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The US is supposed to be the Land of the Free

Kitty Miv, Editor
09 April, 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.

As I wrote in this column recently, there is still some merit in the claim that the United States is the greatest country on earth – the millions of people who have been naturalized as US citizens over the past few years, dwarfing the number handing their passports in, attests to that. Yet, the US is ranked in 12th place out of 178 countries receiving a score in the 2015 Heritage Foundation/Wall Street Journal Index of Economic Freedom. As a result, it is regarded as only "mostly free" rather than just plain "free." It is perhaps a surprising conclusion given that the US is supposed to be the Land of the Free. But the Heritage Foundation has observed what it terms a "precipitous downward spiral" in US economic freedom since 2008. Can it be a coincidence that this period coincides mostly with President Barack Obama's one-and-a-half terms in office? If you believe the rest of Heritage's overview of the situation, then it's unlikely. "Increased tax and regulatory burdens," Heritage notes, "aggravated by favoritism toward entrenched interests, have undercut America's historically dynamic entrepreneurial growth." Alarmingly, while President Obama's second-term efforts to increase tax and spending and expand regulation have been largely thwarted by Republican opposition in Congress, Heritage cautions that corruption in government remains "a concern." High levels of government spending and the expansion and complexity of the Government's regulatory agenda "have increased opportunities for political favoritism and cronyism," the Foundation claims, while it says there have been uneven protection of property rights and numerous instances of regulatory overreach by the Administration. The Foreign Account Tax Compliance Act (FATCA), a regular target for opprobrium in this column, is certainly one example of latter. So too is the use by law enforcement agencies, including the criminal investigation branch of the Internal Revenue Service (IRS), of civil forfeiture, which only came to light last year after an expose by the New York Times. It's amazing how this situation, which, to put it bluntly, amounts to legalized theft of private property by the state, came to pass in a country which prides itself – and rightly so – on the limitations on Government provided for in the US Constitution. But it serves to highlight the apparent disconnect that has opened up between the private economy and a bureaucracy with a propensity to interpret the law in any way it sees fit. And the USA is by no means the only advanced country where this is happening. Thankfully, it's not all bad news. I'm writing this lament in response to the announcement of new limitations on the use of the Civil Asset Forfeiture Act of 2000 by law enforcement. Not that the new measures – if they can be called that – go far enough; as Congressman Peter Roskam (R – Illinois), who chairs the House Ways and Means Subcommittee on Oversight, pointed out, the application of the new restrictions relies on the DOJ's current system of "just trust us" rather than binding statute. It's a step in the right direction though, I suppose.

If overbearing tax and regulation are still somewhat alien to the American way of life, the same cannot be said for the European Union, where companies and individuals must by now be well used to governments taking what they think is a "fair" share of their income (i.e. over half of it in many instances), and generally interfering in the lives of taxpayers. And so it goes on. The European Commission's latest wheeze is its corporate tax plan, which it claims would be "a revolutionary step" towards international tax transparency and the fight against base erosion and profit shifting. The gruesome details of the Action Plan won't be published until summer, but we've been warned to expect the controversial plans for a common consolidated corporate tax base to rear their ugly head again. Essentially though, the corporate tax plan is the EU's version of the OECD BEPS project, with its focus on aligning taxation with economic substance. Although the OECD supports the EU's plans, they could be seen as yet another example of the project being undermined by unilateralism before the final recommendations have been published. Funnily enough, the logical inference of the Commission's immediate priority, the greater scrutiny of tax rulings issued by EU member states, is that governments and tax authorities themselves are as much to blame for tax base erosion as multinational companies, a point which seems to get lost in the ritual company-bashing that accompanies each new tax avoidance scandal. Still, I'm not really sure what Brussels hopes to achieve from its tax ruling information exchange proposals. In its press memo published when the Action Plan was announced, the Commission said that tax ruling information sharing "will better equip member states to protect their tax bases and counter-act aggressive tax planning" and "deter companies from using tax rulings as part of their aggressive tax planning, as they will be under closer scrutiny." Presumably this is meant to encourage member states to patch "loopholes" in their tax legislation – tax loopholes that are often there by design as much as by accident. But will this deter the tax authorities themselves from issuing contentious tax rulings? If it doesn't, what's the point? Given that the Commission expects to challenge more rulings in the years ahead, I suppose one thing this initiative will achieve is keeping the European Court of Justice's staff busy in the years ahead. But, ultimately, the member states in support of the idea, as OECD Secretary General Angel Gurria so presciently observed, "all need the money."

 

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:

United States mostly free

And Kitty's Execrations:

European Union needs the money

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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