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Does Britain really need a new tax policy?

Kitty Miv, Editor
12 October, 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.

I suppose the UK Government is to be congratulated for finally laying down some sort of timetable for its Brexit negotiations and showing us that there is a plan of sorts behind the fog of indecision, although the announcement this week that Parliament will have a greater say in the direction of the negotiations may muddy the waters somewhat.

Anyway, on the face of it, the announcement by Chancellor Phillip Hammond that he is preparing to announce a new direction for fiscal policy after months of speculation is also welcome. But...

While it seems eminently sensible to attempt to be fiscally flexible, especially if Brexit does eventually slow UK growth and tax receipts in the years ahead, what Britain probably needs for the foreseeable future is a stable tax system, not more incessant tinkering in the style of Hammond's predecessor George Osborne.

Yes, young George certainly did love a Budget speech (or perhaps he just liked the sound of his own voice, although he wouldn't be the only politician to be guilty of that misdemeanor). So much so that while most countries are content with an annual budget, the UK, ever the contrarian, has two. Not officially, but in practice. This is because the Autumn Statement has become a de facto Budget, when it is supposed to be, well, a statement about the state of the public finances.

So when you add all these up, including the special summer budgets Osborne announced in the wake of two general elections in 2010 and 2015, and the one delivered by the soon-to-be-ousted Labour Government just prior to the 2010 vote, that's eight Budgets and six Autumn Statements or, in other words, 14 tax and spending policy announcements in less than six-and-a-half years. Does Britain really need a new tax policy?

Businesses have generally welcomed the broad thrust of corporate tax policy since the 2010, but not enjoyed the time spent poring over increasingly long and complex annual Finance Bills. So perhaps it's time that Hammond gave that battered old red briefcase that Chancellors carry around with them a rest.

The September 2016 edition of the Global Financial Centres Index was interesting for a number of reasons. First, London maintained its position atop the ranking, albeit with a more slender margin over second-placed New York, despite increasing regulatory uncertainty caused by the Brexit referendum.

Second, Singapore remained ahead of Hong Kong in third position, a place long held by its fiercest rival until quite recently. And third, the report showed how far China's finance industry has advanced in the last few years; it is noteworthy that Shanghai, in 16th place in the index, is now pulling clear of the likes of Frankfurt, Geneva, and Paris.

Of course, the development of China's finance sector is no accident. There's a plan at work, and as is almost always the case, it's the Government's plan. Nevertheless, the figures quoted in the report are still impressive, especially when you consider that China began building a modern financial system less than 30 years ago.

According to the report, there are now 1,500 financial institutions in Shanghai, and the city's stock market ranks second in the world in terms of trading volume, and fourth in the world by market capitalization. Other Chinese cities have also emerged as notable financial centers (there are now five in the top 50). For instance, Shenzhen, which also has a stock market, is the country's second largest financial center, and often plays the role of a testing ground for China's financial and economic reforms. Shenzhen also has a collaborative relationship with nearby Hong Kong, with both places feeding off each other to a large degree.

However, there is also the perception that China's financial centers could become as much rivals to Hong Kong as collaborators in the future, especially since the central government has created and continues to expand a series of financial and trading free zones across the country, offering businesses various tax and employment law concessions.

As I wrote here recently, the notion that Hong Kong is in decline as a financial center is very premature, and probably wrong. Nevertheless, in relative terms, it now represents a smaller portion of the region's overall financial pie than it did, say, a decade ago, and the Financial Centres Index shows that it is not completely invulnerable to competition.

Now, on to a slightly more light-hearted matter: sport. And I can understand the arguments in favor of taxing America's Olympic athletes. After all, we are talking about men and women who are highly rewarded for their endeavors through such things as sponsorship and product endorsements, aren't we? Why should they get a tax break? Few other Americans, taxed as they are on their worldwide earnings, would. And anyway, isn't the Olympics about the joy of participation in sport, rather than the money you get for participating?

Well, actually, no, not really. Aside from the fact that the amateur ethos that embodied the Olympic spirit has long since departed down the track, it's a generalization, to say the least, to assume that every single member of the 558-string Team USA at the Rio Olympics is rolling in cash.

Yes, one would expect the higher end of the Olympic pay league table to be dominated by a small band of basketball players, golfers, tennis stars, and soccer players. But somehow I doubt whether archery, synchronized swimming, table tennis, Greco-Roman wrestling, and any other of the more obscure sports you care to mention are lucrative activities. But participants in the less glamorous sports no doubt work just as hard to try and get onto the podium.

But this issue goes beyond one of merely the taxation of prize money and earnings. Did you know that the US Internal Revenue Service actually taxes the medals that athletes win too? Given that a gold medal isn't actually worth its weight in gold (because underneath it's mostly silver), and that a bronze medal is an alloy of various metals and worth about five bucks, the actual amount of tax due is small. There's a principle at stake though, and it just feels quite mean on the IRS's part to punish a lifetime's dedication to becoming the ultimate in sporting success with a petty tax bill. Which is why I support new legislation, approved by Congress last week, to prevent the IRS from taxing Olympic medals as well as cash prizes awarded to Olympic athletes.

It's nice to see that a sense of fair play still exists in some quarters.


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

China impressive

United States sporting

Kitty's Execrations

United Kingdom over-budgeted



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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