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Dutifully Toeing The Party Line

Kitty Miv, Editor
15 January, 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.

In my final blog post of 2014, I lamented the rise of Government by Internship in the world's leading nations. Like the United Kingdom. You know the sort: studied politics, philosophy and economics at Oxford; graduted with a 2:1 and became an MP's researcher or ministerial "SPAD" (that's a special advisor for the non-politicos among you); won a seat in parliament in their 20s; promoted to government in their 30s; senior minister by 40-odd; retired/washed up/roving global ambassador by 50. And all the while dutifully toeing the party line without having had the misfortune to experience anything of the "real" world. But perhaps there is hope. Occasionally, as happened in the House of Commons recently, signs of life do twitch in the dying beast that is democracy. Prime Minister's questions can be electrifying, even if it's really a carefully rehearsed pantomime for television. The best debates often take place in a sparsely-populated chamber when the majority of MPs are relaxing at Annabel's. In this case, the debate was on the UK's controversial Diverted Profits Tax, a proposal which even got pulses racing at OECD HQ in Paris. On the spot was Andrea Leadsom, Economic Secretary to the Treasury (your guess is as good as mine as to what this post actually involves, although apparently it's the fifth most senior position in the British Finance Ministry), who fielded some awkward questions from a cross-party group of MPS, like (and I paraphrase) "why has the UK so spectacularly jumped the gun ahead of the OECD's BEPS report?" and "won't this measure effectively destabilize the UK corporate tax system?" and "how do you fancy renegotiating all 100-plus UK tax treaties?" All of which were fended off by Leadsom with an admirably straight bat, as they say in England. Not that the Government is likely to listen to parliament anyway. It will probably only change its mind when businesses vote with their feet. And by then the damage will have been done. Which is why Britain gets a downgrade this week.

Another good day for an elected chamber was had in the United States Congress last week after the House of Representatives voted overwhelmingly in favor of "dynamically scoring" major new tax legislation. In essence, dynamic scoring means that the likely economic consequences of tax reforms are factored in to calculations on their future revenue effects. Almost unbelievably, the Congressional Budget Office and the Joint Committee on Taxation currently use "static" revenue estimating techniques, which make the assumption that tax policy changes – regardless of their magnitude – have no impact on the economy's performance. Under such an assumed scenario, tax cuts are inevitably going to lead to falls in revenue, which is perhaps one of the major reasons why it has become virtually impossible for Washington to have a sensible debate on the issue of tax reform. Any measure put forward by Republicans which is expected to reduce the US tax burden will merely give President Obama and Democrats the opportunity to press the buzzer labeled "fiscally irresponsible." But you don't need a doctorate in economics to know that a significant change to tax rules has the potential to influence the behavior of businesses, investors and workers, and ultimately change the workings of the economy itself. And this works both ways. I've heard it said many times by both employed and self-employed people that as they pass a higher tax threshold, and marginal tax rates surge over 50 percent, there seems little point in putting in the extra hours when only the Government seems to benefit. Conversely, it's no coincidence that we all get excited at the prospect of a tax cut, because we won't be punished so much for working or taking a risk, and we can spend more of our money on stuff in the shops (or going to Annabel's). Economies are hugely complex things of course, and the variables affecting a country's economic performance are legion; it's not necessarily a given that governments will recoup revenues lost from a tax cut through higher economic growth. The trouble is, for Democrats, dynamic scoring smacks rather too much of Reagan-omics, underpinned as it was by the works of eminent supply side theorists like Arthur Laffer and his famous curve. But Sander Levin's claim that tax cuts never pay for themselves surely belongs well in the past, and such attitudes may partly explain the Democrats' dismal showing in last year's mid-terms.

One only has to look at what is happening in Ireland for evidence to discredit Levin's logic-defying position. Taxes have of course risen to help fill the yawning fiscal gap left by the financial crisis, but by no means dramatically. In fact, according to OECD data, the tax burden as a percentage of the economy at 28.3 percent (2013), is lower than it was in 2000 in the midst of the "Celtic Tiger" economy. But tax revenues are now rising fairly sharply – the Government's Exchequer Statement for 2014 shows that tax revenues grew by more than 9 percent year-on-year, with income tax up 8.9 percent, corporate tax up by 8.1 percent and VAT receipts higher by 7.9 percent. The same OECD stats show that the tax burden did rise relatively sharply, by 1 percent, from 2012 to 2013. But according to the Irish Finance Department, recent revenue improvements are indicative of underlying improvements in the economy, rather than tax increases. But perhaps the key figure in all this is Ireland's 12.5 percent rate of corporate tax, which remained on hold throughout the crisis when there was intense international pressure on Dublin to hike it. Despite this low rate (or perhaps because of it) Ireland takes only slightly less in revenue from corporate profits as a proportion of the overall tax take than the OECD average – 8 percent versus 9 percent. And the average corporate tax rate in the OECD is much higher, at about 25 percent. Yes, you can argue just about any way you like with statistics. But it is hard to ignore the fact that foreign companies continue to beat a path to Ireland's door. IDA Ireland, the country's FDI promotion agency, has said that the Government's tax roadmap, which continues to offer businesses a low-tax future (albeit without helpings of Double Irish Dutch Sandwiches), is directly responsible for a surge in employment levels at its client companies, to the highest level in the agency's history. And let's not forget that it's not only companies that pay tax, the people they employ do too, who then go on to pay yet more taxes on the things they consume with their incomes. A sort of virtuous circle if you like, if the tax rates are set right. Of course, it's a shame that we're at a stage in history where governments, in debt over their heads and with little hope of ever paying it off, have got themselves into a situation whereby tax policy is set to maximise revenues, rather than to reflect the price of living in a civilized society. But alas, this has been the way of things for centuries. As Jean-Baptiste Colbert, Louis XIV's esteemed finance minister, observed in the late 17th century, "the art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing." Low-tax countries are, generally speaking, just as interested in raising as much revenue as they possibly can. But at least they are much gentler on the goose.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 139th) 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:

Ireland without a hiss...

United States dynamic

And Kitty's Execrations:

United Kingdom march of the SPADs



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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