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famous for its theatrical tragedies

Kitty Miv, Editor
20 April, 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.

There must be some sort of saying along the lines of: if you repeat the same advice often enough, eventually the recipient will stop hearing it. Perhaps somebody kept saying it to me once and I filtered it out. Anyway, if there were such a proverb then it would apply very aptly to Japan and the interminable debate about its consumption tax. Indeed, there's barely a month that goes by these days without one international economic institution or another, such as the OECD, recommending that Japan raise the rate of its consumption tax. The trouble is Japan appears to have filtered the recommendations out. And perhaps it's all the better for doing so.

Certainly, Japan is going to have to make some tough decisions in the years ahead as it deals with the effect of a rapidly aging population whilst already saddled with a mountain of debt and very possibly a stagnating economy. But hiking sales tax by a few percentage points surely isn't going to be the panacea that makes the problem go away. What's more, we know what happens when consumption tax does go up in Japan – prime ministers are kicked out, and people stop going to the shops. Hardly an ideal mix to promote economic health and fiscal stability. Perhaps it's time more imaginative solutions to Japan's fiscal crisis were found, but I don't see much evidence of that happening anytime soon. Economists need to shed their fixation with Japan's consumption tax first.

However, it is harder for governments to ignore the advice of economists when there is a consensus, or at least something like approaching one, on a certain issue. Otherwise, when economists are split, policymakers can pick and choose the theories they like, and discard the ones they don't. So, I wonder what the German Government will make of the latest official economic forecast compiled by five different economic research institutions, which effectively concluded that Germany is overtaxed.

If it was a time of fiscal austerity for Germany, like it is in much of the rest of Europe, then I suppose it could easily rebuff the economists' position on tax by simply saying "sorry, we need the money." Awkwardly for Chancellor Merkel and Finance Minister Schauble though, Germany announced a record post-reunification budget surplus for the year 2016, and all the indications are that a growing German economy will continue to strengthen tax revenues in the years ahead. Nevertheless, as far as Merkel and her Finance Minister are concerned, this changes nothing. Indeed, they just need to add two words: "sorry, we need to keep the money."

Perhaps it would be better to ask German taxpayers themselves what they made of the institutes' conclusions. They probably see the situation rather differently. According to the latest Taxing Wages Report from the OECD, the combined personal income tax and social security burden – the "tax wedge" – was just a shade under 50 percent for a single childless worker in Germany in 2016, the second highest in the OECD grouping of 35 countries, and well above the average rate of 36 percent. "Isn't it about time for a tax cut?" I expect many would respond.

While the German Government does appear to be lining up a tax cut package this year, it's a relatively minor one, focussed on alleviating bracket creep. It's also an elections year. Coincidence?

Germany's strong commitment to fiscal responsibility is laudable while the fires of the eurozone crisis continue to smolder on its fringes. But the institutes' latest report suggests that the Government is going to find calls for more meaningful tax cuts harder to ignore, and the current policy could backfire on Merkel's Christian Democrat Party if pursued too doggedly.

From one end of the fiscal scale to the other now. And how exactly do you solve a problem like Greece? Well, all I can say is, I'm glad I'm not the one who has to try! It does seem fairly obvious though that part of the problem is that Greece doesn't collect enough tax.

Now, I'm all for low taxation of course. And I think raising rates of tax in Greece will, for the most part, be counterproductive. Because not only will this endanger the nascent economic recovery, but probably encourage yet more tax avoidance and evasion in a country that seems to have transformed tax dodging into an art form – the amount of tax evaded each year in Greece can be as much as 14 percent of gross domestic product, according to EY.

What seems to be the root of the problem is a narrow tax base and relatively high tax rates. If the burden was spread more evenly across the tax base, the Greek Government could possibly collect more revenue while lowering taxes to encourage growth. It's a policy that the International Monetary Fund (IMF) for one is keen for Greece to implement, having called for such repeatedly in recent months. And while it's not going to list Greece out of the crisis in a hurry, it would probably help.

That such measures haven't been put in place yet, seven years after the crisis began, is surely a major failing of the bailout program. Indeed, under the agreement reached by Greece to secure further bailout funding, this important condition won't begin to be met until 2020. Ancient Greece was famous for its theatrical tragedies, but this modern version has already turned into an epic.

Finally, successive governments have tried, mostly in vain, to improve India's tax environment, and by extension the conditions for business and investment. It regularly seemed to be a case of one step taken forward, followed rapidly by two backwards. But things appear to be on the up.

Slowly but surely, inch by inch, the current administration is presiding over a series of improvements that while relatively minor, could be nudging India in the right direction. Recent examples include the streamlining of tax registration procedures for newly incorporated companies, the roll-out of India's goods and services tax portal known as the GST Network, and the addition of more advanced pricing agreements which are helping to provide greater certainty of tax treatment for foreign companies in India; by February 28, India had signed 130 unilateral and 10 bilateral APAs.

The jewel in the crown, as it were, would of course be the introduction of GST itself. And recent developments suggest that the proposed reform is finally on the home straight. On March 20, the Cabinet approved four bills crucial to the implementation of GST, and the Government remains confident that the tax will finally be in place from July 1, 2017.

There's certainly a lot riding on India's largest tax reform for many decades. According to the IMF, India's economy will grow at a rate exceeding eight percent if it manages to see through the introduction of GST. So, the Government will be determined that it does.

July 1 still seems like an optimistic target for such a large undertaking, but maybe, just maybe...


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

Japan filters

India progress

Kitty's Execrations

Germany overtaxed

Greece neglectful



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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