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Costa Rica's Legislative Assembly makes the US Congress look positively dynamic

Kitty Miv, Editor
05 February, 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.

Apparently, taxpayer dissatisfaction with the United States tax code has reached a 12-year high (or should that be low?). But if you're a frustrated US taxpayer growing increasingly impatient at congressional impotence on tax reform, then try living in Costa Rica! Ever noticed how, when a car alarm is blaring away in the street, instead of investigating or calling the police, people tend to ignore it? In fact, they might not even notice it, having mentally filtered out this particular noise-pest long ago. The same could be said of Costa Rican finance ministers when they issue their regular calls for the completion of long-awaited tax reform, which has been on the drawing board in one form or another for more than a decade now. Last week, incumbent finance minister Helio Fallas urged lawmakers to finally approve measures designed to shore up the Government's increasingly shaky finances. The trouble is, Costa Rica's Legislative Assembly makes the US Congress look positively dynamic. Costa Rica's legislative set up is one of checks and balances, similar to America's own constitution. The emphasis in Costa Rica though appears to have been placed on checks, rather than balances, and controversial bills like tax reforms are all too easily killed by endless committee reviews and constitutional court challenges. The Central American Free Trade Agreement, which Costa Rica eventually ratified in 2009, several years after the other signatories, almost suffered a similar fate. But don't just take my word for it. Costa Rica was upbraided and downgraded by two international ratings agencies recently for the slow (non-existent, rather) pace of fiscal reform. However, it is also the content of the present tax package that earns Costa Rica a rebuke. This country has been one of the most successful in Latin America economically, having managed to supplement its largely agrarian economy with high value-added export industries, such as the manufacture of microchips. Costa Rica has one of the highest levels of FDI per head in the region, and is also a popular retirement destination for Americans. This is partly due to its benign (for foreigners) territorial tax system, which will be swept aside in favor of a worldwide system if the tax measures are ever introduced. One could argue that it is because Costa Rica doesn't collect enough tax from foreign companies and individuals that the Government has a 5 percent budget deficit. But Costa Rica also has a reputation for Kafkaesque bureaucracy and regulation, which could account for a substantial proportion of the deficit. It doesn't have an army, so it must be spending money on something.

In a similar vein to my car alarm analogy, Hong Kong is so nailed on to win the Heritage Foundation's "Freest Economy" gong every year, that we no longer tend to notice. So it was no surprise when the SAR topped the Heritage Foundation's league table again in the recently-released 2015 index, for the 21st straight year. However, as mundane as it seems, I have picked this out because of the political context in which the prize was awarded this time around. Save for the odd economic blip, for almost 15 years Hong Kong sailed along serenely, untroubled by the sort of social tensions that dog other countries. But you could almost say that the honeymoon period following the handover of Hong Kong's sovereignty by Britain to China has ended. It was always going to be difficult reconciling the value systems of Hong Kong and China, the former a beacon of economic liberalism, the latter a model of state control. Hence, the "one country, two systems" principle that underpins Hong Kong's constitution. It suits China to maintain the economic status quo, because Hong Kong acts as a huge, low-tax funnel for investment to flow into and out of China. And, although I wouldn't shout it from the rooftops, I've heard that Hong Kong is a useful repository for the wealth accumulated by the higher-ups in the Party. But perhaps the clash between liberalism and statism was always going to produce the sorts of scenes we saw last year during the Occupy Central protest. More worrying perhaps is that the authorities, in both Hong Kong and Beijing, don't really know how to respond to it. China's normal reaction, if such a protest were to erupt on the streets of Shanghai for instance, would be to send the troops in. The sight of a tank trundling between Hong Kong's skyscrapers wouldn't go down too well around the world, however. While Hong Kong's Chief Executive will be directly elected in 2017, the people haven't been given what they want, because the candidates will be chosen by Beijing. And so the problem hasn't gone away. Hong Kong's leaders can point to the Economic Freedom Index and a ream of recent data indicating record company formations and strong FDI inflows as proof that Hong Kong's offering to international investors is almost unrivalled. It gets another encomium from me. But even the Heritage Foundation noticed that Hong Kong's appeal has "faded" by just a little bit.

Rarely do I get the chance to do a "two for the price of one" execration, so I should quite enjoy this. France and Austria are the particular targets for my ire, and I've a feeling it's going to be hard to miss! That's because the European financial transactions tax is involved, and seldom has there been a tax easier to shoot down. Because nobody can agree on such fundamentals like what to tax and at what rate, and in order to spur along the deadlocked FTT negotiations between the 11 participating member states (or is it 10 now, after the Slovenian Government had a sudden attack of common sense following a Council meeting last May, and refused to sign a joint declaration?), France and Austria have come up with the idea of lowering the level of the proposed FTT and widening its scope. Given that the way in which the original proposal was drafted gives the FTT enormous extra-territorial reach, does the FTT really need wider application? Obviously my answer to that is no, it doesn't. Because the whole thing breaks a multitude of laws, including the EU's own treaties, anyway, and is unworkable no matter how much you mess about with it. Introducing the FTT within parts of the EU would illegally exceed member states' jurisdiction for taxation and create distortions to the detriment of non-participating EU member states, while the "deemed residency" principle would contravene customary international law. And those aren't my words. They come, paraphrased, from a legal opinion by the EU Council's own lawyers, leaked to the Financial Times in 2013. Worse, the finance industry has already concluded, more or less, that the FTT countries will be committing economic suicide if the tax is ever introduced. In fact, the list of flaws is so long there's no room here to list them all. It saddens me and maddens me in approximately equal measures though, that the EU's top bureaucrats and politicians are so obstinate in pursuing what is clearly a politically-popular, but economically misguided tax, spending a lot of time and resources in the process. So, Austria and France, I have a better suggestion to take to the EU11 (or perhaps it should be named the EU10.5 now): give up, go back home and think of another way to punish the bankers.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 142nd) 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:

Hong Kong still unrivalled

And Kitty's Execrations:

Austria wasting time

Costa Rica sooo sloooow

France another time waster



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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