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Tax Professionals Gasp With Horror

Kitty Miv, Editor
28 May, 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.

A re-run of the classic tax western is taking place in the Philippines, in which the bad guys want to raise taxes in all directions while the good guy (Ronald Reagan?) believes that reducing tax rates will result in more tax being paid. The part of the Gipper is being played by Juan Edgardo "Sonny" Angara, who wants to  cut the country's 30 percent corporate tax rate (the highest in South-East Asia), while tax professionals gasp with horror, needless to say. Well, how's about some facts? In April, the Philippines Department of Finance disclosed a 26 percent rise in collections of import duties, taxes and fees in the first quarter of the year. In money terms that's equivalent to USD500m (USD2bn annualized), while our hero predicts a loss of just USD160m in corporate tax receipts in the first year of his rate reduction program. Last year there was a primary surplus, and the full deficit was just 1.4 percent of GDP, less than forecast. The increase in customs collections is probably mostly due to the so-called "sin tax" package, whose main component was a quite savage increase in excise taxes on locally-produced hooch, forced on the country by the WTO after a long battle to level the playing field with over-taxed alcohol imports. That's to say, the increase is no flash in the pan, but is likely to be permanent. The one thing the tax-increasers have on their side, sort of, is that total tax collections amounted to 13.4 percent of GDP last year, up from 12.9 percent in 2012, due to a combination of increased collection efficiency and those sin tax increases. This is one of the lowest percentage figures in the region, or anywhere, and as in other less-developed countries such as Pakistan it is due to the fact that tax-paying is largely voluntary for the professional classes. The President, the benign Benigno Aquino, has set his face against mainstream tax increases, and is waging war against corruption. This seems to be exactly the medicine that is required and is already paying dividends. So we are on the side of the good guys: cut tax rates, root out corruption, and turn a deaf ear to the IMF.

To set the Philippines' 13 percent tax take into perspective, let's look at a report from the IMF's Terrible Twin, the OECD, "advising African nations on how to boost their tax revenue collections to foster sustainable development." The OECD says that low-income African countries score an average tax take of 16.8 percent of GDP, while middle-income countries score 19.9 percent, and upper-middle income African countries score 34.4 percent, "close to the OECD average of 35 percent." Now here's the kicker: the United Nations considers that 20 percent is the minimum that allows a country to achieve its Millennium Development Goals, including the eradication of extreme poverty. My question is obvious: what connection has the level of tax collections got with poverty? Here are some basic, incontestable statements:

  1. Taking money from people makes them poorer, not richer;
  2. Money taken by African governments (and others) is mostly stolen or misspent on agendas that have nothing whatsoever to do with the wellbeing of poor people;
  3. The way to help poor people get richer is to get government off their backs and encourage them to be entrepreneurial.

I am not crass enough to suggest that there were no deserving poor people in the UK or the US in 1910, but let us remember that the governmental tax take in these two countries at that time was 11 percent and 9 percent respectively, and they were the two richest countries in the world.

It is an outrage of the first magnitude for these teams of fat-bellied, ignorant, arrogant officials from the IMF, the OECD and the United Nations to prance about the world on their expense accounts telling finance ministers to steal even more money from the poor. The very best thing to do for the poor would be to abolish all of these excrescences right now and force their staff to get jobs in the real world where they might just be able to contribute something useful to the human weal.

I am starting to sound like Chairman Mao, probably, so time to look for a piece of news that doesn't make my blood boil, and here is a welcome announcement that an international pro-FTZ organization will set itself up in low-tax Dubai. As any regular reader of this column will know, Free Trade Zones (or their equivalents) are a Good Thing, while governments that exclude or limit them are a Bad Thing. It's not immediately clear whether the new organization has support from the great and good of the world economic order, or whether it has any kind of reasonable financial footing; but it is welcome nonetheless, and Dubai, which is already home to a large collection of free trade zones, gets a large bouquet for supporting it. At the risk of becoming boring (just move on) let me rehearse some of the reasons why most governments dislike and discourage free trade zones, if they don't ban them outright like the dinosaur European Union. We could classify the opposition to free trade zones into three groups: the doctrinaire; the simplistic; and the corrupt.

The EU provides an example of doctrinaire opposition. It doesn't believe in competition, period. Since all human interaction is based on the principle of competition, and free trade zones at their most basic exist in order to give a competitive advantage to certain types of activity or certain locations, there is really nothing more to be said. Actually the EU goes quite far in the opposite direction, by subsidizing uncompetitive activities and locations, which is the very negation of constructive economic activity. Well, we will leave it to moulder.

Simplistic opposition to free trade zones is a case of not seeing the wood for the trees. Most often, it is displayed by finance ministries which cannot tolerate the "loss" of tax revenue consequent upon giving free trade zone companies corporation tax holidays. This loss, which does exist, is usually very minor by comparison with the extra tax revenues generated by increased employment: one worker earning say USD50,000 per annum generates at least USD20,000 in additional payroll and associated revenues for the government, plus the saved cost of supporting him on the dole, while the profit he generates for his employer is small in comparison and the tax lost on it is a tiny fraction of the payroll revenues that are gained. But the bone-heads in the treasury see only the "lost" tax. For them, the new job created is in replacement for a job lost "outside" the free trade zone. Competition, again, provides the answer: the existing job was going to be lost anyway, if it had not already been lost, whereas the new job is a net gain. The poor saps can't see it.

Corrupt opposition can be dismissed almost as easily as the doctrinaire. Most governments in the world are corrupt to a greater or lesser degree, and most of this corruption depends on income flows which can be diverted to abusive purposes. Some of this income comes from international assistance programs (more poor saps) and some from out-and-out bribery, but most of it comes from tax revenues. A minister who is raking off 15 percent from corporation tax revenues from mineral processing in an un-named third-world country (not very greedy by prevailing international standards) is going to be very opposed to a free zone in which processing plants have 10-year tax holidays.

So the wonder is that there are any free trade zones at all. I hope the new organization knows what it has bitten off, and doesn't find its own bits and pieces missing in the morning.

Kitty's Encomiums and Execrations

Methodology: each week (this is the 106th) 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 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 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:

Dubai gets a free-trade medal

The Philippines getting something right




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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