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The proverb about people in glass houses springs to mind

Kitty Miv, Editor
23 May, 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.

Time and again countries are urged to reduce the tax burden on labor and transfer it to indirect taxes such as VATs and GSTs. But recent evidence suggests that the opposite might be happening.

Barely a month goes by without a supranational economic organization – typically the OECD, the IMF or the World Bank – advising one country or another to cut taxes on labor. In May 2017 alone the IMF has: urged Slovenia to increase its capital gains, real estate, and excise tax burden to raise funds for labor tax reform; recommended that Germany reduce its "large and increasing tax burden on labor" to boost employment; and informed the Czech Republic that its labor taxes discourage women from entering the work place.

However, the evidence is also contradictory. Because according to the OECD's latest Taxing Wages report, published in March 2017, taxes on labor income for the average worker across the OECD fell for the third consecutive year during 2016, dropping to 36 percent of labor costs.

Nevertheless, the average figure masks the fact that the labor tax "wedge" – income taxes plus social security charges minus welfare benefits as a percentage of overall labor costs – increased in 20 OECD countries last year, and fell in only 14.

In fact, research results published by the OECD in November 2016 show that tax revenues collected in advanced economies have continued to increase from last year's all-time high, with taxes on labor and consumption now accounting for a substantially greater share of total tax revenues.

Meanwhile, corporate tax revenues plummeted from 23.7 percent of overall revenues to just 8.8 percent in 2014. This shows how countries have competed quite aggressively for investment with corporate tax cuts in the post-crisis era. But it also indicates that, given overall tax burdens appear to be rising rather than failing, the burden of taxation is often merely shifted elsewhere when taxes are cut, seemingly to payroll taxes and indirect taxes. It also shows how taxpayers often receive from governments with the one hand, but pay them back with interest with the other!

I can see it is going to be struggle to award encomiums this week, so I'll give it to Austria, which reduced its tax wedge the most last year, according to the OECD.

The European Economic and Social Committee, a consultative body of the EU, recently held a debate on tax and the digital economy, in which it was concluded that the digital economy is no longer a part of the economy, but is becoming the actual economy itself. Well excuse me if I don't fall off my chair in shock! With the OECD's BEPS project now four years old, the "digital economy as the economy itself" refrain is now a very familiar one. Indeed, it is stated in the opening text of Action 1 of the BEPS Action Plan published in July 2013.

We've been hearing on a regular basis how national tax rules are failing to adapt to new digital business models, particularly in areas such as the sharing economy. So, the problem has been recognized. Now it's a matter for governments and legislatures to do something about it, instead of throwing up tax barriers to technological progress, or just merely doing nothing, as appears to be the case.

Considering the EU supposedly has a seamless Single Market, you'd think this issue would be of less concern for entrepreneurs and consumers in the digital economy. But just read the following quote from a press release related to the European Commission's Digital Single Market project: "The EU Single Market for e-commerce is still not functioning as it should as there are significant differences in the rules, standards, and practices applied to e-commerce within individual member states. As a result, companies find it difficult to provide online services or to sell goods across EU borders, and citizens miss out on the opportunity to purchase goods and services from websites based in other EU countries."

That press release was published in January 2012. But I'm sure most EU residents and providers of digital services would agree that little has changed in the last five-and-a-half years.

Indeed, wouldn't it be great if taxpayers could get together and blacklist those countries which make life unnecessarily hard for compliant taxpayers, whilst letting the rotten apples still slip through the net? What tends to happen instead is that jurisdictions that intentionally make life easier for taxpayers, with low tax and easy taxes, get blacklisted by their peers, ostensibly for making life too easy for tax dodgers and criminals as well. And rightly so, you may say. Except that things are rarely so black and white in this world.

The OECD doesn't have a blacklist of non-cooperative jurisdictions right now. At least, if there is a sheet of paper filed somewhere in its Paris headquarters under "blacklist," there are no jurisdictions on it. However, blacklists, it seems, are all around us. Individual countries, particularly in the European Union, maintain them, and the EU is at present attempting to compile a definitive blacklist of jurisdictions that are supposedly soft on tax and financial crime, albeit with some difficulty.

The fact that the EU is struggling to complete what should be, on the surface, an easy task – after all, it's only a list of countries and territories – hints at the flaws inherent in a blacklist. The criteria used to determine a "bad" jurisdiction in tax and legal terms is subjective, and can vary from one country to another. One state's bad egg is another's good neighbor.

Politics also plays a key part. After all, it's a near certainty that the United States will not appear on the EU blacklist – or the majority of other countries' lists of bad guys for that matter – despite the fact that a Delaware corporation is as ironclad confidentiality-wise as an international business company in any tax haven you care to mention. And the same goes for many advanced economies that fail to practice what they preach on transparency.

What's more, being named on a blacklist is no trifling matter for the jurisdictions concerned, or for foreign investors. For it can mean that transactions between the source country and the blacklisted country are restricted, or at worse, barred completely.

Blacklists, therefore, can be dangerous things. Maybe we should all be on a blacklist unless we can show we are well beyond reproach. The proverb about people in glass houses springs to mind...


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

Austria thin end of the wedge

Germany fat end of the wedge

Kitty's Execrations

European Union reproachful



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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