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Hard work is for the virtuous, cake is for sinners

Kitty Miv, Editor
15 August, 2017

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.

It's probably reasonable to say that governments around the world have an uncomfortable relationship with sinners. By which I mean those who prefer a chocolate cake for desert, rather than an apple, or who end the working day with an ice-cold beer and a cigarette rather than a pilates class and a sprout smoothie.

Governments feel they have a role to play in discouraging people from indulging themselves into an early grave, so they tax alcohol and tobacco products – often very heavily – and, increasingly, are taxing food and beverages according to its sugar content.

But, the dilemma is, governments collect enormous sums of revenue from sinners. Indeed, they have almost come to rely on them to make budgetary ends meet. So treasury ministers must secretly dread the day coming when people kick the habit and turn to pilates and sprout smoothies en masse.

Recent evidence on this dependence on sin tax revenue emerged recently from the United Kingdom, where the Institute of Economic Affairs said in a recent paper that sin taxes have become a "cash cow" for the Government. 

According to the IEA's paper, revenue from so-called sin taxes will total GBP24.7bn (USD32bn) by 2018, with the new sugar levy expected to raise GBP500m per year. This, it is argued in the paper, is more than enough to offset the undesirable effects of smoking, alcohol consumption, and unhealthy diets.

But more shocking perhaps was the IEA's inference that the Government has a vested interest in people maintaining their bad habits, because they tend to die off sooner and therefore the state doesn't have to look after them in their old age. A wee dram 'afore ye go, anyone?

Staying with the UK, it is interesting that while the Government continues to dismantle the "non-dom" regime, under which wealthy foreign taxpayers (for the most part) don't pay tax on their overseas earnings as long as those earnings stay offshore, Italy is creating its own non-dom regime, aimed at attracting the sort of entrepreneurial types that have been lured to London for decades, centuries even.

Indeed, a number of European countries that have struggled to compete with the UK on tax now appear to be falling over themselves to lay out the red carpet for London bankers and other highly remunerated professionals who contribute substantial sums in tax. France has been banging this particular drum for a number of months now, albeit without doing much about it, and the German state of Hesse – home to Frankfurt, continental Europe's main finance center – has launched a tax helpline to assist any Brexit-disillusioned Brits thinking of making their way in Germany.

It used to be the case that the UK was seen as the predator. Fittingly, "laying out the red carpet" was ex-Prime Minister David Cameron's phrase when inviting France's entrepreneurs to escape President Hollande's tax assault. Now it appears that the hunter is being hunted.

Significantly, the first taxpayer to be granted non-dom status in Italy originated from the UK. Will they be the first of many? Is this an early sign of an irrecoverable slide in competitiveness for the UK as a result of Brexit? Opinion is bound to be very much divided on that, but don't be surprised to see more wolves circle the wagon in the months and years ahead.

On the other hand, perhaps the higher levels of complexity and larger tax burdens generally prevalent in Western Europe will deter many UK-based non-doms and HNWIs from taking the bait. Perhaps these jurisdictions need to make taxes lower and simpler to begin with, to maximize their appeal to investors. This is not a short-term option, of course. Such things are usually done a step at a time, as Brazil can testify, as it begins to slowly creep up the "ease of paying taxes" indexes.

Brazil has received a lot attention recently, including here, for its extremely complex tax regime. And it received further unwelcome publicity in this regard recently, courtesy of the International Monetary Fund's latest "Article IV" report on the economy.

The IMF isn't given to hyperbole in its rather soberly authored "Article IV" consultations, so its description of Brazil's indirect tax regime PIS/COFINS as "exceedingly complex" did jump off the page somewhat. As did its conclusion that companies in Brazil spend roughly a third of their resources on complying with the country's multi-layered tax system.

When it comes to tackling tax complexity, many governments and political parties like to talk the talk, but rarely do they walk the walk. Brazil's authorities seem, however, to have finally woken up to the problem, at least at the administrative level, and further significant moves towards tax compliance centralization, laid out by the country's Inland Revenue last week, is certainly a move in the right direction.

How things got to this stage, I don't know. Much of Brazil's tax complexity arises out the fact that it has a federal system of government, and there appears to be a lack of coordination between the three tiers of administration. But it still amazes me how the relatively simple act (in theory) of taxing a person's or a company's income got so complicated, not just in Brazil, but pretty much anywhere in the world where taxation exists.

In an ideal world, we would tear up the tax codes and start again from a blank sheet of paper. Although I suspect it wouldn't be too long before a single page grew to hundreds, even thousands of pages. In the United States, for example, it probably took no more than 20 years for the intent of last major tax reform, enacted under President Ronald Reagan in 1986, to be undone. True, the Reagan tax reform was hardly started from a blank sheet, but human beings are complex things, as are the economies they create, so I suppose complex taxation is unavoidable to a degree. Still, this doesn't mean complexity shouldn't be attacked whenever it rears its ugly head.

On the issue of complexity, the wheels appear to be turning in the United States towards the introduction of a tax reform bill in Congress, likely some time after the summer recess. And one of the main objectives of the Trump administration and Republicans in this regard is simplification of the tax code.

This shouldn't too difficult to agree on, should it? I mean, after all, I've never met anybody who said that the tax code wasn't complex enough!

Although most agree that simplification is desirable, if not essential, it turns out that simplifying taxation is not going to be simple. Especially any switch from a worldwide to a territorial basis of taxation.

This was the conclusion of an analysis of territorial tax systems by the Tax Foundation, at least, warning tax reformers that there will be many detailed issues to consider. For instance, will the new US corporate tax regime feature "participation exemptions," which exclude foreign subsidiaries from domestic tax, or controlled foreign corporation rules, which bring certain foreign companies' profits within domestic tax?

In simpler terms, tradeoffs protecting the domestic tax base and creating simple rules are going to be unavoidable, and therefore it is probably going to be impossible to eradicate complexity altogether.

Still, that the tax reform ball appears to be rolling is a welcome development. But it sure isn't going to be a piece of cake. Hard work is for the virtuous. Cake is for sinners.

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

Italy hunting

Brazil centralizing

United States rolling

Kitty's Execrations

United Kingdom sinful




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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