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politically popular decisions aren't always the most effective

Kitty Miv, Editor
16 May, 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.

In the current political climate, with the financial crisis still fresh in the memory (even though the height of the crisis was almost a decade ago), political parties can almost certainly expect to gain some votes with proposals to impose higher taxes on banks. At the very least, it's hard to imagine such a policy being a vote loser. But what is politically popular doesn't necessarily equate to effective tax policy.

Some would say that the banking sector got off very lightly for its role in creating the financial mess that still hasn't been fully cleared up. But governments have to be very careful in how they structure additional taxes on banks, because as the Australian Bankers' Association warned in response to the recent announcement of a new levy on Australia's five largest banks, such measures can have "unintended consequences."

Poland is a good example of a bank tax went wrong. While the 0.0366 percent levy appears miniscule on the surface, it applies to banks' assets, which economists have warned could reduce credit supply and suppress economic growth. Indeed, such vaunted institutions as the International Monetary Fund and the European Central Bank have lined up to criticize Poland's bank tax, with the latter warning that it could have a negative impact on financial stability.

Australia's bank tax is structured differently, with the levy based on liabilities rather than assets. But problems are still foreseen. Despite the fact that the levy targets Australia's largest banks, the nature of the banking business means that it is likely to affect the whole banking system, and it is expected that the tax will simply be passed on to borrowers and depositors.

Compounding the issue, the Australian Government appears to be in an urgent rush to push the bank tax legislation through. According to the Australian Bankers' Association, industry representatives heard about the Government's plans at a meeting with Treasury officials only on May 10, and they were given until midday on May 15 to make submissions on the proposals, two days before the Treasury had planned to release draft legislation. No doubt some midnight oil was burnt as civil servants worked to draft the bill in such a short time frame. And this is hardly ideal preparation for an important piece of legislation. A case perhaps of legislate in haste, repent at leisure.

We've heard a great deal over the past year or so about the rise of nationalist political causes, and the rejection by the people of the established political and economic order, which tends to produce identikit centrist politicians. But perhaps the people aren't as angry as is being portrayed by certain political parties and the media. After all, we've only really seen the apple cart upended in two countries, albeit two influential ones, with voters in Britain opting for Brexit, and their counterparts in the United States electing President Trump. Elsewhere, you could say that it is pretty much business as usual, especially after Austria failed to follow the lead set by Britain and America by electing a nationalist leader, and the anti-immigration vote collapsed in recent German local elections.

France is an interesting case though. That the former National Front leader lost the presidential run-off election was not that surprising. However, the scale of her loss surprised many, especially when her contender was a political novice yet to turn 40, whose sole experience of politics and government was a two-year stint as Economy Minister under President Hollande. And in electing Emmanuel Macron, French voters had already discarded mainstream candidates on the center-right and on the left. Indeed, Benoit Hammon, who stood for the ruling Socialist Party, polled barely six percent of the vote in the first round – an outcome that must represent a damning indictment of its track record in power.

France, it seems, would prefer Macron and his cabinet of political virgins, rather than the tired old policies of the past. But then Macron himself can hardly be accused of being an anti-establishment rebel himself, given his career background and largely mainstream economic philosophy. Certainly, his rise to power follows the precedents set in the UK and the US, but in a very French kind of way. It will be interesting to see if he can deliver on his promise to cut corporate and individual income taxes without the sort of barriers that have prevented President Trump pushing through his economic agenda.

Who'd have thought that on June 24, 2016, the day after the British people took the momentous decision to leave the European Union, that the Brexit negotiations could hinge on the ownership of a piece of rock separating Western Europe from North Africa. If a recently leaked report by Spain's Foreign Ministry is anything to go by, this might happen. But is it all just bluster?

First of all, I should clarify that the piece of rock in question is the territory of Gibraltar, and that the territory of Gibraltar is more than a mere geographical feature, albeit a quite impressive one; it's an important European business and finance center. And despite being closer to Marrakech than to Manchester, this rock is constitutionally and culturally British, and wants to remain so. Even joint sovereignty was rejected almost unanimously in a referendum in 2002.

Given the aggressiveness with which Spain often pursues its territorial claim over Gibraltar, you'd think that the country was almost prepared to fight a war to get it back. But it could be argued that the controversy is manufactured somewhat by Spain – a useful distraction when things go badly for the Government of the day on the domestic front.

Spain is also often heard to bemoan Gibraltar's low-tax regime, regularly branding the territory a tax haven and a money-launderer's paradise. But it's also worth noting that the same financial center provides employment for thousands of Spaniards living in adjacent regions. Indeed, unemployment in neighboring Andalucia is over 30 percent. Would Spain therefore really be prepared to crash the economy of Gibraltar and a large area of southern Spain by effectively liquidating Gibraltar's financial center? It would certainly appear to be a counter-productive policy, to say the least.

Nevertheless, Brexit does provide the perfect opportunity for Spain to drive a wedge between the UK, which is withdrawing from the EU, and Gibraltar, which is desperate to remain, given that a great deal of its financial business depends on access to the Single Market. And the report suggests that Spain should exploit this opportunity to the maximum, even calling for the use of its veto in the Brexit negotiations to force the sovereignty issue.

Would Spain really be prepared to go this far just to gain joint sovereignty over Gibraltar – an outcome that Gibraltarians themselves manifestly don't want? All things considered, perhaps Spain raising the possibility that it would go so far is just a red herring. But we should be prepared for the possibility that Brexit could get snagged on The Rock.


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

France refreshes

Kitty's Execrations

Australia hasty

Spain bluster



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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