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In Britain the austere times might only just be beginning

Kitty Miv, Editor
11 December, 2014

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.

An "autumn" statement delivered in December? Sounds a bit late to me. Unless you are in the southern hemisphere of course, in which case it could equally well be early. Anyway, I refer here to UK Chancellor George Osborne's Autumn Statement, which used to be a dry summary of the United Kingdom fiscal balance sheet, but latterly seems to have morphed into a sort of pre-budget Budget. And with a general election due in May 2015, Osborne must have wanted to ensure that the 2014 Autumn Statement grabbed the attention of voters. To a large degree it has. The most substantial rabbit pulled out of the hat by Osborne was a reform of the absurd stamp duty land tax, which, until midnight on December 3, used to apply under a "slab" system. For example, if you bought a property for over GBP250,000, at which price the rate of stamp duty climbed from two percent to five percent, you paid five percent on the whole amount, not just the portion above GBP250,000. So if your house was worth somewhat above GBP250,000 and you wanted to sell it, good luck with that! It represents a fairly hefty tax cut in the order of nearly GBP1bn a year. And packaged as it was with a series of minor tax concessions for businesses, and small firms in particular, it is clear that the Conservative Party is keen to bring the young and upwardly mobile back into its fold in time for next year's election, putting "clear blue water" between it and the main opposition Labour Party. But yet more evidence of this Government's schizophrenic attitude to taxation emerged from the Autumn Statement, like the 25 percent "diverted profits tax" on company income artificially moved out of the UK to avoid tax. The success of this measure will surely rest on the interpretation of an "artificial arrangement." But I suspect that the Government cares little about that anyway. It is a populist move designed to show the voters and the OECD that it is cracking down on corporate tax avoidance. Nevertheless, the UK's thirst for tax revenues is almost unquenchable at the moment, and yet again we saw a fiscal statement littered with anti-avoidance measures. This is because the Government has spectacularly undershot its target for the deficit, which was supposed to have been eradicated by 2015. That won't happen now until 2020, provided the Conservatives, if re-elected, can oversee the largest squeeze on public spending since the Great Depression (the 1930s one). So while the likes of Greece, Ireland and Spain are talking about an end to austerity, in Britain the austere times might only just be beginning…

"Better late than never" you could say about the UK deficit situation. And you could use the same phrase to describe legislation passed by the US House of Representatives renewing a package of expired tax breaks almost in their entirety. It is something that should have been done a year or more ago before the expiry of the measures at the end of 2013. That they weren't renewed, and haven't been in the meantime, tells you all you need to know about the polarized, paralyzed nature of US politics. Yet, the large majority in favor of a simple one-year extension of most of these tax breaks informs us that both sides can come together when they have to, making the previous period of damaging legislative brinkmanship look so unnecessary. As if complying with the tax code wasn't hard enough for those taxpayers with relatively simple tax affairs, the Internal Revenue Service warned in November that continued delay in enacting a tax extenders package would not only cause heightened uncertainty for those taxpayers who are affected by the expired provisions, but also raise operational and compliance risks that would delay the tax filing season and the processing of individual taxpayer refunds. It has to be said that President Obama has been especially obstinate since the Democrats received a shellacking in the mid-term elections, stubbornly rejecting any Republican proposals out of hand, and slapping down Senate Majority Leader Harry Reid (a Democrat from Nevada) when he began negotiating with the GOP on an extenders' compromise. The indications are that the Senate will probably pass this short-term fix, and, so as not to cause more uncertainty, the President will not wield the veto. But you can virtually guarantee that we'll be watching the same pantomime unfold next year – and possibly well into 2016 – when the extenders expire yet again. It's a habit Washington has to kick.

There are also some bad habits that Italy has to banish to give itself a fighting chance of avoiding a potentially cataclysmic economic crisis. For a start, a substantial swathe of the Italian population has gotten into the habit of thinking that taxation is a voluntary exercise. And the Government continues to spend money it doesn't have. The result is a sticky budget deficit which the Government is struggling to contain, and sovereign debt worth 130 percent of GDP and rising. The economy also has a nasty habit of stalling and then failing to re-start. And it is difficult to see how the Government will break the cycle. Although cultural attitudes are largely responsible for rates of tax evasion in any given country, Italy's tax system seems to provide ample scope for it to take place because a) it is so complex and b) taxes are so high. The recently updated PwC/World Bank ease of paying taxes index puts Italy 141st out of 186 countries. That's only marginally better than Zimbabwe in 143rd place, and slightly worse than Sudan in 139th. Even more damning is that Italy's total tax rate on a mid-sized company, represented by the combination of profit, labour and other taxes, is put at 65.4 percent. Who would want to invest in a country where, after finally figuring out how much tax you owe, it transpires that you must hand over two-thirds of your income to the Government? So cutting and simplifying taxes is at least part of the answer to Italy's problems, for this could help to reduce tax evasion and encourage more investment and growth in the Italian economy. But without commensurate spending cuts, Italy's fiscal troubles might just be exacerbated. Prime Minister Matteo Renzi claims to be the one with the answers. But despite his youthful vigor, he is still a politician. Italy's 2015 Budget, recently approved by the lower house, is supposed to be the tonic that saves Italy. The tax cuts contained within in it are claimed to be the largest in Italian history, but there's also a bit of clever accounting going on – EUR3bn of the EUR5bn reduction in the regional production tax known as IRAP actually went into effect in April, meaning that strictly speaking the 2015 Budget cuts the tax by EUR2bn. Not so clever is the fact that the Budget includes more borrowing to finance certain items of public expenditure. Slashing spending, if it happens, is only going to increase the chances of fracturing the fragile coalition and losing the support of voters – should Renzi ever get the chance to face them, that is. Unless he is Silvio Berlusconi, the average career of an Italian premier is fleetingly short. Canceling bread and circuses won't help to prolong it.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 134th) 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 Kingdom rabbit out of the hat

United States extending

And Kitty's Execrations:

Italy bread and circuses




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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