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mixing nationalism with economic policy is rarely a recipe for success

Kitty Miv, Editor
01 June, 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.

The Miscellaneous Tariff Bill (MTB), passed by the United States Senate on May 10, is unlikely to be grabbing any headlines in an increasingly uncertain, volatile, and often violent world. But I thought it deserved a mention here if only because it shows that Democrats and Republicans can come together on tax-related issues. It's also refreshing to see a piece of legislation that will, hopefully, reduce trade taxes for US businesses, amid all the hubbub created by a certain presidential candidate's pledge to raise barriers to trade with China and Mexico. Ok, I know there's no point in protecting said candidate's identity, because we all know who I'm referring to!

This is a highly charged political debate of course, involving as it does patriotism and economics, and this isn't the place to start indulging in Trump-bashing. But I will say that mixing nationalism with economic policy is rarely a recipe for success, and can often come back to bite the governments that carry them out (not to mention the people who suffer economically as result). Given what's happening in the world's steel markets, and the tit-for-tat, beggar thy neighbor measures and countermeasures being used to protect domestic markets, is hiking import tariffs on other products really a sensible move now or in the near future? I certainly don't think so. It's the sort of policy that strikes a chord when delivered to an appreciative audience at the lectern. But what's the plan B when these countries inevitably retaliate, forcing up input costs for domestic manufacturers and prices for consumers? For now, the US gets an encomium for the MTB, but this might have to be reviewed at a later date!

On the subject of protectionism, we move to Brazil, which has been one of the world's keenest users of protectionist measures in recent years. So it was pleasing to learn that Brazil recently signed the Trade Facilitation Agreement, which creates binding commitments on signatories to expedite the movement, release, and clearance of goods and improve cooperation among WTO members in customs matters.

Brazil was more recently in the news for adopting legislation necessary to introduce special customs arrangements for companies and athletes involved in the 2016 Olympic and Paralympic Games, in another good move. However, whether Dilma Rousseff will be attending the games in her capacity as Brazil's president is looking increasingly unlikely after she was suspended from the country's top political post as part of protracted impeachment proceedings. By all accounts, if she goes (and it is likely to be a case of pushed rather than jumped), Rousseff won't be missed by many people, having been at the helm when the economy veered towards the rocks, and accused of burying bad economic news with some creative budgetary accounting. But it is not just Rousseff who may be guilty here of squandering Brazil's huge economic potential. It seems that the country is suffering a leadership crisis of huge proportions, with senior governing party figures seemingly more interested in positioning themselves for the upcoming presidential vacancy than actually running the country. If I was a major investor in Brazil, I'd certainly be nervous about how things are going to turn out. Although completing my company's tax returns, which takes on average about 108 days per year, might be a useful activity to take my mind of these anxieties.

India is another country with a nightmarish tax code, and when headlines like the Income Tax Department's decision to appeal a tax case against Vodafone to the Supreme Court (one of several cases the tax authorities have pursued against the company recently), foreign investors must heave a collective sigh, and think to themselves 'oh, here we go again.' It doesn't matter that, as Finance Minister Arun Jaitley countered in response to criticism of the appeal, the Indian Government believes it has a strong case in this instance. Because, in a sense, the damage to India's tax framework has already been done by years of drift in which the Indian tax code has got steadily more complicated, and grown riddled with trapdoors ready to swallow unfortunate taxpayers. The current Government is to be congratulated for its ongoing focus on 'ease of doing business,' as it likes to call its reforms in the area of tax administration and compliance, and has achieved many improvements in its less than two years in office. However, the statistic that there was USD82bn worth of tax cases pending before the 1st Appellate Authority when Jaitley announced his 2016/17 Budget in February is an indication of the size of the mountain the Government must scale.

Now, nobody could accuse me of being a tree-hugging environmentalist, but I do genuinely look forward to the day when technology has advanced far enough that we no longer have to burn things to keep warm (or cool), keep the lights on, and keep moving. However, unless powerful incentives are going to be provided to encourage the switch to clean and renewable power forms, both by individuals and businesses, then that carbon-free world is getting farther away all the time. Take hybrid and battery-powered cars – they have come on leaps and bounds in the last two or three years, and can now do most things that time-honored gasoline-powered vehicles can. But there are still limitations curtailing their wider take-up by consumers, more so in the case of electric cars. One is the relative lack of charging stations, and the length of time it takes to recharge – even at the most advanced high-speed recharging units, you've got time for a leisurely coffee, and maybe even a stroll around the shops. And, electric cars are still relatively expensive.

Ideally, revenue from carbon taxes should be plowed straight back into schemes to make the technology more affordable and to invest in the necessary infrastructure. Germany has set quite a good example with its recently announced tax incentives and subsidies. Now it's up to other governments to put their money where their mouth is, and follow Germany's example. They could start by swapping the gas-guzzling ministerial sedans for a fleet of hybrids, or chartering a balloon, instead of a 747, to send the Premier to the next climate conference.

 

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 can do

Germany green

Kitty's Execrations

Brazil rudderless

India déjà vu

 

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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