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Some things, at least, never change

Kitty Miv, Editor
18 July, 2017

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.

They say that there's no such thing as a temporary tax hike. If so, the corollary to this maxim should be that there's no such thing as a permanent tax cut.

The reality is that life isn't quite as simple as that, and governments aren't always as mean to taxpayers as is often made out (including by this commentator!).

We've had two examples of countries not living up to this rule of thumb in recent days and weeks.

In one of potential significance, Germany's Christian Democrat Union (CDU) has proposed phasing out the far-from-beloved solidarity tax, which was introduced as a fiscal buffer when the East Germany's basket case of an economy began to merge with the West more than 25 years ago.

Looking in from the outside, it would be hard to disagree with those who say that the solidarity tax has served its purpose. Aside from small remnants of the Berlin Wall, and the austere Soviet architecture in the city's east, if you walked the streets of the German capital today without any knowledge of the city's history, there'd few clues to its former divide.

Statistics do show that the East German economy still lags West Germany's quite substantially. According to The Economist, in 2015, on the 25th anniversary of the fall of the Berlin Wall, GDP per capita in the East was two-thirds of that in the West, and unemployment was also significantly higher. 

At the same time though, the same figures indicate that the economic lot of easterners has improved markedly since reunification, and in terms of infrastructure, the East is more or less up to Western standards. What's more, as The Economist points out, Germany is probably no more economically divided between east and west now as Italy or the United Kingdom is between north and south. So maybe the "soli" has done its job.

On the other hand, there will be those who will argue that the CDU's proposal is nothing more than a cynical election ploy, and that it shouldn't be playing politics with such an important and symbolic measure. It could be said that the "soli" is more than a mere revenue raiser, and represents the spirit of solidarity between East and West.

But then it was never intended to be a permanent tax. So perhaps the CDU deserves some credit for breaking one of the fundamental unwritten tenants of taxation – "thou shalt not repeal a temporary tax."

As I pointed out at the start, following on from this rule is the one that proclaims "thou shalt not permanently enshrine a tax cut." But even that rule hasn't held fast recently.

I refer to Ireland, where in the depths of the financial crisis, the Government of the day introduced a temporary reduction in the rate of value-added tax for tourism and hospitality-related services, at a time when the Irish economy needed all the help it could get. Several years on, the Irish economy is almost roaring like the Celtic tiger of old, yet there have been few indications that the Government intends to restore VAT on these services to 13.5 percent from nine percent. Until now.

According to new Finance Minister Paschal Donohoe, the temporary tourism VAT cut, like Germany's solidarity tax, has "done its job," suggesting that the end is nigh for this temporary tax break. He didn't say it in so many words – starting your career as a finance minister with a tax hike is hardly going to win you any popularity contests – but perhaps we can expect the measure to be buried in the fine print of the next Budget. Some things, at least, never change.

Something else that is becoming commonplace is South Africa's seemingly insatiable appetite for tax revenue. Indeed, the poor country appears to be in a right old fiscal mess!

This is no laughing matter of course if you happen to be a taxpayer or investor in South Africa. And news that the most recent round of tax hikes, announced in the 2017 Budget earlier this year, have had virtually no impact on revenue streams, will probably be making you nervous. Because this can only be leading to one thing: yet more tax hikes.

South Africa has managed to avoid tax increases of the more damaging variety in recent years. By which I mean personal income tax for low- and middle-income taxpayers (i.e. the majority of voters), value-added tax (which affects all voters), and corporate tax (which affects large investors).

Indeed, it is somewhat surprising, even though it would be an unpopular move, that the Government has taken up the option of increasing the standard rate of VAT; at 14 percent, it is comparatively low, and raising it was a key recommendation of the Davis Committee on tax reform.

Corporate tax, although relatively high at 28 percent, would probably be a politically-acceptable way to increase additional revenue, but might not be sound policy economically, especially given the alarming slide in the country's rate of economic growth.

Nevertheless, I don't think I'd be sticking my neck out too much to suggest that it's not a question of if more tax hikes are coming, but rather where and when they will fall.

On a similar theme, Japanese Prime Minister Shinzo Abe got the news he probably least wanted to hear from an economic point of view recently – that tax revenues have fallen .

Famously (or infamously), Japan's fiscal situation is even more dire than South Africa's. Its public debt has grown to a level that is difficult to comprehend, and it can't even begin to start paying it down until the Government's budget is balanced, which won't happen until 2020 – a target that is looking increasingly optimistic. And this is before we consider the fiscal impact of an aging society, which is expected to drive up social security expenditure markedly in the coming years.

So where does Abe go from here? The same place that Japan always goes in a fiscal crisis – the consumption tax. Inevitably, a debate about it has already begun in Japan following the recent revenue development.

To raise, or not to raise, is usually the question. But, believe it or not, this time around, there is a group of lawmakers in parliament arguing for a consumption tax cut on the grounds that it would help stimulate the economy, and in turn restore tax revenues to growth.

They might be right. Or they might be way off the mark with this. But that there is such a dichotomy of opinion on wider fiscal policy in Japan is something of a worry, and is an indication perhaps that nobody in Japan knows what the answer is any more. After all, how do you repay a debt of one quadrillion yen (that's about USD10.5 trillion) when you're living beyond your means? It certainly is a most consuming predicament.

 

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

Germany solid

Ireland hospitable

Kitty's Execrations

South Africa mess

Japan consumed


Ciao

Kitty


Tags: Government


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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