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Caught up in the Eye of the Storm

Kitty Miv, Editor
08 August, 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.

San Marino must be wondering what hit it. A few years ago it was a sleepy backwater with a small but thriving business in warehousing mostly Italian wealth; then along came a tsunami of EU, OECD and Italian regulation and it was unlucky enough to be caught up in the eye of the storm as Italy, perhaps to show off to its own mentors, decided to make an example of it. Now that the dust has settled, there is not much left of San Marino's previous livelihood, and it will have to re-invent itself, if it is able, as a specialist financial services provider. After having done little or nothing to help (I can only imagine what they think of Rome in San Marino) Italy half redeemed itself at the end by signing through a halfway reasonable double tax treaty. Other European one-time "tax havens" have shared a variety of fates, but only Madeira has had it as tough as San Marino, being virtually wiped out by the Portuguese. Spain's Canary Islands and Andorra have played a better game, and have more or less survived, while Gibraltar, Jersey, Guernsey and the Isle of Man, with the sometimes rather grudging support of the UK, have even thrived. Monaco has kept a low profile under French skirts, while Luxembourg, Malta and Ireland are full members of the EU themselves. Liechtenstein has a kind of semi-detached relationship with the EU, and has been left mostly untouched, while its protector Switzerland is still in the melee, not doing too well because of its attempts to be in the EU while not of it. "He who sups with the devil needs a long spoon."

This week the OECD even congratulated Jersey (Channel Islands of course, not New England) for its support of the transparency program, which had me rubbing my eyes, and is a testament to what engagement can bring you, whereas you can fairly say that San Marino was rather ostrich-like when the storm clounds threatened. Jersey has managed to preserve its standing and its business fairly well untouched by the "anti-offshore" pogrom of the last 20 years. Perhaps more importantly, though, it saw early on that the "offshore" that was going to survive would be one based on corporate business, rather than the traditional "wealth protection" model, and crafted for itself a series of specialist niches in which it is now well established.

New Zealand's tax authority was congratulating itself this week on being a good and faithful servant of the country and the Government, but the truth is that, while the revenue service is no doubt efficiently run, the credit needs to be given to the Government for having run a tight ship with business-friendly policies. Corporate tax revenues are particularly healthy, and the Treasury expects a return to surplus in 2014/2015, as predicted. This is all in sad contrast to the developing disaster area next door called Australia, which has been misgoverned for the last few years by one of the most fiscally inept administrations on the planet. Not everyone with a handbag keeps a tight rein on expenditure.

The Australian Government has admitted that lower than expected economic growth has had a "major impact" on tax receipts. The Treasury is expecting a shortfall of AUD33bn in receipts over the next five years. But instead of cutting back dramatically on bloated costs, which would be the normal reaction of a prudent housekeeper, this left-wing government thinks that "seeking to offset the drop in revenue by introducing budget cuts would risk both jobs and growth." Instead, they will protect "growth, employment and essential services," i.e. they will continue to spend money like there is no tomorrow. Significantly, there is an election tomorrow, though, which probably explains their stance. They are expected to lose, but they can still try to minimize the political damage, while gifting their successors a barren Treasury. Whoever wins will have to wield the chopper with a vengeance. By and large, the existing government has been anti-business, and the Australian Business Council has said that the country's tax system must be made more effective and competitive. President Tony Shepherd says that Australia now stands "at a crossroad." What is needed is "a comprehensive road map for the actions and changes required to seize our opportunities and avoid our nation slipping back." The Council's Economic Action Plan for Enduring Prosperity warns that if the current approach to government spending is maintained, it will result in budget shortfall at both federal and state levels of 5 percent of gross domestic product (GDP) by 2050. In current currency terms, this would equate to around AUD75bn (USD67.6bn).

Skipping from one socialist administration to another, it is frankly depressing to read President Obama's latest tax reform proposals, which seem to take no account of the bi-partisan work that has been done in Congress over recent months. The intended tax rate of 28 percent is not "globally competitive" as he claims; you have to add an average state tax rate of 5 percent, taking it to 33 percent in total, which is equal to the highest rate in the EU, and a full 10 percentage points above the current world average. Then, the idea of a minimum tax on foreign earnings would be a disaster, throttling overseas investment, which is one of the few bright spots in US corporate performance, and driving companies into ever more arcane global structures, which is precisely the opposite of what is wanted by the G20. But the worst part of the proposals is that, while the headline corporate tax reform would be roughly revenue-neutral, there would be additional revenue from the taxation of foreign earnings. A tax hike, therefore. Not that there are any numbers, and by jumping back so far from the sorts of detailed proposal being made in Congress, the President has shown that he doesn't believe in tax reform, period. This is another piece of electioneering, and just like his Australian peers, Obama must be thinking that he is going to lose (meaning, control of the Senate in the mid-terms). So the poor old US is set for another three years of inaction, blighted by its rusty old tax system. Not fit for purpose.

Just in case you think that I am taking political sides (heaven forfend) I will have a go at the nominally right-wing Spanish Government. The truth is that I am totally cynical and pessimistic about all governments, and require sustained, incontrovertible evidence before beginning to believe that any individual govermment is getting it right. No British or North American government would have survived the scandals that have rocked Premier Rajoy's government, but we are not here to judge its morals, only its performance, and that is highly questionable, for the usual reasons: all spend and no save. Tax revenues have risen 5 percent, says the Treasury proudly, as if that's evidence of economic recovery. Do me a favor! It's evidence of increased taxes, that's all, so it's bad, not good. The economy itself is continuing to shrink. Allowing that the government has done some sensible things for small business and entrepreneurs, the rest of its fiscal program is positively Micawberish. The horrid reality is that the deficit is at 3.8 percent; debt is 90 percent of GDP, up 20 percent in just one year, and continuing to rise. Somebody cleverer than me will have to explain why the market price of 10-year Spanish debt is a mere 4.6 percent, 3 percent over German debt. It's a conjuring trick being performed by mentalist Draghi. I see only disaster ahead.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 64th) two or three countries are given encomiums and two or 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 is on + 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 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. Two weeks ago it dropped a place, though.

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:

Jersey sucks up

New Zealand reaps what it sows

San Marino survives

And Kitty's Execrations:

Australia spendthrift

Spain circles the vortex

United States in stasis




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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