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Middle England is a key election battle ground as ever

Kitty Miv, Editor
14 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.

A bit of an individual theme to this week's blog, and we start in the United Kingdom where Prime Minister David Cameron would "love" to give financially hard-pressed Middle England (in the income sense) a tax cut by raising the earnings threshold at which the 40 percent income tax rate kicks in. This year the starting point of this intermediate rate is GBP41,865, although effectively it bites after the first GBP31,865 of income once the GBP10,000 tax allowance is factored in. Historically, such upper rates of tax have been designed to hit wealthy, high income taxpayers. However, few people earning just over GBP40,000 a year would consider themselves "wealthy" these days. But then governments can play all sorts of sneaky tricks on taxpayers using progressive tax rates, often without them realizing. For instance, although the UK's top rate of personal income tax is 45 percent, the highest marginal rate is actually nearer 60 percent for those earning between GBP100,000 and GBP116,000, because for every GBP2 earned above GBP100,000, GBP1 of one's personal allowance is lost. However, although everything seems to be going swimmingly for the Coalition Government in economic terms – the UK will likely have the highest rate of growth in the G7 this year – it is only part-way through a fiscal retrenchment program and has put most of its tax eggs into the business basket by giving companies a substantial eight percent income tax cut, leaving little room for tax gifts for individuals; personal income tax receipts account for almost a third of the Government's overall tax take – the largest single of revenue – and corporate tax is relatively small by comparison. It's probably no coincidence that Cameron chose to talk about this with a general election less than one year away and Middle England (in the income and geographical senses) a key election battle ground as ever. At least his intentions are good even if he knows nothing will change drastically anytime soon.

Governments certainly benefit from being rather lazy with tax thresholds, which somehow seem to move much slower than earnings growth, so that more and more people fall into higher rate tax bands each year. This phenomenon is usually referred to in tax circles as "bracket creep," when tax bands fail to keep pace with wage inflation. Germany has its own phrase for it however, which translates as "cold progression." But while Cameron has at least expressed a desire to thaw the cold progression, the German Government has consistently rejected all calls to give German taxpayers a break by shifting tax thresholds for a number of years now, with the latest rejection coming through a spokesman for Chancellor Merkel. It seems something of a mean-spirited stance given that the Government has eradicated its budget deficit, and the German economy, until recently, was ticking along nicely, producing record tax revenue hauls. However, not all is sweetness and light in Germany right now. The economy is expected to more or less flat-line this year as the economic conflict with Russia hits one of Germany's key export markets. What's more, Germany is also deeply in debt, to the tune of about 80 percent of GDP, and it is still effectively propping up the economies of the eurozone. One suspects that Merkel, like Cameron, would like to tackle the problem of bracket creep, but is similarly hamstrung by tight fiscal conditions and political necessity; Merkel's CDU is in coalition with the center-left SPD, which has promised to veto such a move unless wealth taxes are hiked. At least Cameron acts as if he's on the side of the taxpayer.

Spare a thought, however, for Belgium's oppressed taxpayers, who currently carry the largest tax burden in Europe according to a recent study – and that's up against some pretty stiff competition. The Brussels-based Institut Économique Molinari found that most Europeans celebrate "Tax Freedom Day" – the notional day when taxpayers' income stops funding state expenditure – in June, reflecting the fact that European governments generally take about half their citizens' income in tax. It's a shock, but not a surprise given that western and northern Europe in particular has long been the most highly-taxed place on earth. It was slightly disturbing to learn though that Belgians had to continue effectively working for the government until August 6. That's just over seven-twelfths of the year, or just shy of 60 percent. It's difficult to know whether Belgians are getting value for money here. Clearly there has been heavy investment by the state in transport infrastructure because apparently Belgium's road network is one of the densest in the world. But get in a car in Belgium and drive no more than an hour or so in any direction and you'll arrive somewhere else. At least this gives Belgians the ability to escape I suppose. The irony is that sometimes you don't even get a government at all for your money in Belgium. Following elections in 2010, it took 589 days for a government to be formed, largely as a result of deep divisions between groups representing the Flemish-speaking north and the French-speaking south. And now it's happening again. Following elections on May 25, Belgium has drifted ungoverned, with few signs of a consensus breaking out anytime soon. Governments – who needs them!

With the deadline to implement the World Trade Organization's Trade Facilitation Agreement having been missed, the Trans-Pacific Partnership negotiations held up by Japanese intransigence, protectionist policies in some emerging economies and ongoing trade spats between the EU, the US and China, it has been a bit of a bleak period for believers in free trade. But at least there is Canada. It has taken a number of years for the free trade-skeptic President Obama to soften his protectionist views and embrace the TPP among other multilateral trade agreements. But Canada under the Government of Prime Minister Stephen Harper has been flying the free trade flag proudly and has just tied up its most ambitious free trade deal yet, with the European Union. Canada has FTAs in force with just 12 countries at present, most of which were agreed under the current Government, to the US's 20. But Ottawa probably the most ambitious trade program of any country in place. Negotiations with 60 nations are underway, including as part of the TPP, and a global trade action plan targets key emerging markets like India and aims to get SMEs involved in foreign markets. South of the border, a more cautious President Obama continues to insist that trade agreements should be "fair" as well as "free." There are few indications that the Canadian economy is suffering as the Government continues to open it up. Trade Minister Ed Fast claimed that 2013 was Canada's most successful in terms of international trade, and Canada moved up from 13th to 12th in the WTO rankings of the world's leading merchandise exporters. So you could say that what's good for the goose is good for the gander!


Kitty's Encomiums and Execrations

Methodology: each week (this is the 117th) 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 trading freely

United Kingdom good intentions

And Kitty's Execrations:

Belgium over taxed

Germany cold progression




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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