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nothing can be ruled out

Kitty Miv, Editor
05 October, 2018

When looking at recent tax developments for this week's entry, I began to wonder whether a country's tax regime reflects its topography. Take the United States for example. From east to west its relatively plain-sailing as you cross the rolling plains of the Mid-West. Then you hit the Rockies, and all of a sudden it's an uphill struggle. Like getting accustomed to filling in relatively simple 1040s, then being presented with the Subpart F rules.

In tax circles, Brazil is notorious for its complex tax system. You could compare it to the vast, dense, often impenetrable rain forests that dominate its interior, full of assorted critters and creepy-crawlies ready to bite you at the first opportunity. Indeed, Brazil's tax code is so vast, it's probably home to a lost tribe or two.

Then you get down under, to Australia, and things start getting a little topsy-turvy. Christmas in summertime. A carbon tax repealed. A corporate tax stubbornly resistant to the global downtrend.

But back to Brazil. And the good news for taxpayers is that several candidates for the Brazilian presidency, to be decided on October 7, 2018, are proposing to reform indirect taxation, an area of the tax regime particularly noted for its mind-boggling complexity, with a more widely understood system of value-added tax. The bad news is that, like Australia's corporate tax, sales tax in Brazil has also proven to be stubbornly resistant to reform. And this is only one aspect of a tax regime which, akin to an expedition in the country's huge forests, takes the average business an awful lot of time, effort, and resources to navigate.

As a glass-half-full person, I'm optimistic, however, that Brazil can make progress on tax reform, building on recent administrative changes which have helped to move it up the "paying taxes" league table. Stranger things have happened. Indeed, stranger things did happen just last week, when the US and Japan agreed to begin talking about the possibility of concluding a free trade deal. Yes, this is the same US Government which pulled out of the Trans-Pacific Partnership (also involving Japan) at the earliest opportunity and which has been tearing up the free trade rule book for the last 18 months. And the same Japan that is known to be the most protected of the advanced economies, and probably the most resistant to the forces of trade liberalization.

If agreed, this would probably be the unlikeliest of trade tie-ups in recent history. However, it's probably wise not to look too far into the future. FTAs are complex animals, can take several years to form, and can stall over the minutest of details. Still, given the way events have transpired over the last two years or so, nothing can be ruled out, quite frankly.

Reassuringly, in a world in flux, there are some things that never change. For example, try and name an elected politician who, in recent memory, was more popular when he or she left office than when they entered it. It's as inevitable as gravity that a leader's approval ratings will slide as their term wears on, save for a brief honeymoon period after inauguration. Perhaps it should be called Newton's third law.

The curious case of French President Emmanuel Macron only serves to help reinforce this rule. Two years ago, he was the bright young rising star of French politics. A year later his nascent La République En Marche! Party broke the Republican/Socialist grip on French power in an election result without recent precedent. A little more than a year on from that, and he's already up against it, if the opinion polls are anything to go by.

Even stranger is the fact that Macron, by and large, seems to be fulfilling his pledge to reduce France's high tax burden. The 2019 Budget, announced last week, includes approximately EUR26bn (USD30.4bn) in tax cuts, including reductions in corporate tax, social security contributions, and the housing tax.

So what's gone wrong for Macron? The answer probably lies in the ratio of tax cuts for businesses and individuals, which is about EUR20bn/EUR6bn. Macron's trouble is that while business tax cuts are seen as necessary to enable France to compete globally, businesses don't have votes. Maybe if the ratio was flipped, he'd now be lauded to the rafters.

Time will tell if Macron, like his predecessor Francois Hollande, will be forced to change course on tax. But, for now, he can cling to one crumb of comfort: he's nowhere near as unpopular as his predecessor. But then few people have been as unpopular as poor old Francois. I think at one stage his approval rating reached negative figures. I'm not sure how that's even possible, but it's some achievement, and one Macron must sincerely be hoping not to repeat.

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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