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Entitlement Spending is Roaring Away Unchecked

Kitty Miv, Editor
19 December, 2013

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 an unexpected and very welcome outbreak of sanity, Congressional negotiators in the US have come up with a budget, which passed easily through the House, and looks to have a good chance of being accepted by the Senate. President Obama has already said that he will sign a budget bill if one reaches him. If there is a budget, it will be the first one for five years. It's no great shakes: it foresees spending of USD43bn above the Republicans' own budget total, albeit USD50bn below what the Democrats had originally proposed. Some of the more damaging parts of the "sequester" spending cuts have been replaced by minor funding initiatives, but for the most part it's "steady as she goes." There is nothing in the budget to address the debt ceiling problem, which means that another confrontation is probable in January or February, and no action has been taken on the "tax extenders." If those were included, without additional funding sources, they would take the total up by about that selfsame USD50bn to USD1.06 trillion and the Center on Budget and Policy Priorities says that this would push up the nation's debt to 99 percent of GDP by 2040. Spending is still out of control, right-wing Republicans would say; but John Boehner seems to have been able to head them off. The tax extenders are the big issue: most of them exist in order to moderate the deleterious effects of the dysfunctional US tax system on the economy, so abandoning them will have a seriously bad result for business. Yet the country suddenly seems unable to pay for them – why? Because entitlement spending is roaring away unchecked, and it is apparently impossible for anything to be done about it with a left-wing White House and Senate. So it's only half a cheer for the budget. It's evidence that bipartisanship is not quite dead; now aisle-crossing needs to accelerate, to give the country what it needs: a new tax system. There's no time to lose.

Switzerland has come in for more than its fair share of criticism and punishment in recent years, most of it traceable to the fact that it has more money than other countries, proportionately speaking, and it can't be ruled out that there is a trace of envy in the behaviour of the aggressor countries and regions, notably the European Union. And the Swiss themselves are not united on all the dossiers that are involved: some left-wing political movements inside the country have been doing their bit to make things worse for the Confederation. But the majority of sensible burghers are having none of it: most recently the Swiss Council of States (a mostly advisory body, but powerful) has rejected a "people's initiative" to abolish the scheme that allows wealthy foreign residents to pay a flat tax rather than the normal graduated tax; the measure had been put forward by the Alternative Left party. The proposal still has to be considered by the Government, which will also reject it, given that the scheme brings in CHF700m a year, and will be put to a referendum. This week, the Government has also turned down a proposed revision to the country's double tax treaty with France, which would allow the latter to tax the heirs of Swiss decedents if they are resident in France, at rates up to 45 percent. Although the finance ministry reached the deal with its French counterparts, it seems odious. The French have long believed, mostly rightly, that Switzerland is a haven for French flight capital, but that does not justify an extra-territorial inheritance tax. European inheritance taxes are an unholy mess, and I won't even try to explain just how complicated it is to die there if you have a spread-out family or assets. It's an obnoxious tax in the first place, since it taxes money that has already been taxed over and over – or at least, should have been – and is highly anti-business. That's why the issue of the "death tax" has been a political football in the US, with pro-business politicians wanting to get rid of it, and the redistributory faction wanting to get its hands on people's accumulated wealth.

As an ardent free-trader, it gives me no pleasure at all to have been right over the extension of the Trans-Pacific Partnership trade deal to include Japan. What I can't understand is why Japan agreed to put everything on the table, and then just a few months later refuses to negotiate over its agricultural tariffs, including the crazy 777 percent levy on imported rice. Well, I do understand that in apparently changing his mind Shinzo Abe is making a carefully orchestrated domestic gesture, probably because he thinks that the American administration will be unable to get a TPP treaty through Congress without a TPA (Trade Promotion Authority), and there is no point in spending his precious, and limited, political capital and getting nothing in return. In fact, Abe has already gone a long way towards dismantling the agricultural regime that supports high rice prices, although it will be 2018 before there is much market impact. The TPA is the bigger problem, in reality: nobody supposes that Congress in its current factionalized state is going to wave through a TPP treaty that includes Japan without mauling it half to death over labor issues. There is a chance however that with a TPA in place, a majority might be obtained. The problem is that the price of a TPA is the inclusion of a "currency manipulator" clause in future trade agreements, and Japan will not wear this. Nor should it: that countries manipulate their currencies is beyond doubt – what is quantitative easing if it is not currency manipulation? It doesn't have much effect, because it's not just the Fed: the Japanese are doing it, the ECB is doing it, the Brits are doing it, and we'd probably find out that the Chinese are doing it if their monetary policy wasn't so inscrutable. So it's a zero-sum game in terms of currency values, at present. Its impact is to keep interest rates down, which is a Good Thing, short term at least. The problem with a currency manipulation clause is that it gets used, or rather, misused as a protectionist tactic by anti-trade lobbies, and this is not even a left/right issue. There are plenty of well-funded Luddites and backwoodsmen on both sides of the aisle in legislatures around the world, and it is devilishly hard to keep them at bay even when there is a level playing field. If you give them a currency manipulator weapon, it becomes impossible. So the inclusion of Japan in the TPP negotiations was a fatal error. The best thing to do is to say thanks but no thanks, get an 11-country TPP through, and then in 2017, when the dust has settled, start all over with Japan.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 83rd) 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. Some weeks ago it dropped a place, but then quickly recovered one step.

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:

Switzerland being sensible

United States less disunited

And Kitty's Execrations:

Japan slams the door




Tags: Euro | Government | Trade

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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