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a virtuous circle of vice

Kitty Miv, Editor
18 January, 2016

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.

Usually, a government's response to an increase in undesirable activity by its citizens and companies is to tax that particular activity. Therefore, with many of us intent on gorging ourselves to death on an abundance of deliciously sugary and dangerously cheap sweetmeats and drinks, sugar taxes have become the weapon of choice as health authorities seek to combat growing obesity. The UK looks like it could be the next country added to the expanding list of nations with a sugar tax, following calls for such a levy from the British Medical Association and latterly members of parliament. But will a sugar tax save the UK from what Prime Minister Cameron called an "obesity crisis"? Well, as far as I can see, the evidence in support of sugar taxes is fairly scant.

Recently, the results of a study into Mexico's sugar tax were published in the BMJ medical journal and they suggested that there was a direct correlation between higher prices for sugary drinks and a fall in their consumption. On the other hand, Denmark scrapped its controversial "fat tax" in 2012 after only one year because reports pointed to job losses in the food processing industry and Danes crossing the German border to buy cheaper products. The US tax policy research organization the Tax Foundation also noted a serious flaw in the reasoning for junk food taxes in a 2011 study: that even when selective taxes on certain food products do cause individuals to consume less, those same individuals replace the calories avoided with other foods, resulting in no net decrease in caloric intake. Adding taxes to certain foodstuffs is, according to the Foundation, "a clumsy and inefficient strategy" on the part of governments.

But ultimately, does all the analysis really matter? Governments make a huge amount of money from our vices in the form of "sin taxes," so it could be argued that they don't really want us to be virtuous anyway! For Governments, you could call it a virtuous circle of vice.

From virtuous circles to washing cycles. I never thought I'd see the day when I'd use this column to discuss the price of washing machines. But there's a first for everything! Actually, washing machines are subsidiary to the main issue at hand: trade. And, more specifically, the practice of "dumping." And to be precise, the "dumping" of washing machines into the US market.

The World Trade Organization took part in 233 new anti-dumping investigations from July 2014 to June 2015. So at any given time, there are numerous anti-dumping investigations taking place the world over concerning all manner of traded goods, from bicycles to biofuels. Hence, the wider public rarely gets to hear about such trade disputes unless they are of particular economic significance, such as the allegations that China is dumping steel into various steel-producing nations.

Nevertheless, this particular story caught my eye because of something that was said in support of the proposed imposition of anti-dumping duties – that Chinese washers are being sold in America at less than Chinese domestic market prices. This could be because the Chinese Government is subsidizing the makers of washing machines in one form or another. However, the reason that American firms are being undercut could stem from the fact that Chinese producers are able to offer cut-market-price deals as they can make washers more cheaply! Heaven forfend! I can't help but feel it seems at odds that the US, a bastion of the global capitalist system, feels the need to so frequently protects its industries from such competition.

Now, BEPS may be changing the international tax landscape irrevocably – whether for better or worse being a matter of intense debate – but the allure of offshore and low-tax financial centers remains as strong as ever. For example, the little island of Guernsey, which at just 78 square kilometers in area is over half the size of Washington DC, is now home to more non-UK entities listed on the London Stock Exchange than any other jurisdiction globally.

In fact, the UK Crown Dependencies (Guernsey, Jersey, and the Isle of Man) all play a hugely important role in funneling investment into the capital markets of London, and the wider economy of the UK. One-third of the Chinese companies listed on London's Alternative Investment Market (AIM) were incorporated in Jersey in 2014, up from one-quarter prior to 2008. LSE data also shows that, at the end of December 2014, there were 54 Isle of Man-incorporated companies listed on AIM, putting the island in third place behind Guernsey and Jersey.

A recent study by Capital Economics found that Jersey alone channels approximately GBP118bn (USD170bn) of investment into the UK every year. The UK Government, an eager participant in the BEPS project, might therefore want to think very carefully before doing anything that might shut off this supply line of finance.

And finally, another acknowledgment of German fiscal prudence is due, with the news that the federal Government has achieved its second consecutive budget surplus. I admit to berating Germany in the not-too-distant past for being, frankly, a bit of a scrooge by steadfastly refusing to share the fruits of its bountiful tax revenues with the country's long-suffering taxpayers, who haven't seen anything resembling a tax cut for what must feel like an eternity to them. Okay, tax thresholds were recently updated to counter "fiscal drag," effectively giving taxpayers a EUR2bn (USD2.2bn) tax cut. But that doesn't really count in my book. Still, it's probably just as well Merkel and Schäuble were hell-bent on delivering a budget surplus given that the Government plans to spend EUR7.2bn on processing and accommodating the hundreds of thousands of people who have sought political asylum in the country. And this is on top of the EUR5bn it has already spent.

As the saying goes, make hay while the sun shines, and the German Government has certainly accumulated a useful haystack during a period of relatively stability in the eurozone's recently turbulent history. And, it'll need it if the financial and economic gloom and doom predicted for 2016 by an increasing number of analysts comes to pass. Indeed, I read recently that one analyst at a UK-based bank has urged clients to sell "everything" before the bottom falls out of the markets. Over-excited? Maybe. Or perhaps he or she is one of those people who likes to relax after work by pounding the streets wearing a sandwich board bearing the words "the end is nigh." But my point is this: as individuals, we're told to save for a rainy day. This applies to governments, too, as we found out to our cost in 2008. At least Germany has learned its lessons.


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

Guernsey channelling

Germany in credit

Kitty's Execrations

United Kingdom sweet and sour

United States dumped



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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