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One of the most complete u-turns in political history

Kitty Miv, Editor
28 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.

In life, you tend to reap what you sow, and there are few better demonstrations of how accurate this idiom can be than the condition that  France finds itself in. Francois Hollande came to power openly promising to squeeze every last cent from the wealthy and from wealth creators in taxes as a means to repair France's tattered public finances. As recent eurozone growth (or non-growth) statistics suggest, all this policy has succeeded in doing is throttling the economy. Yet worringly, despite raising France's tax burden to painful levels, the Government still looks like missing its budget deficit target this year, and Paris is pleading with the European Commission for a more flexible approach to fiscal discipline. Meanwhile, Hollande's popularity ratings have sunk in tandem with the French economy, and, in one of the most complete u-turns in political history, the President now claims to be a firm friend of enterprise, pledging tens of billions in tax cuts in an attempt to spur jobs growth. But alas, the damage looks to have been done. Hollande's apparent swing to the right has alienated him from a large swathe of the ruling Socialist Party, and after a drubbing in last year's local elections, he is fast runing out of friends. And as if economic forecasts weren't gloomy enough, there has been a dramatic rise in the number of people unable to meet their tax obligations in France. It's all very depressing, not only for French taxpayers, but also for the EU, which has its own concerns about France's ability to pay its way. It's not for nothing that privately, many senior EU officials say that France is the eurozone's "elephant in the room."

I am beginning to fear for the future of Thailand. Economically, Thailand has been one of the glowing beacons of South East Asia: in recent years its governments have generally embraced free enterprise by following pro-investment policies and this has cultivated strong export industries, a well-developed infrastructure and an unemployment rate of less than 1 percent of the labor force – one of the lowest in the world. But, as a result of civil unrest sparked by Yingluck Shinawatra's increasingly unpopular government, it now has the military in charge. The idea was that the military government would be a transitional phase, with power handed back to a civilian administration once order had been restored. The trouble is, dictatorships, even in temporary and benign form, tend to stick around after they get a taste for power, and so it has proved again, after General Prayuth Chan-ocha was appointed Prime Minister last week following a parliamentary vote in which he was the only candidate, with the whole thing seemingly done and dusted in a matter of minutes. What's all this got to do with tax? Well, shortly before this parliamentary "vote," the military-led and Orwellian-sounding National Council for Peace and Order announced plans for tax reform, including a new inheritance tax and a property tax, the details of which remain sketchy. The government's intentions are laudable enough. The idea is that tax hikes on the wealthy will subsidize tax cuts for the lowest-paid. But perhaps soldiers should do what soldiers do best – fighting wars rather than meddling with the economy. Just because the General has swapped his uniform for a suit doesn't mean he's qualified to run a government.

It seems to have taken an awfully long time, but at last some international opposition to FATCA has emerged. Just how seriously the US Government will take Serbia's doubts about the legality of this insidious law is another matter. One suspects not very much at all, if it even registers on the scale on H Street. I should clarify that it is not the Serbian Government as such which has raised concerns about FATCA's extraterritoriality, but the country's Information Commissioner, Rodoljub Sabic. The Commissioner's English language press release isn't easy to follow, but the gist of it is this: banks must obtain clients' consent before sending their private financial information to the US tax authorities; banks would break the law if they subsequently declined to offer services to clients refusing such consent; FATCA can only be enforced in Serbia via an official treaty with the US ratified by the Serbian legislature; and FATCA breaches Serbia's own data protection laws, as well as the EU Convention for the Protection of Individuals with regard to Automatic Processing of Personal Data. Serbia hasn't signed a FATCA IGA yet, but it is treated by the US Treasury as having reached an agreement in substance on June 30 this year. So presumably that will be that, and the Information Commissioner can sound off as much as he wants. But mighty oaks from little acorns grow. And it follows news that the Canadian Government is being taken to court by long-term residents of US birth who have found themselves entwined in America's tax web. The two plaintiffs have not lived in the US since early childhood, and they never obtained a US passport or developed meaningful ties with the US. One of them asked why she is being treated as a potential US tax evader merely because of her place of birth, stating: "This was not the Canada our brave Fathers of Confederation envisioned. FATCA destroys our unity and we cannot permit the loss of our sovereignty." Enough said!

I don't normally hand out encomiums to countries introducing new taxes, but in the case of India it might just be warranted. India has had plans on the drawing board to introduce a goods and services tax for about 20 years. The proposals are now more or less complete but administration after administration has failed to jump the last hurdle due to opposition from state governments unhappy at the prospect of losing tax sovereignty. It should be pointed out that the GST isn't an additional tax as such, but replaces a cornucopia of existing taxes including central sales tax, the state sales tax, entertainment tax, lottery tax, electricity duty, and value-added tax, and some economic commentators have suggested that replacing several inefficient taxes with one slightly less inefficient one could actually contribute towards economic growth while boosting the coffers of the central and state governments. That remains to be seen. It has to happen first. Encouragingly, Finance Minister Arun Jaitley wants the new Government to sew up the GST reforms as quickly as possible. If recent history is anything to go by, that'll be the day! This is a government that has pledged widespread legislative and administrative change and is attempting to carry it out through a bureaucratic machine that seems very change-resistant. If nothing else it's a signal of intent, and I am prepared to cut Jaitley a little slack if things don't quite go according to plan in the early months.

 

Kitty's Encomiums and Execrations

Methodology: each week (this is the 119th) 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:

India a good tax?

Serbia questions FATCA

And Kitty's Execrations:

France l'éléphant

Thailand soldiers in suits

 

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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