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This Most Illogical and Destructive of all Taxes

Kitty Miv, Editor
24 October, 2013

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.

I'm going to give Ireland (Eire, that is) a bouquet for dropping its air travel tax, although it's possible that the credit really belongs to RyanAir and the European Commission (in very unequal proportions). It's like free will: when a human being does something, you can usually prove that they did it in response to external or historical causes. But at the end of the day, they still have to take the action themselves. So, RyanAir may have threatened to remove untold numbers of flights and flight attendants (who would go to live in Warsaw, instead); and the EU may have disallowed the really juicy parts of the ticket tax. But eventually the Government has to act, and it has. Unlike some other governments, which persist in levying this most illogical and destructive of all taxes, notably the UK. We have long ago ceased believing governmental environmental blandishments as regards the ticket tax: it's a money-grab, pure and simple. People have to fly, so let's make them pay for it. Very little demand elasticity, in the jargon. That's palpable nonsense, and governments only pretend to believe it because their policy-making processes are not well adapted to being intelligent. Dramatic swings in holidaying statistics as a result of quite minor economic changes show how much human behaviour can be affected on the margin: people's decisions are far more emotional than rational, and just a small amount of additional tangible evidence can have a quite disproportionate impact on their final behaviour. Ask the Caribbean, which sees the UK's air passenger duty as a major existential threat to its economies. Nasty as the APD is, it seems counter-intuitive that a couple of hundred pounds could make the difference between spending or not spending five thousand pounds on a Caribbean holiday, but that's how human minds work. I suppose it's partly that people don't like paying away money that is overtly going to be mis-spent. Everyone knows that their government will waste a high proportion of any money that it can get hold of; but tax on aviation fuel (for instance) somehow seems less directly rapacious than APT. Not logical, but then we aren't. So yes, Ministers do have free will, but no, they don't have a clue as to how to exercise it accurately. Except on the Liffey, it seems.

Congratulations, I think, to Tony Abbott's new Australian Goverment which has gone ahead with publishing its bills to abolish the country's carbon tax, which was introduced only last year by the outgoing left-wing administration, and not because I am in favor of global warming, although it will improve the climate in Northen Europe, but because taxing large polluters is not an effective way of tackling the problem, as the European Union is finding out with its Emissions Trading Scheme, which is on life support and will likely collapse altogether. Like "ticket" taxes, most carbon taxes are convenient ways for governments to extract money from large companies under the hypocritical pretence of doing good. In Australia's case, the money was used as a pre-electoral bribe (it didn't work). So how should we control emissions? It doesn't seem to be a very hard problem: most countries have introduced or gone along with requirements to reduce particulate and greenhouse gas emissions in vehicle exhausts. No taxes are required for that, or similar schemes which have been or could be introduced for aircraft, power station and chemical plant emissions. If you break the law you go to prison!

What to say about the failure of the US Congress to reach a substantive agreement on tax and spending reform last week? Of course it's a failure of the political establishment in general, rather than of the Congress in particular. Acres of verbiage have been devoted to analyses of the relative contributions of all the leading players, from the President downwards, the need to change the Constitution, the gerrymandering that has reduced the effectiveness of the electoral mechanism in both houses, but particularly in the House of Representatives, etcetera, etcetera and so forth. So we won't go there. Still, from the perspective of business, the whole thing is a disaster: as a destination for investment, the USA is already uncompetitive, and the prospect of endless logjam which now stretches out certainly until January and probably much further will do nothing to help. Businesses usually have stability at the top of their wish-lists, so as to be able to plan their investments, and I suppose you could say that they have got it, since nothing is going to change in the foreseeable future. But that means continuing lack of competitivity, continuing leakage of US corporate profits and capital to lower-tax foreign destinations, and continuing preference for other markets on the part of foreign manufacturers and investors. All of that is bad for American jobs. Don't be fooled by the ebullient stock market: companies like Apple and Google may have their capital base in the US, but they are rewarding stockholders with profits made abroad, not in the US. Apple is a perfect example, indeed, turning corporate somersaults in order to repatriate enough of its foreign earnings to be able to pay dividends without incurring horrendous tax charges in the US. I don't have a panacea for America's ills – there is not much point in hoping for a bi-cameral right-wing legislature after the damage the Republicans have done themselves with their antics, and the now-more-probable bi-cameral left-wing legislature will bring on another onslaught of anti-business legislation. The future looks bleak.

Ah well, let's cheer ourselves up by taking a look at France, where things are even worse, indeed as a result of a full house of left-wing parliaments, presidents and press. I had a good laugh when I read a report this week by some deputies claiming that the "tax gap," that's to say, the tax that should be paid but isn't, in the European Union amounts to two trillion Euros, of which EUR80bn is in France itself. And their proposed remedy? Well, of course, it's to give the tax authority more powers and to wring more information out of corporations and banks. Naturally, in their jaundiced eyes of the deputies, it's the banks' fault in the first place. Wouldn't we be better off without them? Surely to goodness it would be better to nationalize them and be done with it? The banks, that is. The deputies are already nationalized. Mind you, it's not just the French who salivate at the thought of all that "lost" tax: Britain's HMRC published its estimate of the UK's tax gap this week, much lower than the French estimates, it's true. Never fear though, Margaret Hodge, Westminster's answer to Carl Levin, leapt to say that HMRC was grossly underestimating the tax owed by international businesses. The only problem is, for these ladies and gentlemen who would save their economies so handily, that the "tax gap" is just pie in the sky.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 75th) two or three countries are given encomiums and two or three 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 on + 1, 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, though.

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:

Australia decarbonated

Ireland ticketyboo

And Kitty's Execrations:

France yet dafter

USA in stasis




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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