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I foresee the midnight oil being burned in large quantities on Constitution Avenue

Kitty Miv, Editor
18 July, 2016

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.

The United States Internal Revenue Service is more often vilified than it is complimented. So when it does receive a rare piece of praise, it is worth pointing out. Apparently, the agency had a pretty good 2016 filing season. Although, as you'd expect from a review by National Taxpayer Advocate Nina E. Olson, there is considerable room for improvement. More than 25 percent of telephone inquiries to the IRS still go unanswered, many taxpayers remain baffled by a nightmarish tax code, and rates of fraud and error are still unacceptably high.

Still, I've bashed the IRS often enough in this column, so perhaps it's time to go to its defense. After all, the IRS doesn't make the rules, Congress does; I'm pretty sure that the IRS doesn't ask to do more with less. But Congress and the Administration routinely demand this. And they do so in the knowledge that the agency's ever-expanding remit is stretching it to breaking point. Yet, the IRS's remit continues to expand. The agency was handed the task of Obamacare, and now has FATCA to contend with. Even more international enforcement programs are in the pipeline, promising to produce a mountain of information to be sifted through, like CbC reporting, and the Common Reporting Standard. One wonders though, where the agency's enforcement officers will find the time to read all of these reports. I foresee the midnight oil being burned in large quantities on Constitution Avenue.

One country that has been forced to look to the long-term is, of course, the United Kingdom, as it contemplates life beyond the European Union. And, not before time, the country's leadership seems to have awoken from its post-referendum stupor to actually contemplate the daunting task of negotiating a withdrawal agreement acceptable to all sides – by which I mean all sides at home, and all 27 sides in the EU. IRS Chief John Koskinen might think he's got the impossible job, but the UK's negotiators might think it a cakewalk if their aim is to gain concessions from Juncker, Merkel, and an EU elite deeply wounded by the UK's decision to leave. And you know what they say about picking fights with an injured beast.

However, before it strides into battle, the UK had better find some soldiers, and find them fast. Because the Government managed to let slip recently that it doesn't actually have any trade negotiators. This state of affairs is understandable. After all, the UK hasn't had to set its own trade policy for four decades. Nevertheless, to say the least, it is a state of affairs that is worrying. You could say that it's akin to entering a horse raise without a horse. Still, I have faith in the UK. Surely, enough clever people can be found from the fields of academia, business, and civil administration to quickly get to grips with the complex nuances of international trade negotiations. At the very least, with Boris Johnson now heading up the Foreign Office, things will be entertaining.

It's difficult to predict how amenable or otherwise the EU will be in the impending Brexit negotiations. The Remain camp repeatedly warned that Europe would seek to "punish" the UK for voting out by playing hard ball, thus deterring any other member states with similar designs. The Leave campaign argued that this would not be in the EU's economic interests, given its high volume of trade with the UK. To do so would be tantamount to the EU cutting off its nose to spite its face.

In or out of the EU, you could say that the EU has a vested interest in the success of the UK economy. Yet, I suspect the EU doesn't want the UK to flourish too much on the outside either, lest it show the way for other member states. And this was hinted at by the prickly response in Berlin and Paris to the suggestion by former Chancellor George Osborne that the UK could slash corporate tax to a rate approaching the Irish level.

With Osborne having been banished to the back benches by newly installed Prime Minister Theresa May, UK fiscal policy is now likely to follow a more conservative course (with both a small and a large 'c'). Nevertheless, German Finance Minister Wolfgang Schäuble's suggestion that such a tax cut would be "unfair" does betray a certain amount of fear that the EU can't compete economically. Or, more to the point, perhaps it is simply unwilling to compete, especially on tax.

Looking back at the various tax announcements from the European Commission and Council over the past few months, EU tax policy, if there is such a thing, seems almost solely focused on tax avoidance. This is laudable, and tax fraudsters deserve to be caught and punished. But when do you ever read about the EU wanting to make its tax system more competitive? Rarely, if ever. Yes, in theory, it is simplifying things by insisting on non-discriminatory tax rules and a level playing field, and by further harmonizing VAT rules. But so many EU tax initiatives seem to end up increasing the burden on taxpayers, especially on small businesses, rather than alleviating it.

Perhaps Brexit will force the EU to do some soul-searching, to change a model which seems stuck in the latter half of the 20th century. Here's hoping, but I wouldn't hold my breath.


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

United States praiseworthy

Kitty's Execrations

European Union uncompetitive




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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