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Italians do it 'on the black'

Kitty Miv, Editor
11 October, 2012

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.

Half a cheer for Italy, which is pressing ahead with its plans for incentivizing small start-ups by cutting formation bureaucracy and waiving some minor taxes. But only half a cheer, because nothing is being done about the tangle of taxation which is reported to take nearly 300 hours a year to deal with for an average business. In fact the provision that entrepreneurs can offset 25% of their investments against taxable income sounds good, but can you imagine the forest of paperwork that the tax inspector will demand? With taxes so high and officialdom so intrusive, can you wonder that most Italians wanting to start a business will simply do it 'on the black'?

A trickle of relocations to Bermuda by major reinsurers and captives shows that the island's determination to stick to its last is paying off. Bermuda and Bermudians can appear to behave arrogantly, and it is not a place where you would want to set up a run-of-the-mill offshore business. Costs are through the roof and work permits are a hassle. But for those niches where Bermuda has carved out a specialized role for itself, it is hard to beat, and insurance is the most obvious case. Insurance assets are more than half a trillion US dollars, and continue to rise steadily. One of Bermuda's advantages is its top-grade regulatory regime: it has always wanted to be seen as a completely respectable jurisdiction, and by and large it has succeeded. For instance, while some of its competitors view the EU's new Solvency II Directive as an opportunity to tempt European insurers away from tight regulation, Bermuda has embraced Solvency II (a prickly embrace, indeed) and is now reaping the rewards. Bermuda is not the only offshore jurisdiction to dine out on captives: it is strange that while the fiscal militant tendency (OECD etc) has attacked most aspects of 'offshore', no-one has said a word against captives, which surely represent one of the most blatant tax dodges around? They are a bit arcane, it's true: you have to be a bit of an insurance freak to understand them (I used to work in insurance). Maybe people outside the industry are merely puzzled by them? This is the stick insect defence: you may be good to eat, but if you look like a twig no-one is going to try.

It's party conference season in the UK, and you'd have to say that the Tories won handsomely, being able to ignore coalition partner LibDem's pleas for a 'mansion tax'. The LibDems face low and declining poll ratings, while Labour is more than ever in thrall to the unions - because that's where the money is - and their leadership doesn't convince. By the end of the Tory conference (last of the three) their leadership felt confident enough to say that austerity was here for long past the next election, while also launching an innovative scheme which would allow employees to receive tax-free shares in small companies in exchange for abrogating many of their employment rights. If that doesn't give heart attacks to union leaders, I don't know what will.

What has happened to Denmark? It used to be one of the bulwarks against assorted Brussels madnesses, but has turned left, and now, horror of horrors, one of its ruling left-wing coalition partners has thrown its lot in with the Tobin brigade, coming out in support of an FTT. But that's only one coalition partner, and Denmark wasn't included among the eleven member states which lined up later in the week in geometrical hari-kiri formation behind Algirdas Semeta. He has supported some negative initiatives, but he's not a country, so I can't give him an Execration, more's the pity. That's what you get if you put academics in charge of the real world.

Brazil, one of the usual suspects, is at it again with protectionist legislation prettily dressed up in green. But the finance minister made no pretence about it, saying that it was to close the gap between domestic sales and production in the auto industry. Sorry, but isn't that a complete denial of trade? The whole point of trade (said Ricardo) is for two partners to swap or sell each other what each does better than the other. But never mind the merchantilist stupidity; what about the affront to Brazilians? Why should they have to pay more for inadequate machinery badly made in feather-bedded factories because the owner has a friend in Brasilia, when the same product is available better-built at 30% less cost from a foreign producer? It makes me angry; maybe you can tell!

France published a social security budget a week after the main budget - there are so many tax increases they can't get them all into one bill, so there are two, and then usually a few supplementary ones as they keep remembering some they left out the first two times around, or as their over-optimistic revenue projections turn out to be wrong, which we all already know is the case. Presumably they know as well, so you have to ask who they are actually deluding? I've been looking through the fine print of the social security bill hoping to find some savings identified, an increase in the retirement age, for instance, but of course, silly me, I was forgetting that arithmetically-challenged Francois Hollande had already promised to reverse Nicolas Sarkozy's increase in the pension age from - wait for it - 60 to 62. The main budget did contain a promise of EUR10bn to be saved from a freeze in public spending, but that isn't exactly 'saving' is it? And politicians' promises to cut spending are easy to make, very hard to fulfil. This government meanwhile shows every possible sign of being profligate rather than penurious. The volte-face on pensions is reckoned to cost an extra EUR3bn. So make that 13bn instead of 10. It's just funny money to them. There is real trouble ahead.

Kitty's Encomiums and Execrations

Methodology: each week (this is the 22nd) three countries are given encomiums and 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 ranking of 0, 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 it's now in neutral territory.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but hopefully one day they will become useful for decision-making, even if for the moment it is all just an amusing game. For any country in negative territory, you should think carefully before starting a business there.

Kitty's Encomiums:

Bermuda stays the course

Italy has the right idea

UK not in denial

And Kitty's Execrations:

Brazil's protection racket

Denmark has an attack of the Brussels

France double double, toil and trouble





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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