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Why is it that governments hate speculators?

Kitty Miv, Editor
22 November, 2012

Kitty's Kountry Rankings are below, with a description of how they are kompiled. This week, as every week, I give out three Encomiums to countries which have done Good Things, and award three Execrations for countries which according to my highly personal and partial views have done Bad Things.

How often does an EU bail-out country reduce taxes these days? That's right: it's unheard of. Well, Ireland hasn't exactly reduced taxes, but it has done the next best thing, which is to defer them for small companies by reducing filing frequency, which gives a cash-flow advantage to the companies and a corresponding disadvantage to the Revenue. Although you do wonder if it may not be self-serving - perhaps it costs more to process all those reams of monthly and quarterly returns than the cash-flow advantage gained on myriads of tiny payments. Then, refunds will be later as well. It would be an intricate calculation; but I won't take back the award - they deserve it just for reducing the amount of form-filling and bureaucracy.

The Middle Kingdom (when did you last hear it called that?) has just changed its leadership in its normal obscure, shadowy and woefully undemocratic fashion, and it will receive no accolade from me in that respect; but if the new team is behind this week's reduction in dividend withholding tax then it is off to a good start. The men in dark suits and red ties say they want to support investment in the stock market, while punishing speculation. Why is it that governments hate speculators? All economists nowadays (well, perhaps not in Beijing) agree that speculation is a good thing because it reduces volatility in markets, letting off steam if you will, and correcting disparities in the prices of - well, just about everything. But governments are control freaks, for ever seeking to 'control' the market. Just this week, Hong Kong (a part of China, after all) is trying to control its property market through taxation; why doesn't it use all that cash to build a few more islands in Kowloon Bay, or buy some land from mother China? Well, partly because Beijing is swimming in cash already despite its ever-weakening economic indicators; they were brand new, those suits and ties, did you notice? Savile Row? Brooks Brothers? Surely not 'Made In China'?

When playing the alphabet soup game (Harrods or Macy's, GBP12 or USD14 - things are always cheaper across the pond - and as an anglo-saxon sport you can't buy it on the Continent) EFTA is a trick question which people hardly ever get right. They think the 'A' stands for agreement, as in Free Trade Agreement. Of course it stands for Area. There was a time when there was also 'ex-EFTA' which was indecipherable even to aficionados, but the game hadn't been invented back then. Anyway, enough history: what remains of EFTA can be compared to a regulation-lite European Union, and focuses on the single market and trade agreements, as at this week's meeting, which wins it, or rather them, a star. 'Them' is Iceland, Liechtenstein, Norway and Switzerland, so it's a cheap and cheerful way of bringing three new countries into the table.

Now we are for the dark, and nowhere darker at this time of day (as write it's a drizzly morning in Italy) than Australia, where they have taken to retrospective legislation, always a sign of a recidivist government. But it's a new twist to say that legislation will be retrospective when you haven't even written it yet, and for that Australia gets the order of the boot. In fact the law won't be put to Parliament until the fall of 2013, another bad sign because it means the government is legislating too much. In fact this is an extremely sour piece of legislation in itself, and amounts to a further tightening of the GAAR, although the minister responsible was careful not to mention that horrid beast in his press release and kept a smile on his face as he talked - inevitably - about the integrity of the tax system. I expect he also talked about "fairness" and "sharing" but I had already switched off.

Why does the UK's HMRC want its spies inside your payroll computer? Its "Real Time" initiative amounts to a direct electronic link between every company's payroll and the tax authority's computers. Presumably it will be able to download software upgrades, and who knows what nasty pieces of intrusive code they will contain? It's already scary that Microsoft, HP, Google and the rest can change my computer without my knowing about it, but at least they are subject to fairly stiff privacy laws and commercial imperatives, which gives me some sort of comfort. But HMRC, like every national tax authority, considers itself to be the guardian of fiscal virtue, and behaves as if it is above the law. Anyway, morality aside, this scheme is going to be a technical and operational nightmare not just for the myriads of small companies and their payroll providers, but also for HMRC, which has convinced itself based on its trials with a handful of highly sophisticated larger companies that the system can be rolled out nation-wide - and next year! Every single large IT project it has attempted over the last twenty years has collapsed in ruins. Why would this one be any different? Spooks are scary at any time, but an incompetent spook is deadly!

Since I gave out five stars to Good Countries and already two execrations to Bad Countries, I am one over quota for the week, so I'm allowed to give an honorary kick (like the honorary knighthoods given to Caribbean cricketers) to the EU, even though it is not a country. Specifically in response to the speech given by Commissar Semeta, oh, sorry, naughty me, Commissioner Semeta, excuse me, after this week's ECOFIN meeting. Everyone knows what that is? No? OK, it's the EU's finance ministers' monthly gathering. Really Mr Semeta would be more at home in a planned economy, but unluckily for him there aren't many left and they're nowhere near Brussels. Apart from ritual pleadings for teeth to be put into the Savings Tax Directive, which even he must realize is a lost cause, he focused mainly on the Tobin stallion, which he is riding with such glee. There is much to play for in respect of the FTT (last helping of soup for today = Financial Transactions Tax). If it was just 11 countries about to destroy their banking and investment sectors (because why would anyone carry out a transaction in Frankfurt if you can do the same transaction in London, untaxed?), that would be up to them, but the devil in the detail is that the tax will be extra-territorial, that's to say, if a French bank carries out a transaction through its London or Zurich or Hong Kong subsidiary, it will still be liable for the tax in France. Whether this is lawful, even, is something that the courts will have to sort out, but the banks won't wait, or rather, the customers won't wait. If you are a derivatives trader using a clearer inside the territory of the 11 countries, will you not already be looking for a clearer outside that area, and with no significant relationship to it? I don't see how they can make it work, but perhaps I am being ignorant.

Kitty's Encomiums and Execrations

Methodology: each week (this is the 27th) three countries are given encomiums and 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 has a ranking of – 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, falling back again in week 24 to minus two.

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:

China pumps up the stock market

Ireland cuts paperwork

Iceland EFTA star

Liechtenstein EFTA starrier

Norway EFTA starriest

Switzerland EFTA but no comparatives left

And Kitty's Execrations:

Australians' luck runs out

United Kingdom payroll pain




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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