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despised by taxpayers and chastised by political masters

Kitty Miv, Editor
07 September, 2015

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.

I believe that one tends to make one's own luck in this life, generally speaking. So what did the US Congress expect when it created a tax super-authority but refused to fund it as such? Lawmakers regularly express surprise and shock at the rate that the IRS is bleeding tax revenue through tax refund fraud and erroneous tax credit claims (a quarter of Earned Income Tax Credits worth USD14.5bn were paid in error in 2013). Many words of indignation on this have been expressed in sternly written letters to IRS Commissioner John Koskinen, the latest coming from Senator Ron Wyden, the senior Democrat on the Senate Finance Committee, but poor Koskinen isn't a miracle worker. Indeed, the nation's top taxman is an unenviable position to be in: despised by taxpayers, and chastised by your political masters.

Nobody seems to be using the word "crisis" when discussing the IRS's workload, which now includes administering President Obama's labyrinthine health care legislation, but this must be an institution close to breaking point. The problems won't be solved overnight but they're not insurmountable. Basically, there are two options: increase IRS funding; or reduce the size of the State, thus reducing the IRS's ever-increasing remit. Trouble is, the Republicans oppose the former while supporting the latter, and the Democrats vice versa. So, for the time being, it is likely that the agency will continue to lurch from one scandal to another. Still, having said all this, it's impossible to say without conducting a thorough audit of the agency's activities whether the IRS is making the best of a shoestring budget, or is guilty of extravagant waste. It's worth remembering that its budget is still about USD10bn a year, a sum larger than the gross domestic product of about 30 countries. If the first case is true, that'd be some luxurious shoestring!

India seems to go backwards and forwards in this column. A couple of weeks ago, India was execrated here after Cairn Energy announced it had resorted to some serious measures in order to settle a tax dispute, which, according to Finance Minister Arun Jaitley himself, is just one of almost 40,000 cases that were pending before the various income tax tribunals and courts. But, this week, the Government deserves praise for its sensible decision to follow the recommendations of the Shah Committee and not impose the minimum alternate tax on foreign investors retrospectively. Retrospection in the context of taxation is, unfortunately, something that is now associated with India, thanks to the previous Government's tendency to resort to this unwise policy. It is a reputation that Prime Minister Narendra Modi's Government is trying hard to shake-off, and it is making slow but sure progress towards this goal, in no small part because it has declined to use retrospective tax measures. Foreign direct investment figures have been encouraging. According to data released by the Reserve Bank of India, the manufacturing sector saw a 50 percent jump in FDI in 2014/15, reversing three consecutive years of declining investment. Total FDI was the highest in five years, reaching USD16bn. Nevertheless, India's woeful rankings for ease of doing business and simplicity of taxation indicate that the path ahead is a long one for Modi. But at least he has put India on the right one.

The same cannot be said at the moment for Brazil however. Like India, Brazil has an almost unfathomable tax system, but unlike India, the Government is showing little interest in changing things for the better. Indeed, while India is trying to stabilize the tax regime, tax policy in Brazil is becoming increasingly erratic, with tax cuts announced one week and tax hikes announced the next. Nevertheless, the overall balance seems to be tilting towards a rising tax burden in Brazil, with Finance Minister Joaquim Levy recently announcing that another round of revenue-raising measures are necessary to help balance the budget. It shouldn't surprise us then that, while FDI in India is rising, foreign investment in Brazil is falling. According to fDi Markets, Mexico is racing ahead of Brazil in the Latin American race for FDI, with an estimated USD33bn invested in greenfield investment projects there last year. This was almost double the USD18bn invested in greenfield projects in Brazil in 2014. Although tax can't be the only reason why Mexico is outpacing Brazil in the FDI stakes, surely it can't be a complete coincidence that investment jumped; the Mexican Government has pledged stable taxes through a Tax Certainty Agreement, reaffirmed last month, which will keep Mexico's tax system unchanged throughout the remaining period of his administration.

Notably, Moody's, the international ratings agency, downgraded Brazil's bond rating in August 2015, citing a lack of political consensus on fiscal reforms and general pessimism about the economy, among other reasons. In fact, after the Brazilian economy barely grew at all in 2014, some economists are expecting it to shrink in 2015. The reasons for Brazil's economic slump are complex, and some are linked to external forces beyond the Government's control. However, the damage must, to some extent, have been self-inflicted, including through weak and inconsistent tax and investment policies. Just like how India shot itself in the foot in the final years of the former Congress administration. Brazil could therefore learn a few lessons from the way its fellow BRICS member India seems to be turning itself around.


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

India sensible

Mexico stable

Kitty's Execrations

United States IRS in crisis?

Brazil stumbling



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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