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One of the Investment Capitals of Europe

Kitty Miv, Editor
13 February, 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.

Why does Luxembourg want to deny that it's a "tax haven"? "Profiting 'fiscally' from other countries." Well, we know why: because in dying Europe it's not politically correct to compete against other countries any more, so Luxembourg has to pretend that it doesn't have an advantageous tax regime. But it does! And its efforts to cling on to that regime are the reason for giving it a prize. While pretending otherwise, Luxembourg is engaged in fighting a rearguard action against the extension of the Savings Tax Directive and AEI (automatic exchange of information). It refuses, quite correctly, to give in to the EU's demands for a much more encompassing Directive until all of its competitor nations (Switzerland, Singapore, Hong Kong etc) sign up to similar rules, which hopefully will never be the case. Let's be clear: people should pay their taxes; but the reality of human nature is they never will until tax rates are reasonable. In fact, Luxembourgish individual tax rates are fairly high; the problem arises because it has a number of advantageous corporate structures which have helped it to be one of the investment capitals of Europe. Thus, like the City of London, it has become the target of the jealous governments of less favored and highly indebted member states of the EU, who wish to stem their loss of investment capital and accompanying tax revenue by imposing a flat, "fair" tax regime on the entire Continent. And one of their weapons is to destroy financial competition between countries, with "harmonized" tax rates and regimes. "Profiting fiscally" means having lower taxes, in less emotive language. This is called competition, and is a Good Thing, not a Bad Thing. The bad guys are the ones who tax too much. There is an argument, of course, that in a single market area, the fiscal rules should be harmonized (as they largely are in, for instance, the USA). That's correct, of course; but if that fiscal area is in strong competition with other areas, as is the case with the EU, then having harmonized high rates of taxation is suicidal, and that's where the EU is headed, unfortunately. And the bone-headed rulers in Brussels can't even see that such is the case. They just plunge on, like lemmings, to their destiny, which on current form looks likely to be economic extinction at the hands of the BRICs and their fellows. So we congratulate the holdouts: Luxembourg, Ireland, Cyprus and a few others, who are still, and who knows for how much longer, flying the flag for low taxes.

Germany is in the grips of its economically destructive Grand Coalition agreement, which we have previously had cause to criticize, and which will prevent any business-friendly tax measures from being implemented for as long as it lasts, so we should at least give a subdued cheer for Finance Minister Schäuble's determination to press ahead with an increase in the pension age, although the increase, from the current 65 (as almost everywhere) to 67 by (wait for it) 2029, is underwhelming. Life expectancy in Germany has risen by 10 years in the last 50 years to 80 years at present: that may not sound very much, but consider that post-retirement lifespan has therefore gone up from 5 years to 15, on average, while the retirement age has not changed. No wonder that the pension system is in a mess. By 2029, expectancy will have increased by a further three years (and post-retirement longevity to 18 years, an increase of 20 percent in the interim). Not surprisingly, therefore, and this is the bad news, Schäuble says that the pension contribution will have to rise to 22 percent by 2030. But even that (an increase in taxation, however it is labelled) will be wholly inadequate to fund the increased pension needs. Governments are in denial across the world on this trend, of course; it's not just Germany. The Christian Democrats know very well that they ought to increase the retirement age much more rapidly, but hobbled as they are by their partners, they can't. Germany's businesses however know that the Coalition agreement simply amounts to a recipe for increased taxes. Why did Mrs Merkel do it? Just to stay in power? Because she hadn't got the spine to run a minority government? There is no happy answer.

India's Government appears to have given up any hope of passing significant legislation through a divided Parliament before general elections take place in April this year; given that the outcome of those elections is extremely unclear, and that post-election maneuvring seems likely to be more complex than usual, it will probably be late summer at the earliest before a new Government is in place, with a Lok Sabha that might be more or less obedient to its will. Given the number of important dossiers that are pending, the GST and the Direct Tax Code among them, this can only be said to be highly injurious for the country's economic future. Among the consequences are that there will be no changes to the damaging retrospective tax legislation that was passed in 2012, and which is being abused – no lesser word will suffice – by the tax department. The Courts are going to be busy dealing with a series of very unhappy MNCs!

On a par with the Indian Finance Minister's protestations last week that his country "offers a stable and non-adversarial tax regime besides a fair and just dispute redressal mechanism" must be European Commissioner Algirdas Šemeta's claim this week that the EU's planned Financial Transaction Tax (FTT) is "a highly popular initiative, which Europeans believe in." Well OK, perhaps about three of them. Obviously both eminent gentlemen have been busy practising before breakfast in front of their mirrors. It's true that Mrs Merkel's Grand Coalition, amongst its other unfortunate betises, set out its belief in the FTT last month, but as far as I know that's the only minor support it has received, amid a torrent of negative publicity. Commissioner Šemeta calls it an "avalanche of lobby-driven criticisms." At least the man knows when he is buried!


Kitty's Encomiums and Execrations

Methodology: each week (this is the 91st) 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 at neutral, 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 neutral 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:

Germany back to the future

Luxembourg giving the EU the bird

And Kitty's Execrations:

European Union brazens it out

India in stasis


IFrame

Ciao

Kitty



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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