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plenty of scope to mess things up

Kitty Miv, Editor
03 November, 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.

You know the world's gone a bit topsy-turvy when the Japanese Government is determined to go ahead with a consumption tax increase and the International Monetary Fund is urging it not to be so gung-ho.

Normally it's the other way around; it's the IMF, along with other rich nation quangos like the OECD, telling Japan, the world's most-indebted country, to hike consumption tax or face fiscal and economic crisis, while Japan itself demurs, petrified at the thought of another recession. But following the recent snap election in Japan, which gave Prime Minister Shinzo Abe a fresh mandate, it is Japan itself that seems prepared to bite the bullet and hike consumption tax in two years' time, with the IMF worrying about the consequences of such a move on the economy, according to its most recent country report for Japan.

In a sense, the news that Abe's Government is sticking to its consumption tax plans is good news. Few people relish a tax increase, but at least taxpayers now know well in advance that a consumption tax rise is coming down the track.

Then again, if a week is a long time in politics, then two years must be an epoch. A lot can change between now and the scheduled consumption tax rise in October 2019. And the relevant legislation does give the Government of the day a certain amount of wiggle room to further postpone the measure, should economic conditions deteriorate, so this is far from set in stone. But things are about as certain as the can be.

Another sign of unusual political times was exhibited in New Zealand recently, where a 30-something governmental novice called Jacinda Ardern became Prime Minister.

It always used to be said that you know you're getting old when you notice how police officers seem to be getting younger. Perhaps that adage should be changed. Now, a sign of age is to realize how much younger than you the Prime Minister or President is. Never mind Emmanuel Macron, the incoming Chancellor of Austria Sebastian Kurz (31) makes Canada's Justin Trudeau look over the hill. At this rate, senior office will be barred to anyone over the age of 40.

Not that there's something inherently wrong with relatively youthful leaders. Indeed, haven't many of us been complaining about political elites dominated by crusty old men with stale policies? What's more, the phenomenon isn't anything new. Alexander the Great was in his mid-20s while rampaging around the world, while in Great Britain, William Pitt the Younger became Prime Minister at the tender of age of 24, in the late 18th century – arguably one of the most crucial points in British history.

However, the current political situation in New Zealand is largely unprecedented. We have the country's youngest ever leader, and what appears to be an unholy alliance of a coalition between the social democratic Labour Party and the nationalist New Zealand First party. They then need support from the Green Party to pass bills.

What this means for tax in New Zealand isn't immediately clear. The coalition agreement sheds little light on tax policy, hinting that the two parties were unable to resolve their differences in this area.

For taxpayers, deadlock on the issue of tax could be a blessing in disguise. Because doing nothing might be preferable to doing something badly, as in New Zealand there is much at stake. When one thinks of the most dynamic, open, and business-friendly economies in the world, places like Hong Kong and Singapore are probably top of most people's lists, with New Zealand likely to be some way back. But that is to underestimate New Zealand's competitiveness.  

New Zealand currently sits atop of the World Bank's Doing Business Index, a league table in which it has never dropped lower than third over the last decade. The country is also a creditable 11th place in PwC's Paying Taxes Index, 13th in the World Economic Forum's Global Competitiveness Index, and 3rd in the Heritage Foundation's Index of Economic Freedom.

In other words, any further improvements to New Zealand's offering to foreign investors is likely to be hard won. But there is plenty of scope for a novice government to mess things up.

Another interesting case this week is Taiwan, which is bucking global tax trends by raising corporate tax and cutting the top rate of income tax.

At a time when the direction of corporate tax rates is firmly down, Taiwan is putting up its corporate tax, by three percent, which is a relatively substantial hike in the context of a highly competitive global corporate tax environment.

On the other hand, a post-hike rate of 20 percent is still below the world average of approximately 23 percent, so Taiwan perhaps has more scope than others to pull the corporate tax lever to raise additional revenue.

However, it remains to be seen what sort of signal this sends to investors. Taiwan is in a similarly advantageous position as New Zealand, with generally favorable rankings in the international competitive league tables; it is just one place behind New Zealand in the Doing Business Index. Only time will tell if this turns out to be a risky move from a reputational point of view in such a cut-throat environment.

Controversially, Taiwan has also cut the top rate of income tax at the same time as raising the rate of corporate tax. It is a strange combination of tax measures, especially given that the top rate of personal tax is generally a political cause célèbre: cut it and hear the left howl about fairness (or the lack of it) and injustice; raise it and watch the right predict an exodus of investors and skilled workers and economic disaster.

Perhaps the two tax measures are calculated to cancel each other out. Or maybe it is hoped that a five percent cut in the top rate of personal tax more than compensates for a three percent corporate tax hike in the eyes of the investment community. Either way, it is difficult to determine whether these moves are brave or foolhardy.

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 sure

Kitty's Execrations

New Zealand messy

Taiwan contrary



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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