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Not many have backpedalled faster

Kitty Miv, Editor
04 October, 2016

Kitty's Country Rankings are below, with a description of how they are compiled. 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.

There has been a generally underwhelming response from businesses in France about the Government's long-trumpeted plans to install a 28 percent intermediate rate of corporate tax. Earlier this year, Medef, the main employers' association in France, slammed the proposal as a "half-measure" that would provide only a modicum of tax relief to a relatively small number of companies, much of which will be offset by the increased complexity and compliance costs brought about by having to account for an additional tax rate. That may be true, but the 2017 Budget could have been a lot worse for taxpayers, especially if the current Government had gone on as it started back in 2011, when it began its life raising tax left, right, and center. Indeed, if it had carried on in that vein, there would have been scarcely anything left untaxed by now. So perhaps French companies should be grateful for small mercies. Not many governments in the history of the world have backpedalled faster on tax policy – and largely for the better – than the Government of President Hollande.

Now, from a country which many believe pays too much tax, to one where hardly any is paid at all: Nigeria. So, at first glance, the headline that the Government is considering a tax amnesty is hardly going to make people fall off their chair with excitement, even though most studies point to the fact that tax amnesties are generally a bad thing, especially if repeated, because they tend to erode compliance rather than foster it. However, it is still a story worth noting. Because in Nigeria's case, its problems aren't so much with a lack of tax compliance, but a lack of taxpayers. According to data used to compile the Heritage Foundation's Index of Economic Freedom, tax revenue as a percentage of Nigeria's economy was just 6.1 percent in 2015. And the majority of this revenue came from the oil sector. I fail to see therefore, how a tax amnesty is going to help Nigeria out very much. Indeed, in the long-run, it could be counter-productive.

The logical extension therefore is that Nigeria needs more taxpayers, rather than more taxes, which is the course it is currently pursuing to fill a widening fiscal void. However, I suggest that Nigeria takes a leaf out of South Africa's book. There, the tax authority has done a remarkable job in expanding the tax base, from just 1.7m registered taxpayers in 1994 to 15.4m in 2013. Furthermore, the half-a-million businesses registered for tax in 1994 had swelled to 2.2m by 2012. And South Africa's tax-to-GDP ratio now sits at a more workable level of 27 percent. Still, I wouldn't advise Nigeria to follow Pretoria's fiscal policy entirely. Because, somehow, South Africa has contrived to end up with a substantial budget deficit, despite compound revenue growth rates of 15 percent per year until relatively recently. And therein lies the rub, you could have the most efficient tax system in the world. But if the Government can't stop itself from spending more than it receives, well, we all know what happens...

What happens is you get situations like the one in Australia, which put most of its eggs in the commodities basket shortly before watching commodity prices go rapidly south along with economic growth and tax revenue. Now the Government is resorting to desperate measures, and is, quite frankly, beginning to make itself look a bit silly having backtracked on the so-called backpacker tax.

The Government may be justified in pointing out that it was the economic and fiscal policies of the previous Labor Government that landed it in its current mess. But that's by the by now, and seems to be the stock excuse when a Government falls short on its promises i.e "it's the last guy's fault!" I'm sure the Government could find an equivalent amount of revenue quite easily from less visible sources. But backpackers do seem like an easy target, especially as most of them are not entitled to vote, and will probably be gone by the time the election comes around anyway.

If Australia were in the European Union, it might not be allowed to get away with a caper like the backpacker tax. Because as a member of the Single Market, it would be prevented from treating its own taxpayers differently to those of other member states. In such a scenario, it could well find itself the recipient of a "reasoned opinion" from the European Commission, followed by a request to change the offending legislation. And if it wasn't careful, it could find itself hauled up in front of the European Court of Justice, because there's one thing that the Commission won't be, and that's ignored. This is what Germany found out recently when the EC took severe umbrage at its lack of a response to concerns about the compatibility of a new road pricing scheme with EU principles.

Whether you agree with the Commission, and its increasingly aggressive policing of the EU tax framework, I suppose, ultimately, Germany has only itself to blame here, firstly for not properly thinking through its plans, and secondly by hoping that the Commission would eventually just go away. But the Commission rarely just goes away. What's more, it tends to fight cases to the bitter end, increasing uncertainty facing travelers to and from Germany, as well as businesses.

Still, what I find never seems to happen is the Commission hauling member states across the coals for discriminating against its own taxpayers. Take the UK for example, where drivers, particularly in the haulage sector, have long complained that European motorists, used to paying tolls to maintain trunk roads in their own countries, get to drive the largely toll-free highways and byways of Britain without shelling out a penny in taxes or fees for up to six months (after which they must register their vehicle, although the requirement was rarely enforced until recently). Meanwhile, keepers of British-registered vehicles are subject to an annual road tax. Yet, the Europeans don't reciprocate this apparent generosity by exempting Brits from toll charges on their first few forays down the autoroutes, autopistas, and autostradas of the EU. No wonder so many of them are upset!


Kitty's Encomiums and Execrations

Methodology: each week (this is the 147th) 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

France petit mercies

Kitty's Execrations

Nigeria shamnesty

Australia silly

Germany culpable



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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