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Kitty Miv, Editor
25 October, 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.

Estonia's tax system is frequently lauded internationally – and particularly by those on the right politically in the United States – as the very model of a modern and efficient, pro-business, low-tax corporate tax regime. It's all about being flat, you see. Not just topographically, but also fiscally.

In one example, on a brief visit to Tallinn en-route to a NATO conference back in 2006, President George W Bush expressed wonderment to be in a country "that has been able to effect a flat tax in such a positive way." More recently, Estonia was the inspiration behind former Republican presidential candidate Ted Cruz's own flat tax plan. Indeed, according to the Tax Foundation, Estonia has the most competitive tax system in the world.

However, appearances can be deceptive, and Estonia's 20 percent flat tax doesn't tell the whole story. Why, if the country is uber-competitive on tax, is Estonia only 30th in PwC's latest Paying Taxes Index? According to PwC, when all these taxes are added up, Estonia has the ninth-highest total tax rate on the average medium-sized company in the 32-nation EU/EFTA bloc, with an overall tax rate nudging 50 percent. In fact, as is the case in many countries, it seems that Estonia's corporate tax advantage is almost entirely offset by a huge tax "wedge" on labor.  It just goes to show that companies have to look beyond mere headline corporate tax rates when pondering where to invest.

At the bottom of the EU/EFTA league table is — not that surprisingly — Italy, with an eye-watering total tax rate of 64.8 percent. Therefore, the recent approval by the Government of a draft budget with a heavy emphasis on cutting corporate tax was probably greeted with a degree of relief by most of Italy's businesses. However, as is the case with most of the countries towards the bottom end of the ranking, the bulk of this tax burden consists of labor taxes. 43.4 percent in Italy's case. I can't knock the Government for approving what is, in the context of Italy's fiscal restraints, a fairly bold business tax improvement plan. But perhaps Prime Minister Matteo Renzi is looking in the wrong place in his attempts to improve Italy's competitiveness. Or, more to the point, perhaps he should be looking in more places.

One of those places should be, metaphorically speaking, down the back of the couch. It's surprising how much money can fall out of your furniture if you give it a good shake-down. And the parallel is, as has been well-documented, that Italy, with its highly inefficient tax system, lets far too many euros vanish into the cracks between the cushions.

Another place is under the mattress. Because it is also a well-known fact that Italy has had a long-standing problem with tax compliance, and Italian taxpayers, so it would appear, have become quite adept at – hmm, how do I put this diplomatically – let's just say staying a step ahead of the tax man. Still, the latest set of "tax gap" figures seem to confirm that rates of tax avoidance and evasion remain high, despite several high-profile (and often amusing, from the outside) campaigns by the tax authorities, which have resulted in tax inspectors making appearances in the most unlikely of places – think you're safe on your yacht or off-piste in the Dolomites, think again!

Coincidentally, there have been a couple of other tax gap stories in the recent news. Official statistics released by the UK Government on October 20 revealed that the UK tax gap fell to a record low in 2014-15. And a few weeks ago, Canada released its first study on the extent of the nation's tax gap.

However, just as headline corporate tax rates in isolation can be unreliable indicators of a country's competitiveness, can we really trust tax gap figures? I'm not sure we can. Why? Because surely it's impossible to measure a tax gap with any degree of certainty. The definition of a tax gap is the difference between the amount of money a government collects in tax, and the amount that is legally owed. The key word here in my view is "legally."The frustrating thing about most tax regimes is that they've grown so complicated over the years there's a multitude of ways to reduce what one legally owes. Who knows what is legally owed anymore. And the evaders are probably disinclined to inform us what deductions, exemptions, incentives, etc., they would have used if they chose to play by the rules. More to the point, if tax evaders are hiding their money, how do we know how much they've got, and how much tax they should be paying?

So many economic variables and behavioral assumptions must be factored into a tax gap calculation that they can only ever be a ball-park estimate. Which is why they should be taken with a pinch of salt. Indeed, a lot countries don't go to the bother of trying to figure out their tax gap precisely because it is not really worth the effort. However, those that do go to the trouble often use tax gap analyses to justify the need for ever-tougher anti-avoidance laws. Like the UK. Or perhaps it's just a coincidence that the Government has been accused of steadily eroding taxpayer rights to virtually nothing in some instances during a period in which the "tax gap" has become increasingly publicized.

 

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

Estonia flat

Italy bold

Kitty's Execrations

United Kingdom mind the gap


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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