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SME's represent 90% or more of all companies

Kitty Miv, Editor
24 January, 2013

Kitty's Kountry Rankings are below, with a description of how they are kompiled. This week, as every week, I give out three Encomiums to countries which have done Good Things, and award three Execrations for countries which according to my highly personal and partial views have done Bad Things.

Singapore has had a good week, being named the world's most dynamic country in a Grant Thornton survey, while it continues to try to help its SMEs to take advantage of the generous tax breaks available through its Productivity and Innovation Credit. Many countries pay lip service to the need to encourage their SMEs, while continuing to strangle them with regulation and taxation. Figures continually show that SME's represent 90% or more of all companies and generate all of or even more than total net employment. That's to say, bigger companies actually lose jobs overall. But of course that may be because they 'offshore' them or employ technology effectively to improve productivity. If SMEs can be faulted, it is indeed that they tend to be too labor-intensive, with their attention fixed so hard on the daily grind that they fail to innovate when they could. Singapore knows this, apparently.

One man in Europe who does understand the need to support SMEs is Ireland's Finance Minister Michael Noonan, who announced a set of measures to improve funding and cash-flow for SMEs this week. He also says that Irish banks will provide US4bn of finance to SMEs this year. 'Irish banks' is nowadays almost a euphemism for the state, given the tens of billions of support that Ireland gave to its banks, and which drove the country into its bail-out. I didn't and don't approve of such 'rescues' which destroy more assets than they create, but if the banks then do actually help business rather than shrinking their balance sheets because of new capitalization rules from Brussels and Basle, then, a bit grudgingly, I have to award a mark of approval.

China comes out well from a new analysis of international trade flows conducted by the WTO and the OECD. These unlikely bed-fellows (the OECD believes that the more tax, the better, while the WTO believes the opposite) show that on a 'value-added' basis, China's trade surplus with the USA falls by 25%. The size of the trade surplus has always been one of the US administration's main complaints against China, along with its supposedly over-valued currency. So, with statistics you can prove anything; but this is actually very thought-provoking. If a gadget that goes into a Chinese mobile phone that is sold into the US was produced in the Philippines and further processed in Vietnam before being assembled into the phone in Ghangzhou, then it may be taxed three times before arriving in Philadelphia, depending on the presence or absence of trade treaties between the various country pairs, and it's the gadget's final value that will find its way into the China/US trade figures. Another myth that such figures call into question is the role of 'offshoring' in worsening the trade surplus. If a US company produces the gadget through its subsidiary in the Philippines, albeit the profits remain deferred from the IRS's perspective, is this not better for the US than if an indigenous Filipino firm produces the gadget and sells it to Vietnam? Comparative advantage can't be wished away, and it's wrong even to try.

Faced with a barrage of criticism from businesses and foreign investors, the French government went on a charm offensive this week, announcing a range of business-friendly tax measures, including for the sacred SMEs. But in truth, there was nothing new other than some fresh good intentions, and we must remember that the EUR20bn of apparent tax incentives through the CICE is merely compensation for new taxes that were loaded onto the economy last year, and only part compensation at that. The remainder of the government's deficit reduction program is supposed to come from cuts in public expenditure; well, this is France we are talking about and I'll believe in the cuts when I see paving stones being thrown around in the streets of Paris. In fact the government was busy planning yet more taxes during the week: unemployment insurance contributions for short-term contracts are go up; and the dwellings tax is to be linked to household income, which will be a typically socialist redistributive measure, although not until 2014. So, another black mark!

Normally I would be complimenting any country that reduces taxes, but things aren't normal in Japan, with national debt heading for 220% and a newly-elected government which has a cavalier attitude towards economic rectitude. It's throwing a Keynesian pile of trillions of yen at infrastructure in an attempt to light a fire under the economy, and it may work in the short-term, but if history is any guide, won't be of any long-term help at all. Now, after years of inter-party struggle, the consumption tax rises which everybody (except most Japanese) agree to be critical to reforming the economy are to be negated by populist spending. Japan has had more than its fair share of disasters lately; it didn't need such a government. Obviously, not knowing the language, and at such a distance from the country, I don't understand the political dynamic. In fact I am baffled. But I know a mistake when I see one.

Now for some fun: we're going gambling! But be careful, if there's money on the table and if the Cyprus tax police catch you playing bridge or poker or gin rummy, they'll arrest you. It's one of the (many) countries in which only the State is allowed to offer gambling, but of course the odds are terrible, so everyone pours across the border to the Turkish-occupied North where casinos line the streets. On-line gambling is prohibited, naturally. Strangely, bingo is allowed, perhaps in deference to British pensioners; the prisons are already bursting, so where would they put all those criminal British grannies? In Sweden, Italy and in Spain, the tax authorities try to collect tax from poker players, and Spain has just announced a pogrom against them. Silly me, I can't see the difference between taxing the mafia and taxing professional gamblers, if both activities are illegal. Do the Italian tax authorities shut their eyes when a Sicilian farmer with a smallholding declares and pays tax on a declared income of half a million euros? Or do they report him to the carabinieri? In the case of a poker player (and the Italians estimate that 4,000 players made EUR100m last year at it) presumably they just take the money and smile out of clenched teeth. Well, leaving aside the moral dimension, which is fairly slippery if not outright dangerous ground, let's consider the likely results in Spain. Naturally I agree that a Spanish resident who makes EUR200,000 profit from professional poker-playing should pay tax on it; it's part of her world-wide income, even if she made it in tournaments in Costa Rica. But she has a few defences: first being costs, including business-class travel, bodyguards (tricky places, casinos), clothes (designer couture is de rigeur at these tournaments). Naturally the tax authority will accept all such deductions, won't it? If it doesn't, or even perhaps if it does, our heroine will wonder about the pearl necklace she bought for cash out of the side bets she made on her performance in the tournament. You can't blame the tax authorities for trying to uphold the law, but you definitely can blame the governments concerned for allowing such a travesty to continue. The Spanish ought to legalize gambling, set up international tournaments in Barcelona, give incentives to attendees (low, flat-rate final withholding tax), and create a 'gaming box' like a 'patent box' or an 'interest box' with lower income tax rates. And pigs may fly. If they continue to persecute their poker champions, however, they'll quickly find they haven't got any.

Kitty's Encomiums and Execrations

Methodology: each week (this is the 36th) three countries are given encomiums and 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 has a ranking of – 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, falling back again in week 24 to minus two.

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:

China figures

Ireland lends a hand

Singapore top of the class

And Kitty's Execrations:

France good at spin

Japan on the primrose path

Spain Texas hold-up




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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