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Taxpayers are getting restless

Kitty Miv, Editor
06 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.

Flat taxes were all the rage in the not-too-distant past. But have they had their day? Latvia seems to have fallen out of love with them.

Flat taxes, normally defined as a single rate of tax on personal or corporate income, or in some cases both, are often associated with Eastern Europe, where countries embraced these supposed pro-growth tax policies as they emerged from the economic straight jacket of the Warsaw Pact. But they are found in all corners of the world, from Abkhazia to Tuvalu.

Nevertheless, it was Eastern Europe that many countries looked to when debating the merits of flat taxes versus progressive taxation, including the United States. Indeed, the region has been something of a massive laboratory performing a mass flat tax experiment.

So what can we glean from the results? To my mind, they are inconclusive. Undoubtedly, flat taxes are easier to understand, comply with and administer than progressive systems with their many brackets, marginal rates, and unintended glitches. But whether they are fair is moot, and is always likely to be.

Flat tax proponents would argue that the economic benefits reaped from simpler, lower taxes would outweigh any concerns about fairness. But then there is no hard evidence that flat taxes have driven economic growth in the countries concerned. There could be a range of reasons why an economy grows, and there is simply not enough space here to explore that tangent.

Critics would also say that flat taxes did little to insulate the economies of Eastern Europe in the financial crisis. And they may have actually contributed to fiscal weaknesses in the region as revenues fell. Indeed, there is a growing list of countries which have abandoned flat tax regimes in favor of more progressive taxation, and this includes Albania, Czech Republic, Montenegro, Slovakia, and Ukraine. As mentioned, these will soon be joined by Latvia.

There may have been political rather than purely economic or fiscal reasons for these u-turns, mainly that the governments in question wanted to restore "fairness" to the tax system. Whatever the reason(s), perhaps the tide has turned against the somewhat short-lived flat tax revolution, at least in Eastern Europe.

I'll tell you something else that also might have had its day: the internal combustion engine.

I don't want to get drawn into the debate on whether man-made climate change is taking place or not, but you'd have to be an uber climate-change sceptic to deny that air quality for the inhabitants of and visitors to most major towns and cities across the world is bad, and in some cases, shockingly so. And it is just as hard to refute that the internal combustion engine – particularly of the diesel variety – is a major culprit. Singapore certainly thinks so, which is why it is cutting taxes on electric vehicles.

I have few doubts that humankind is capable of making the required technological shift to turn things around. After all, the period between the first tentative flight by the Wright brothers and putting a man into orbit took only a half a century. But, innovation may need a helping hand, and this is where tax policy can play its part.

We are already seeing increasing use of the stick to discourage industry from belching out plumes of carbon and other toxicants in the form of carbon taxes, pricing schemes, and environmental levies. But the carrot shouldn't be overlooked either; governments should be looking to make clean technology as cheap as possible for consumers through tax breaks, as well improving incentives for research and development in the field. Which is why Singapore deserves an encomium this week.

One thing that definitely hasn't had its day, however, is tax code complexity – especially in jurisdictions with progressive tax regimes. Who could have imagined, when the first modern income taxes were introduced, largely in the 19th and early 20th centuries, how things would end up! Appropriately enough, since we have just explored an environmental theme, it's just as well that the business of taxation has for the most part gone digital, otherwise we'd be experiencing paper shortages.

In the United Kingdom for example, Tolley's guide has expanded to almost 1,000 pages, and over in the US, former House of Representatives tax committee chairman Dave Camp (R – Michigan) was often heard to quip that the tax code is "ten times the size of the Bible with none of the good news."

In an ideal world, we would be able to tear up national tax codes and start again from scratch, drafting new laws which reflected the realities of a technologically-driven, globalized economy and which recognized new ways of working. Perhaps then there'd be no need for BEPS. Back in the real world however, most countries merely patch and mend taxes. This tends to exacerbate the problem of complexity, perpetuates tax avoidance, and leaves taxpayers vulnerable to various anomalies, pitfalls, and legal trapdoors.

It's a state of affairs that nobody likes, but which nobody can seem to get a grip of. If only governments would at least help taxpayers by publishing nice concise guides to their tax systems, instead of making them trawl through reams of impenetrable regulations and guidance. Like Switzerland just has, in fact!

Now, I'm almost tempted to say that like flat taxes and the internal combustion engine, the United Kingdom might also have had its day. And if I did, it would only be in jest of course, Brexit and all that being such a sensitive issue. But I'm struggling to recall a time when an advanced economy experienced such legislative and political uncertainty, so it's difficult to ignore.

But where does one start? Brexit? The budget deficit? Austerity versus growth? Trade? And what about the current government? Will it survive? And if so, for how long? One aspect that seems to have been forgotten in all of the hullabaloo over Brexit and trade is devolution, which continues to stream along beneath the surface. For example, in May this year, Wales enacted its first devolved tax, in the form of the Land Transaction Tax and Anti-avoidance of Devolved Taxes (Wales) Bill. Meanwhile, north of the border, Scotland has the Scottish Rate of Income Tax, and is consulting on a new air passenger duty.

But as I've noted before, less centralization and more power to the people is a fine concept, but in the UK's case it poses practical difficulties on the ground. For surely one set of taxes is preferable to calculating multiple sets. Indeed, tax experts have said that this peculiarly British half-way house between a unitary and a federalized tax regime is going to cause confusion. The Association of Taxation Technicians for one has warned Scottish taxpayers to expect incorrect tax bills.

A change is as good as a rest, as they say. But in the UK's case, perhaps a bit of rest would be preferable to yet more change. Taxpayers, including those with substantial investments in the country, are certainly getting restless.


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

Switzerland helpful

Kitty's Execrations

Latvia progress?

United Kingdom restless



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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