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another piece of wishful thinking

Kitty Miv, Editor
30 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.

Poor governments. They rarely seem to learn the lessons of bad tax policy. And not only do they not seem to learn from experiences within their own boundaries, they fail to learn from the (often bad) examples of their peers.

Last week I observed how Poland had failed to heed warnings from the likes of international ratings agencies and the International Monetary Fund about the likely consequences of its bank asset tax. Well if the IMF's latest assessment is anything to go by then the Polish Government was unwise to ignore them. As predicted, banks in Poland have reined in lending, and chosen instead to invest in government bonds, a far from ideal outcome in the post-credit crunch world when businesses are finding it more difficult to borrow to invest.

I also noted how Australia may travel down a similar path by rushing through a hastily drafted bank tax bill. And despite the almost daily warnings from Australia's big banks that the levy will hit profits and be passed on to consumers, the Government has merely promised to compile a regulatory impact statement on the proposal, rather than review it. Perhaps government ministers are too proud to admit that they might have got this wrong, and too afraid of the public backlash that may accompany the admission. But pride often comes before a fall.

However, perhaps Hungary is the master of the ill-conceived sectoral tax, and it is this country I wish to admonish this week.

Hungary thinks it will get away with its amended revenue-based advertising tax because the tax threshold is low enough to effectively fly under the European Union's state aid radar. Except that the Hungarian ad tax has been flashing brightly on the European Commission's scope since it was introduced in 2014, and the two parties have already had run-ins over the measure. What's more, said threshold, at HUF100m, which at the time of writing converts to approximately EUR325,000, is surely too high, considering that the EU deems state aid of more than EUR200,000 per year to any one recipient to be illegal and therefore recoverable.

It wouldn't be so bad if this was a one-off. But Hungary's rap sheet in this respect is by no means a short one. The Government has targeted financial services, tobacco companies, and telecommunications providers with special – and likely illegal as far as the EU is concerned – taxes. Indeed, in 2013, the Commission warned in an Occasional Paper that sectoral taxes had caused policy uncertainty and "contributed to historically low investment and productivity growth rates."

Hungary is in better shape fiscally and economically than it was four years ago, but the Government appears fixated with special taxes. And it was only when the public revolted against a proposed internet tax in 2014, in the process nearly bringing down the ruling Fidesz Party, that the proposal was withdrawn.

While businesses cannot protest against punitive taxes by taking to the streets en masse in the era of globalization they arguably have an more effective weapon: they can vote with their feet and invest elsewhere. Admittedly, the attractions of a nine percent corporate tax now make such a decision more difficult, and some taxpayers may consider sectoral tax risks a price worth paying for this.

On trade matters now, and credit goes to EU Trade Commissioner Cecilia Malmstrom for talking up the possibility of a free trade agreement between the European Union and the United States. But is her optimism misplaced? That the 11 non-US signatories of the Trans-Pacific Partnership have agreed to forge ahead with what initially promised to be the most ambitious regional free trade to date suggests that they consider any attempt to renegotiate the deal with the US to be a waste of time. So perhaps expecting the EU and US to make progress on what could be the world's most complex FTA to date in the current political environment is unrealistic. Besides, the US perhaps has enough in its trade inbox to cope with for now after formally beginning the legislative process to renegotiate the North American Free Trade Agreement, which is unlikely to be a smooth ride all the way.

Coincidentally, Malmstrom was recently in Mexico – the southern third of the NAFTA trio – to discuss renegotiating the existing EU/Mexico FTA. It will be interesting therefore to see how these two negotiations progress over the coming months, as well as to compare the outcomes, should any outcomes be achieved. If Malmstrom is to be believed, the EU is confident that its new deal can be concluded by the end of this year, which is likely to be well ahead of any renegotiated NAFTA text. Or perhaps that's another piece of wishful thinking on her part.

 

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

European Union positive

Kitty's Execrations

Hungary selective


Ciao

Kitty


Tags: Euro | Government | Trade


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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