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avoiding the cliff-edge

Kitty Miv, Editor
27 December, 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.

2017 saved the best until last.The end of the year saw a series of breakthroughs, with the EU-UK Brexit negotiations moving forward, and the approval in the US of a law to comprehensively reform the US tax code, having ping-ponged back and forth between House and Senate.

And so,the United States has managed its first major tax code shake-up since the 1980s, and one of the largest tax cuts in its history, givingTrump the best Christmas present he could have hoped for, after a year of legislative frustrations – a gift that will keep on giving you might say, especially if it results in the economic growth that Republicans are expecting and the boost in tax revenues.

While much commentary on the subject has focused on the domestic impact of the plan, US tax reform has triggered a wave of soul-searching by government ministers and by national trade associations and chambers of commerce worldwide, suggesting that they too consider that the corporate tax cut and switch to a territorial corporate tax basis will have an impact on global investment patterns and potentially divert foreign investment away from their borders.

For example, earlier this month, the German Association of Chambers of Commerce and Industry (DIHK) warned that a corporate tax cut in the US will put Germany under further competitive pressure and would lead to growing calls for the Government, after the next coalition is finalized, to reduce taxes. "The next federal government will have to respond," declared Eric Schweitzer, DIHK President.

But it might not be all one-way traffic. According to the Centre for European Economic Research (ZEW) in Mannheim (Germany seems to be especially worried by US tax reform), the corporate and international tax measures will indeed make the US a much more attractive investment location, including for European companies. But, it points out, since, in theory, US investors will no longer face double taxation on foreign earnings, foreign jurisdictions with low corporate taxes, like Ireland, will continue to be attractive for them. On the other hand, jurisdictions like Germany, with much higher corporate tax rates, will lose out, according to Professor Christoph Spengel, who studied the matter.

Certainly, members of the Australian Government are worried about the implications of a leaner and meaner US tax code, with Finance Minister Scott Morrison saying recently that the development makes the case for an Australian corporate tax cut even more urgent.

So, despite warnings of a race to the bottom on corporate tax, will US tax reform trigger a new wave of corporate tax cuts around the world? That will be the main question for 2018.

Probably one of the few countries not overly concerned with the imminent slashing of corporate tax in the US is the United Kingdom, which already has one of the most competitive rates in the developed world, at 19 percent and falling. This isn't to saythat the country doesn't have any worries on its plate. Far from it.

Unsurprisingly, Brexit has become an all-consuming issue at home. So how are things really going on the Brexit front? If you just listened to David Davis, you'd assume the talks are going swimmingly, and that the negotiations are a doddle, a synch, a cakewalk even, and that he's been running rings around Michel Barnier from the start.

If you want a truer depiction of a state of affairs, sometimes it's better to ask businesses or investors who have to live with policymakers' decisions. And the Brexit business barometer certainly isn't set "fair;" It seems to be pointing firmly to "changeable," which for them, is a problem.

As a recently issued joint statement issued by chambers of commerce in Britain and several other northern European countries observed: "Many companies are embedded in supply chains spread over several northern European countries that depend highly on tight 'just in time' management cycles, which can be severely disrupted by even the slightest unforeseen regulatory changes. All these companies that engage both directly and indirectly in EU-UK trade and EU-EU trade via the UK, most notably in the case of Ireland, need to start taking the necessary actions to prepare for new EU-UK trading arrangements as soon as possible."

But the prospect that the trade negotiations will end on time before the Article 50 clock stops ticking in March 2019 is now considered so unrealistic that the general consensus among businesses trading in Britain and Europe is that a transitional period in which UK laws, rules, and regulations mirror those of the EU's for at least two years is the only option, avoiding the potential cliff-edge of a "no deal" Brexit.

The UK's divorce from the EU was never likely to be a clean one. But one wonders if the UK Government could do more to help itself. For instance, how much input are businesses having inthe process? I suspect not very much. Those trading goods and services across multiple borders probably know more about the complexity and nuances of international trade than most governments. And, with regards to international trade law expertise, the UK's cupboard seems especially threadbare.

At least the festive period has given us tax pundits a welcome distraction from tax changes and uncertainties for a short while. Oh, wait – no it hasn't! Perfectly timed to reach the newswires just before the Christmas holidays was a report suggesting that governments should tax meat consumption to complement efforts to tackle climate change. As if governments weren't already attempting to make us feel guilty enough for stuffing our faces with candy and other sweetmeats, now governments are expected to tax meat for the emissions produced from rearing animals, the damage to human health from consumption, and the cost of increasing antibiotic resistance. With this, there's not only an obligation to maintain our own health but newly the planet's too. How was your turkey?

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

United States reformed

Kitty's Execrations

United Kingdom changeable

Ciao

Kitty



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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