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It's no way to run a tax code!

Kitty Miv, Editor
21 August, 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.

It's something of an exaggeration to say that the United States Congress is totally paralyzed. Yes, the ideological chasm between a left-wing Government and a right-wing Republican Party holding sway in the House of Representatives is wide. Yet since the commencement of the 113th Congress on January 5, 2013 – perhaps the most divided Congress in modern history – 146 laws have been enacted and the current session isn't due to end until January 3, 2015. Yes, this figure is substantially lower than the 283 laws enacted in the 112th Congress and the 383 enacted in the 111th. But it shows that Congress isn't completely gridlocked. The difference between the current session and the previous two is that the amount of tax legislation passed over the last 18 months has been virtually nil, (scouring the list of statutes, I found four: the Fallen Firefighters Tax Clarification Act; an amendment to include vaccines against seasonal influenza within the definition of taxable vaccines; tax benefits for charitable cash contributions for the relief of victims of the Typhoon Haiyan in the Philippines; and a law which eliminates taxpayer financing of presidential campaigns and party conventions). Don't get me wrong here; there's no point in passing laws for the sake of it, and sometimes, in the interests of stability, less is more. But Congress has maybe passed laws when it hasn't really needed to, and hasn't when it really has needed to: the 50 or so tax provisions known as the "tax extenders" which expired at the end of last year being the most obvious example. Among these extenders is the R&D tax credit, which has been renewed more than 20 times since its inception around 30 years ago. With probably billions of dollars of investment in research riding on such things, it's no way to run a tax code! The protagonists in Congress have their reasons for holding their ground so doggedly, but it isn't doing America's reputation or competitiveness much good. The USA is now paying the price for effectively refusing to join the corporate tax cut race.

It hasn't quite been the "race to the bottom" that some Democrats had feared, but it is cold hard fact, and often repeated, that the US, with its 35 percent statutory corporate tax, plus state tax, is way behind the competition – the average rate in OECD countries is in the mid-20s and falling. So the current clamor for US pharmaceutical firms to "invert" by acquiring rivals in lower-taxed jurisdictions is in a way quite understandable. But in spite of a Congress constipated on tax issues, is there really a need for President Obama to bypass the legislature to deter US corporations from inverting? It sets a dangerous precedent in a country that is rightly proud of its democratic traditions. The President does have some form though; the growing network of intergovernmental agreements was never mentioned in FATCA, and neither was reciprocity of information exchange. However, elections do funny things to politicians, and the current clamor for changes to the inversion rules has more to do with winning votes in the upcoming midterms than anything else. Corporate tax reform isn't exactly going to be a winning ticket, even though it could benefit the US economy in the long-run. Hammering companies which "game the system" as the President puts it, while "shipping jobs overseas" probably will.

Compare and contrast with America's northern neighbor. No country, government or parliamentary system is perfect, and this also applies to Canada. But Canada seems to have done a lot of things right, or at least the fewest things wrong, compared with many of the countries in its developed country peer group. Although it wasn't immune from the economic shockwaves that reverberated globally when the financial crisis broke, Canada was the only member of the G7 not to suffer a domestic banking crisis. Indeed, so impressed with Canada's monetary stability was the United Kingdom that it poached the country's senior central banker to head the Bank of England, although this might turn out to be something of a poisoned chalice for Mark Carney as the British economy approaches a crucial juncture; the housing market is racing ahead, and it may be about time to switch off the life support provided by record-low interest rates. Anyway, I digress. The fact is that as a result of prudent economic management the Canadian federal Government will be back in surplus next year – a scenario that most of its G7 counterparts, with the exception of Germany, can only dream about. And over the course of the last decade it has cut corporate tax from one of the highest among the richest countries to one of the lowest, with a headline rate of 15 percent. So while President Obama says that tax reform is as much about raising revenue to reduce the US federal deficit than it is about giving the economy a boost, Canada has the luxury of thinking about tax cuts without having to worry so much about the revenue consequences.

Switzerland doesn't get many plaudits in an era when the numbered bank account is Enemy Number One for tax authorities in many parts of the world, despite the fact that it has made many concessions to the global tax transparency cause. So the Swiss Federal Council's decision to make the dissemination of information about owners of Swiss banks accounts punishable is hardly likely to win it any new fans in the global community; the treasuries of Europe, Australia and North America have all benefited in the past from bank client data passed to them from disgruntled employees and ex-employees of banks in Switzerland and Liechtenstein. Yes, those silly enough to evade the tax laws in their country of residence deserve to be penalized. But surely two wrongs don't make a right? In any other walk of life, buying stolen goods is a criminal offence, often punishable by jail time. But apparently these codes do not extend to tax officials, as several governments have in the past sanctioned the use of public money – tens of millions of dollars of it – to acquire such data. In my view it is stretching it somewhat to suggest that these individuals are whistle blowers, exposing tax-dodging millionaires and billionaires. A whistle blower usually acts on conscience and principle, and while they may sometimes be compensated or rewarded for the risks they take, financial gain isn't their primary motive. With revenue authorities so willing to throw money at those brandishing a CD or memory stick containing the private financial information of thousands of individuals – not of all of who will be guilty of anything – one suspects that financial gain is the primary motive, with conscience and principle coming a distant second. The fact that in at least one case a few years ago, a regional tax authority in Germany helped to protect the anonymity of the person who sold them information almost makes the whole affair laughable. Perhaps they gave her a new identity, a second passport and a secret bank account too. It just shows how the headlong rush to global tax transparency has warped the minds of those in power. No doubt they will be queuing up in the days ahead to condemn the Swiss for making an offence out of theft and data protection breaches.

Kitty's Encomiums and Execrations

Methodology: each week (this is the 118th) 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 plus 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. Etc etc and now it's on plus 1 again.

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 cutting taxes

Switzerland protecting the innocent

And Kitty's Execrations:

United States election fever




Tags: Euro | Government | England

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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