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Hope That the Fed Doesn't Start Tapering Too Soon

Kitty Miv, Editor
12 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.

The Tory toffs who are running the British Government seem to be doing a reasonable job, despite the LibDem barnacles encrusting their hull and slowing progress. The Chancellor's Autumn Statement last week had some disappointing aspects, but by and large it does the right things, particularly by helping small businesses in various ways. I don't know quite what to make of the grandiose package of tax avoidance measures: surely it is mostly grandstanding? Having committed themselves so thoroughly at the Lough Earne G20 summit to abolishing BEPS, they probably had no choice but to make a big song and dance about it. But most thoughtful commentators have by now concluded that the whole BEPS circus will change very little in the real world. So there is no point in criticizing the Brits for continuing to push the bandwaggon along. Even the imposition of capital gains tax on non-resident property owners is probably just another case of gestural politics, meant to de-fang the mansion tax threat from their LibDem "partners". The real problems the Government has are the deficit and the debt pile, and there is little to be done other than to keep noses to the grindstone and hope that the Fed doesn't start tapering too soon, which would send interest rates skyward and rip apart the British fiscal tight-rope act. Not to mention the similar French, Italian and Spanish turns. Mario Draghi would have to shovel another couple of trillion euros down the throats of European banks if tapering happened. It's a mystery to me how all of this money creation doesn't result in more inflation. Sooner or later it has to; but perhaps for now the global economy is still in a state of shock. George Osborne must be hoping it stays that way for quite a long while.

Talking of tightropes, David Cameron was on a trade high-wire last week, trying to encourage the Chinese to forward their putative trade deal with the European Union while hoping that his euro-sceptic right wing wouldn't notice. If he really wanted to leave the EU, he'd want a separate UK/China deal, presumably. Well, I wasn't at the table in Beijing, so for all I know, that's exactly what they talked about. The Chinese are very pragmatic, and they must wonder if the French will ever allow a Mandarin wave to flood their precious culture paddies. Still, it's true that Paris is full of Vietnamese restaurants. Very perplexing, the French. Anyway, back to the Chief Toff, who is clearly on the same trade wavelength as Steadfast: Trade Minister Ed Fast indeed earns Canada a bouquet this week for its and his enduring attachment to free trade. It has been a good week for free trade, generally, with the WTO surviving its latest brush with disaster by the skin of its teeth. In fact, we need to compliment India for helping to bring in at least a partial Doha harvest, after having been cast as the anti-Doha villain over the last few weeks. Of course all players had to kick the ball, and the fact that in the end they did so was a welcome but entirely serendipitous tribute to Madiba's dicta of cooperation and compromise, in the week that he died.

The French are considering jettisoning one of the few favorable aspects of their individual taxation system, being the fact that personal income tax is payable a year in arrears, rather than being withheld from salary, as is the case in almost all "advanced" nations, and as is the case for social contributions, even in France. Probably they are being forced into it by a looming deficit in 2014 – the change would give a massive boost to revenues in the year in which it took place, well, years, probably, because it would have to be phased in gradually. That's far from the only revenue-boosting initiative being cooked up in Paris: fines and penalties are being increased for many types of tax misdemeanor (although the Constitutional Court, to its credit, slapped down some of the Government's more illiberal measures); next year's social security law has been passed, including increases to a range of contributions and a "fat tax" on sugary drinks; and the 2013 "supplementary" finance law has toughened exit tax rules, lowering the threshold and increasing time periods for realization. All this in just one week – no wonder that the employers' association is shrieking for tax cuts. But it won't get them; the Government can't afford it after two years of socialist largesse. The most it offers is the famous "pause" in tax increases in 2015.

Continuing a round-up of the usual suspects, India may have behaved beautifully in Bali, but back at home it was up to its normal practice of tormenting mncs, demanding the equivalent of USD800m from IBM on the grounds that it understated 2009 income. IBM will fight, of course, and it joins a long list of major corporations aggrieved by India's predatory behavior, including Vodafone, Shell and Nokia. One theory is that the Government realizes that it is going to overshoot its deficit predictions this year, and can't resist picking at fat corporate wallets. So it just told the tax department to go for it on the basis that most companies will roll over and pay up, rather than become embroiled in endless proceedings like Vodafone, which after three years may, or may not, be approaching meaningful talks with the Government.

And our final cash-strapped administration is, of course, Italy, which has been struggling to find a way of canceling the second instalment of property tax (the first was canceled back in June when the now-ousted Silvio Berlusconi made it a condition of his support for the cross-party coalition under center-leftist Enrico Letta). With Berlusconi gone, Letta now has a freer hand, and has used it for this highly populist gesture, resourced, you guessed it, not by savings, but by increasing taxation on the finance sector, which is an unexploded bomb and may blow up in his face next year. The employers' federation, as in France, complained loudly, but no-one in Rome is listening, any more than they are in Paris. It's so drearily predictable that left-wing administrations will get the economy wrong – why can't electors see it? I suppose they do see it, but then it's the tragedy of the commons every time. Isn't there a better way?


Kitty's Encomiums and Execrations

Methodology: each week (this is the 82nd) 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:

Canada sticks to its Fast

United Kingdom steady as she goes

And Kitty's Execrations:

France strapped for cash

India v the world

Italy on its uppers




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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