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Political Gimmickry

Kitty Miv, Editor
15 June, 2015

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.

Legislation designed to bind governments to maintaining a budget surplus might initially sound like a good idea. But are such laws mere political gimmickry? I’m still trying to work out whether or not to take George Osborne’s proposal for such a law in the United Kingdom seriously. In actual fact, the UK had a budget law for a brief time before the end of the last Labour administration, called the Fiscal Responsibility Act. This committed whichever party was in government to halve the deficit in four years. But the Conservative-dominated coalition repealed it in 2010 after Osborne disparaged the law as “vacuous” and an irrelevance. Which hardly helps him to make the case for a similar law now. What’s more, if the Tory Government’s fiscal plans come to pass, it will have eliminated the deficit by the end of its current five-year term anyway, and presumably, if it wins another election, it’s not going to go on a sudden irresponsible public spending surge. If it doesn’t get voted in again, recent history shows that its replacement could simply repeal the law anyway. I suspect what’s really going on here is Osborne’s determination to paint his party as fiscally virtuous, and tar Labour – searching for a new direction after the disastrous Ed Miliband years – as fiscally wanton, even before they’ve had a chance to reinvent themselves. On the other hand, I’m growing a little weary of hearing economic commentators say that this will be a bad idea because deficits are a good thing. It would be impossible, so their argument goes, for governments to invest in such things as infrastructure and other growth-inducing projects without borrowing. After all, debt-financed investment is common in the corporate world, and most small businesses probably wouldn’t get off the ground at all without at least some leverage. Yes, that’s true, but governments aren’t businesses. Not subject to the same commercial and competitive pressures, governments are very different animals altogether. In fact they are the sort of creature that is very good at spending money, but not very good at generating it, apart from through excessive levels of taxation, of course. With government after government around the world proving to us that they are largely incapable of restraining themselves, surely some kind of externally enforced discipline is no bad thing? Besides, how would Britain ever hope to reduce its debt, which currently stands at 80 percent of GDP, if deficits are the norm and surpluses are the exception? And this of course applies to any other country with dangerously high sovereign debt. Okay, the Osborne law probably is a gimmick, but the era of profligacy with public money has to come to end at some point, so I’m going to award an encomium.

Colombia’s recent economic track record is quite remarkable given the internal strife that continues to blight the country. Large swathes of rural Colombia remain no-go zones for those not affiliated with the FARC guerrilla movement, which the Government has been battling (literally) for 50 years. Yet, the economy has been growing at a very respectable four percent a year for the past four years, stretching a trend of unbroken economic growth which has lasted a decade. Colombia also attracted record levels of foreign investment last year after all three international credit rating agencies upgraded the Government’s debt to investment grade. Not bad for a country seemingly in a perpetual state of civil war. It’s also pretty impressive when you consider how bad the country’s tax system is. As the OECD pointed out recently, the combined statutory corporate tax rate of 34 percent (consisting of the 25 percent headline corporate tax and a nine percent “equity” tax on corporate income) is high even by OECD standards. But it gets worse. According to PwC, the total tax rate, made up of corporate taxes, labor taxes, and other taxes paid by businesses in the country, is a whopping 75 percent. Out of the 189 economies in PwC’s annual Paying Taxes survey, only six have a higher total tax rate (Palau, Tajikistan, Eritrea, Bolivia, Argentina, and, topping the list, Comoros, if you’re curious). Coupled with the fact that it takes businesses 239 hours on average to comply with their taxes, Colombia gets a very bad score indeed from PwC, and an overall ranking of 146th. Presumably, investors must be finding ways around these taxes (legitimately of course!) otherwise you’d expect foreign investment levels to be a lot lower. But just imagine what an economic powerhouse Colombia could be if it had a more sensible tax system.

If the Paying Taxes index is a reliable guide to a country’s corporate tax environment, then my next subject, the Philippines, doesn’t fare much better (ranked 127th, with a total tax rate of 42.5 percent and a 193-hour average compliance time). Ironically, one of the problems with the Filipino tax system is the array of tax incentives on offer, which might actually be serving to deter investors rather than encourage them to establish operations in the country. At present, the Philippines has 211 special laws that provide numerous tax incentives from some 14 investment promotion agencies (IPAs), with each IPA operating differing and competing tax regimes. The estimated cost of FIs in the country in 2012 was PHP157bn (USD3.5bn), after PHP144bn in 2011 – over 10 percent of government revenues in both years. It would appear that this clunky tax system has already damaged the country’s reputation with foreign investors, with the President of the European Chamber of Commerce of the Philippines recently saying that companies relocating from China are overlooking the Philippines in favor of other ASEAN (Association of South East Asian Nations) hosts, with Vietnam seemingly becoming the location of choice. However, the Government has at least responded to these concerns with the proposed Tax Incentives Management and Transparency Act, which was passed by the Senate last week. Not that the legislation really gets to the root of the problem; it merely provides a framework for the Government to assess the effectiveness of the myriad tax incentives, rather than redesigning and simplifying them. It’s a start at least, and a lot of governments probably wouldn’t manage to go this far, so the Philippines does make the good books this week.

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.

Kittys Encomiums

United Kingdom prudent

Philippines getting there

Kittys Execrations

Colombia overtaxed

 

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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