maybe the stars will align for pro-growth tax reform from 2017
Kitty Miv, Editor
11 January, 2016
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.
It'll never happen of course. No, I don't mean Angela Merkel inviting Silvio Berlusconi to Baden-Baden for tea and gateaux. I mean Ben Carson's proposed tax reform plan. As if the idea of a flat tax of 14.9 percent (not even a nice, round, 15 percent) wasn't radical enough, his tax blueprint would actually, in his own words, "repeal the entire tax code." There'd be no more troublesome income tax deductions and other "loopholes" under a Carson presidency, and we would also kiss goodbye to the taxation of capital gains, dividends, and interest at the individual level so that a person's income is only taxed once. Indeed, it all makes Jeb Bush's proposed Reform and Growth Act sound timid by comparison.
I've long thought it scandalous that governments get three bites at the cherry, first from your income, then from your savings and investments, and then a third mouthful after you die. But Carson's plan, which he says will boost US gross domestic product by an enormous 16 percent over 10 years, is surely too good to be true. For the time being at least, Congress will struggle greatly to pass even a modest tax reform bill to cut America's 35 percent corporate tax by just a few percentage points, let alone agree a more comprehensive one, even though almost everyone agrees this is necessary. However, what I like about some of the outlandish tax proposals of presidential candidates past and present is that they show how America's aspiring leaders are prepared to think outside the box, to dream of a better future (and, of course, get votes). And after all, that's at the core of American beliefs, isn't it? Making the seemingly impossible possible? Achieving the dream? We rarely see such ambition from politicians in other major economies. Even if there is a gap between ambition and reality in Carson's plan, the beauty of democracy is that things can change fairly dramatically if the electorate wills it. Who knows, maybe the stars will align for pro-growth tax reform from 2017.
Although several Central and Eastern European nations carried the torch for flat taxes when they emerged from the shackles of communism, these days you'd be unlikely to see a Carson-style plan emerging from Europe. Indeed, the EU as an institution seems determined to tax Europe's economy out of existence. So well done Romania for implementing that most rare of measures these days, especially for a member state of the European Union: a value-added tax cut. And not an insubstantial one either, of 4 percent.
I'm well aware that there is a trend taking place that is seeing tax shifted away from income and labor, and onto consumption, which seems to be a good thing. Even though consumption taxes tend to be regressive, a lot of economists agree that this tax shift will encourage economic growth and secure governments' tax bases. Yes, Romania has just bucked the trend, but that may be to its competitive advantage. Few countries in the EU now have standard rates of VAT of less than 20 percent, and many have pushed VAT rates well above that level.
Most of the countries that have recently increased VAT did so in response to the calamitous effect the financial crisis had on national budgets. Now things have stabilized somewhat, few have shown much inclination to reduce VAT rates, except Romania. But maybe its decision to cut VAT will inspire other governments in the EU to follow suit. Or perhaps I really have just entered La-La Land.
I'm all for governments listening to their citizens. Of course I am. Which is why I'm going to give Canada an encomium for launching pre-budget consultations with taxpayers, a tradition that is now long established there. But do governments really listen in these situations, or do they just pretend to? Can such consultations ever be more than a PR stunt, a going-through-motions "yes, we really do have your best interest at hearts, promise" tick-the-box kind of exercise? Canada might just be the exception that does consider its taxpayers' opinions.
If we look at the lead-up to last year's federal Canadian Budget, business associations were calling on the Government to reduce the small business corporate tax rate, which has fallen by only 1 percent since 2000, whereas the headline rate has been slashed by 13 percent over the same period. Lo and behold, one of the flagship measures announced by the late Finance Minister Joe Oliver in the Budget itself last April was a 2 percent cut in the small business rate. Certainly, there were probably plenty of budget requests that were ignored by the Government – calls to streamline the individual tax code seem to have been disregarded for a number of years – and likewise, there must have been measures in the Budget that some taxpayers didn't want. But it's something, I suppose, that taxpayers' wishes weren't completely ignored, especially by a Prime Minister who had been in power for a decade. By this time political leaders tend to have succumbed to a form of selective deafness, which helps to shield them from the awkward demands of citizens. However, Canada has a different Prime Minister now, so it will be interesting to see if the new Government is as inclusive with its decisions as it claims to be.
Now if there's one group of people that is supposed to have the ear of government at all times, it's the backbone of the economy, salt of the earth type of people who run their own businesses. Except, as a number of recent reports show, the ear in question must sometimes be hard of hearing.
It's difficult enough being self-employed when you have to account for and pay your own taxes – and woe betide anyone who happens to get it wrong, innocently or otherwise – as well as make provision for your retirement and very often your healthcare too. And forget about regular paid vacations. As HMRC in the UK tells us, thousands of self-assessors spent Christmas Day and New Year's Eve away from the festivities, blinking into their computer screens to complete their tax returns while the families and friends were making merry. Yet, in some places, governments seem to be making things harder, not easier, by imposing unfavorable tax rules on the self-employed. Exhibit number one is Ireland, where those working for themselves seem to be in a much worse position with regards tax than their salaried counterparts, and where small business owners have repeatedly implored the Government to ease the tax burden on them. Exhibit number two is the UK, where Chancellor of the Exchequer George Osborne has just undermined the work the Government has supposedly done to create a dynamic, flexible workforce the envy of Europe by withdrawing tax relief on travel for contractors and those who work largely from home. In my view, this is exactly the wrong way to go about things. Governments should be doing all they can to nurture a culture of enterprise, not stifle it.
Many governments claim to be the friend of small businesses, no doubt well aware that SMEs employ around 90 percent of the workforce in many countries. But who needs enemies when you've got friends like these.
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.
United States dares to dream
Romania VAT relief
Canada all ears
United Kingdom stifling
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