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Little more than thinly disguised conspiracies to rob the State

Kitty Miv, Editor
03 October, 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.

Good to see that the new, pro-business Australian Government is off to a promising start, announcing that it will attack the tendency of the tax authority to put all kind of roadblocks in the way of entrepreneurs who want to start up in business. Australia's Treasury department is not alone in detesting small businesses; most Finance Ministries regard entrepreneurs and the self-employed as little more than thinly disguised conspiracies to rob the State, and most Finance Ministers won't be happy until they have criminalized all tax-payers, either because they're too poor to pay the imposts demanded of them and therefore cheat, or because they are in business, with the Government as the enemy at every turn, or because they have moved "offshore." The situation is especially taxing for entrepreneurs when there is a left-wing Government in cahoots with the tax collectors, which has been the case in Australia for the last four years, since the Government eggs on the tax department to be as spiky and difficult as possible. All sane economists know that it's small businesses that create the jobs, and even Finance Ministries can sometimes be pressurized into creating schemes to encourage SMEs; but the tax authority is always there, oppressive and grasping, ready to negate such efforts.

Entrepreneurs should be allowed, even encouraged to cheat, because that is the way in which the most jobs will be created, and in the end, the most tax generated. Of course I am not stupid enough to suppose that a "duly elected government" in all its precious grandiosity could ever overtly wink at entrepreneurial fiscal escapism; but a sensible Finance Minister would keep her tax collectors on a tight leash. A prize, by the way, for anyone who can come up with a female Finance Minister. It seems to be the ultimate glass ceiling. You can be Prime Minister, or President, but heaven forbid that as a woman you should be allowed near anything as important as money. There was a female Governor of the Russian Central Bank; and Janet Yellen may step into Ben Bernanke's shoes; but Central Banks are not Finance Ministries.

Russia has just provided a perfect example of how not to treat your entrepreneurs, by doubling social security contributions by RUB35,600 (about USD1,500) each year, for self-employed persons earning from RUB50,000 to RUB100,000 a month. In March, an SME business association called on the Government to reverse its decision after a government representative admitted that 7 percent of self-employed persons had ceased operating. By September, 485,000 people were said to have canceled business registrations this year, and most of them are doubtless continuing to operate "in the black." So the Government has reacted by proposing a two-year tax break for entrepreneurs registering a business for the first time, in order to stem the mass exodus to the illegal economy. All government ministries have approved the plan and it is expected to come into effect next year. But what's the use of that? Most new businesses don't make a profit at first, and anyway, imagine the hoops you'd have to jump through to prove your numbers to the tax authority.

There are encouraging signs of modernity from the Philippines, which is taking real steps towards creating a joined-up, electronic tax filing and collection system. We have had occasion to berate the Filipinos for such inanities as their official, printed VAT invoice requirement for the sale of a single drawing pin, and their cack-handed system of airline taxation which has decimated the tourist business; but in general the country seems to be making modest progress away from its disreputable past. President Benigno Aquino said there would be no new taxes on his watch, and he seems to have stuck to that pledge so far. He has cracked down on corruption, and the economy is firing on at least some cylinders, with 6.8 percent GDP growth last year, and 7.6 percent in the first half of 2013. The IMF says that more taxes should be raised; this is something it always says, whatever the circumstances, even when addressing near-dead European basket-cases, but in this particular case it is right, since the Philippines is one of those countries, like Pakistan and Mexico, where only a tiny proportion of the economically successful pay taxes.

One country where the IMF's higher-taxation prescriptions are not required is France, where they need no encouragement to add taxes at every opportunity. This week saw the publication of the country's 2014 budget, which is full of wishful thinking and wordy prescriptions for social fairness. It is based on the assumption of 0.1 percent growth this year, and 0.9 percent in 2014, both numbers being more optimistic than the IMF's current forecasts, and those themselves often tend to be too sunny. There are a number of new and increased taxes, with a redistributive flavour overall, including the notorious 50 percent "solidarity" tax, which will raise next to nothing but amounts to a sort of socialistic declaration on the part of President Hollande. There are also, to be fair, some tax reductions benefiting the less well-off and small businesses. The Government keeps insisting that it is going to make meaningful expenditure savings of EUR15bn next year, although the high-flown wording of that section of the budget is so dense that it is impossible to make out exactly what is intended. Me, I'll believe it when I see it. Meanwhile, a plan in the budget to reform the existing corporate turnover tax came in for a pasting from the employers' federation, which said that the changes were "improvised and precipitate," while the budget in general is bad for the competitiveness of businesses, for growth, and for employment in France. And just in case you thought that the French Government is showing signs of realism (I don't), they came up with a proposal this week for an EU "data transfer" tax. Translated, that means an attempt to grab some of the profits which in French eyes are extracted unfairly from Europeans by US e-tigers such as Google, Amazon and Apple, only to be whisked away to "paradis fiscaux." They aren't taken to America, that's for sure, where the tax rate is even higher than it is in France. And then again, quite a lot of the profit ends up in Ireland and Luxembourg, which are EU member states, so they won't be in favor of the plan. Well, nobody will, except the French; it's just daft. Comme d'habitude.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 72nd) 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, though.

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:

Australia turns a corner

The Philippines e-progress

And Kitty's Execrations:

France dreaming

Russia doesn't get it




Tags: Euro

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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