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lift the lid on an espresso and you are confronting a miracle of modern science

Kitty Miv, Editor
24 April, 2014

Kitty's Kountry Rankings are below, with a description of how they are kompiled. 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.

Coffee, anyone, with your double Irish Dutch sandwich? That'll be Starbucks, then, especially if you're at say Oxford Circus or Trafalgar Square. The firm has announced that it is moving its European HQ from the Netherlands to the UK. Although the company was fairly unclear about its motives, it can't be irrelevant that the UK's corporate tax rate will be down to 20 percent from next year, while the Netherlands sticks with its 25 percent rate and has no plans to reduce it. Of course, that's not the whole story: the Dutch withholding tax regime is hard to beat, although the UK's participation exemption is by now not that different from the Dutch regime; and the Dutch patent box rate of 5 percent is still much better than the UK's 10 percent rate. I would not have guessed that serving coffee is such an R&D-heavy business, but lift the lid on an expresso and you are confronting a miracle of modern science, it seems. It's difficult to know where that process ends: the cups are probably coated in a proprietary stain-resistant glaze, developed at vast expense in an underground laboratory in Newcastle-on-Tyne; the ergonomically perfected chairs are made to be just that tiny bit uncomfortable so that you don't stay too long with your cooling coffee (the glaze on the inside is heat-absorbing, while on the outside it is an efficient black-body radiator); and the sandwiches, well I won't even start to try to understand, whether they are bread ones or tax-efficient ones. Presumably both. At all events, a bouquet to George Osborne, even if his Treasury has brought out some fairly unpleasant anti-taxpayer initiatives lately. Well, he would call then anti-non-taxpayer initiatives, I guess. Difficult to know whether Starbucks executives will welcome the hop across the Channel; the Dutch personal tax system is quite a bit nastier than the equivalent English one, and there is not much contest in cultural terms. They'll be digging deep into their savings to live in London, though, so watch those bonuses go up next year.

Promises, promises, from the Austrian Government, which would like to reduce and simplify business taxation. Half a bouquet then, for good intentions, but the reality is very different. According to the OECD's annual "Taxing Wages" publication, the average tax burden for a childless single worker earning the average national wage was 49.1 percent last year, the third highest in Europe. But the Government is trapped by its foolish decision to stand behind failed bank Hypo Alpe Adria, beginning by nationalizing it in 2009. The full extent of the damage is not yet known, or at least not being admitted to, but estimates range north of EUR19bn, and increased tax revenue of EUR5bn last year, while it may be testament to the Government's resolve, does not go very far in dealing with such losses. Public debt stands at 74 percent of GDP, and has been rising steadily in recent years. The Government is now saying that it will transfer EUR18bn of compromised assets into a "bad bank," but other Austrian banks have refused to participate in it, so what difference will it make? There is a bank levy which is expected to generate EUR5bn over the next ten years, and will be devoted to Hypo's losses, but sooner or later the taxpayers will have to cough up. To add to its woes, the Government is formed of a coalition, and the partners are far from agreeing about taxation policy.

By comparison with most European countries, the USA has relatively low taxation, but it is going up. That OECD report (the organization does have some uses!) says that the average worker in the United States faced a tax burden on labour income (tax wedge) of 31.3 percent in 2013 compared with the OECD average of 35.9 percent; but it had risen by nearly 1 percentage point since 2000. American workers should probably be thankful that Congress is paralyzed: according to a report from Americans for Tax Reform, President Obama has proposed 442 tax hikes between 2010 and 2014, but most of those will be in his annual budgets, quite repetitive year on year, and rejected every year by the Republican House. That doesn't include the Obamacare taxes which are gradually going into effect. Statistics are not much use in understanding what is happening to the tax structure in the USA: although individual tax revenues have increased steadily over the years, while corporate tax revenues have declined by comparison, that is probably mostly due to the shift by smaller businesses to "pass-through" structures which evidently has the effect of transferring tax revenues from the corporate sector to the individual sector. What is clear, though, is that the complexity of the tax system is ballooning out of control: a report this week from the National Taxpayers Union has some scary numbers about the size of the Tax Code and the taxpayers' time it soaks up. Congress is not short of recipes for reform – showers of hearings and well-intentioned bills regularly descend upon the heads of legislators. This week's crop includes a bill to extend small business expensing tax breaks permanently. It is an attempt to get around the log-jam of "tax extenders" legislation which is threatening to run into the buffers when sittings are suspended for the November mid-term elections, probably at the beginning of October. All of this activity is presumably futile, and its purpose? Electoral propaganda, mostly, I suppose. Despite inaction from the Congress (or perhaps because of it) total government spending is more or less static at 37 percent of GDP, a low figure by international comparison, while tax revenues are booming and the deficit this year will probably be only about 4 percent of GDP. Weirdly, therefore, there is less and less case for reform. Roll on November!

We must end on a lighter note, and where else but in Paris, with Government ministers being rolled out to pull the wool over the eyes of disgruntled taxpayers by promising ever-greater tax cuts to be financed by cuts in public expenditure which they must surely know are illusory. The latest to play at this game was Michel Sapin, newly enthroned as Finance Minister, and he is offering EUR40bn of corporate tax cuts. He was previously Finance Minister under Francois Mitterand in 1993, a long time ago in politics, so people have probably forgotten all the jokes about him as a young pine tree (sapin means little fir), and his failure to deal adequately with the collapse of the ERM in 1993 which led to devaluation of the franc and electoral reverse, whereupon he resigned. He is said to have been a bosom pal of Hollande's over the years, although not quite as bosom as a certain other minister, we trust. At least now he can't do much damage to the Euro (we hope).

Kitty's Encomiums and Execrations

Methodology: each week (this is the 101st) two or three countries are given encomiums and two or three 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 neutral, 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 and now it's on plus 1 again.

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:

Austria making the right noises

United Kingdom does nice coffee

And Kitty's Execrations:

France dreaming on

United States getting taxier




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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