies in order to 'reduce their profits and reduce inflation'. Sigh. Back to business school with the lot of them! The only result of increasing taxes is to increase inflation; it seems so obvious that it's hardly worth saying. The next thing will be the introduction of price controls and hey presto! before you know it we are back to 1970. Anyway, the government has more pressing concerns, because it seems to be faced with a rebellion from one or more of its 'autonomous' provinces, and especially Catalonia. Hey! I have a good idea: why not sell Catalonia to the Catalans? Brussels would be pleased, because it would mean more bureaucrats, interpreters and sherpas; Barcelona would be pleased, because it would become what it already thinks itself, an international capital city; Madrid would be pleased because it would get a big pile of money in exchange for giving up its taxing rights; and the banks will be pleased because they can buy sovereign bonds from a new country that hasn't got any debt. Catalonia could then do exactly what Spain, Italy and Greece have been doing for the last thirty years, and it will be 2040 before anyone notices!

It seems mean to bring Finland into the rankings with an execration given that it is quite a business-minded country, nearly managed to prevent the EU's Greek bail-out, and has such good music. It deserves one though for increasing taxes in all directions in its 2013 budget. On the other hand they are saying the right things about cutting public spending (don't they all?) and there are some pro-business measures tucked away at the bottom. So I'll let it slide into neutral territory. But I'm on the case, although my Finnish is weak (did you know that it's closely related to Hungarian?). Out of space, or I would treat you to an essay on why Google translate is going to change the world. (Phew! - ed.)

Kitty's Encomiums and Execrations

Methodology: each week (this is the 21st) 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 it's now in neutral territory.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but hopefully one day they will become useful for decision-making, even if for the moment it is all just an amusing game. For any country in negative territory, you should think carefully before starting a business there.

Kitty's Encomiums:

Cyprus isn't Spain

India tries to mobilize savings

Sensible Sweden

In neutral territory:

Finland one up, one down

And Kitty's Execrations:

Spain slides leftwards

United States Congress isn't helping





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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