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Getting Rid of the AMT

Kitty Miv, Editor
16 May, 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.

Just possibly the US Congress is getting serious about tax reform, with the launch of a bi-partisan consultation site showing that the two parties actually plan to create a model for a simplified tax code based on what taxpayers themselves say they want. If it's to work, the two sides will have to ditch their existing, entrenched positions, and concentrate just on simplicity. It won't be a question of increasing or reducing taxation; it will be a question of rearranging it, possibly changing the balance between individual and corporate taxes, possibly getting rid of the AMT, possibly reducing capital taxes. And what of the President? People are quick to say that he has not succeeded in "managing" the Congress; now it will be a question of Congress managing him, because any straightened-out tax system is going to cross some of his red lines, running up against his principles. You see how difficult it all seems: Messrs Camp and Baucus make a comparison with 1985, the last time that there was a serious attempt at major tax reform. But in 1985 Ronald Reagan was President, the Democrats had the House, and the Republicans had the Senate. I'm not sure if at the time that constellation seemed favorable towards a bi-partisan reform, but today's constellation seems decidedly unfavorable. I hope to be wrong.

North Korea has joined the ranks of countries supporting SMEs with tax incentives. Well, that woke you up, didn't it? If only it was true. Are there SMEs in North Korea? There certainly are lots of them in South Korea, and the country says it will significantly enhance the tax environment for start-ups. Generally speaking, Treasury ministers are very unimaginative, or rather, perhaps their officials are. When you think about it, you have to wonder how a senior finance ministry official would have any true understanding of the mindset of a person starting a business or thinking about doing that. Everything about their training and their priorities militates against such understanding. And, vice versa, everything about the mindset of a start-up entrepreneur militates against their having any understanding of how their new company could benefit from involvement on the part of the State. In most countries, to begin with, there are bureaucratic hurdles to jump before you can even begin to trade: licences, permits, you name it. From the start, the State is an enemy. Then, because everyone you deal with has already been taught to stay well away from the State, they all want to be paid in cash, and they want to pay you in cash. So, right from the beginning, you fall into the self-fulfilling Treasury prophecy that any entrepreneur is a crook in waiting. And of course if you want an employee . . . well, I need not go on. By and large, Governments, even the worst of them, cannot but be aware that start-ups are where the jobs come from; yet even the South Koreas are not brave or insightful enough to lay down a red carpet for people who want to risk their all on a new business. Let them do what they want for the first three years, with no consideration of tax of any description, for them or their employees, and then have a reckoning: give them a bonus for every employee, and pay them 10 percent of their profits as a kind of negative income tax. And only then start subjecting them to things like VAT, corporate income tax, payroll withholding and property tax. Instead of that, in most countries you have to fight to be allowed to run a business. It's crazy.

It's very difficult to find any good behaviour on the part of governments this week, so if I compliment German Finance Minister Wolfgang Schäuble, it isn't because he actually cut a tax – but at least he talked about cutting a tax. German capital gains tax was imposed in 2009, and in practice it amounted to an increase on the previous system which imposed income tax on 50 percent of capital gains. So now Schäuble talks about abolishing the tax; but perhaps all he means is to revert to the previous system, which would at least be a sort of improvement, at least for lower rate taxpayers. But we have to remember that elections are coming, so we are into a period in which no politician can be taken at face value. "Read my lips!"

Well, if it's hard to find countries to compliment, it's all too easy to find some to criticize, and we'll start with the appallingly protectionist European Union attack on China's solar energy industry. Let's remember that the EU is supposed to be about consumers, not producers, and ask why the Commission should find it necessary to impose up to 60% duties on Chinese imports, thus doubling the cost to EU consumers of alternative energy, which is one of the EU's most important goals, as they are constantly telling us. The lobbying organization which has fronted this campaign to defraud you and me says disgracefully that its members choose to remain anonymous for fear that the Chinese will punish them for their role in excluding cheap Chinese goods from the EU market. The argument brought by companies that request "anti-dumping" or "countervailing" measures is that the offending country – China in this case – means to damage or destroy the home company concerned, and will then raise its monopolistic prices having driven competitors out of the market. It's possible that such an argument might have had force 200 years ago when there were just two or three competing countries in a market; to adduce it today is economically illiterate, and for the Commission to believe it is nothing short of egregious. Down with the EU, if this is the best it can do!

Poland gives "advice from the European Commission" as its excuse for creating a Controlled Foreign Corporation regime; that's like asking a lawyer if you should draw up a will. Perhaps it's surprising that Poland doesn't have a CFC regime already; but that doesn't excuse what amounts to a new tax. The proviso that a company in a country with a tax rate more than 25 percent below that in Poland will pay the tax seems very antagonistic, and it's hard to square with EU single market rules: 75 percent of 19 percent is 14.25 percent, so that would catch Cyprus (12.5 percent), Ireland (ditto), and Bulgaria (10 percent), although Poland does have double tax treaties with all three of those countries, which might help, depending on the fine print. Then of course there are all the usual offshore suspects, which don't have DTTs with Poland; so there won't be too many new Polish start-ups in the Bahamas or Guernsey in future, and that's probably what lies behind the Commission's advice. For that matter, a Polish company taking advantage of the UK's new 10 percent Patent Box rate would presumably be caught, again driving the Polish holding company into the arms of the DTT. But it's not clear that the DTTs would help: they don't necessarily stop a tax being imposed, they just allocate taxing rights; so a Polish IP subsidiary in the UK would pay the tax, and what then if the holding company is loss-making?


Kitty's Encomiums and Execrations

Methodology: each week (this is the 52nd – our anniversary!) 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 has a neutral ranking, 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 last week.

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:

Germany might cut a tax

South Korea starting-up

United States goes at tax reform

And Kitty's Execrations:

European Union against the consumer

Poland gets colder




Tags: Euro

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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