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revenue production is often the primary motive for "green" taxation

Kitty Miv, Editor
26 February, 2015

Kitty's Kountry Rankings are below, with a description of how they are kompiled. 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.

Many people, including increasing numbers in government, are convinced that discouraging environmentally harmful activities with taxes, and encouraging environmentally virtuous deeds with tax breaks, will go a long way towards saving the planet. I'm not so sure. For starters, we are going to have to wait quite a long time before there is enough evidence to show that carbon taxes and carbon trading schemes have resulted in meaningful cuts to emissions. If the majority of climate scientists are to be believed, this might be time we haven't got. But there is a more fundamental problem. A bit like the OECD's BEPS project, surely there is going to have to be a globally level playing field on carbon taxation if companies aren't going to indulge in carbon tax arbitrage, moving their operations to those countries with the lightest tax burdens, or those with no carbon taxes at all. Let's remember that, while a handful of US states are introducing carbon taxes, there is no real desire to introduce one at federal level.

The trouble is that – despite their good intentions – governments tend to put their own self-interest first, and revenue production, rather than carbon reduction, is often the primary motive for "green" taxation. The United Kingdom's air passenger duty (APD), hiked massively during the financial crisis, is probably the best example of a revenue-raiser masquerading as an environmental tax. The major flaw in the APD is that it is essentially a ticket tax, which is charged on a per-passenger basis, with the amount payable varying depending on distance and class of travel. This leads to some perverse results, the most obvious of which is that less tax may be paid by the passengers of a half-empty plane than a full one, despite the fact that the former may be emitting considerably more carbon per passenger than the latter. The banding system also seems to have been designed by someone with a limited grasp of geography; passengers flying to the Caribbean, for example, pay more APD than those bound for Florida, despite the two destinations being roughly equidistant from the UK. Somehow, Hawaii is also deemed nearer the UK than the Caribbean. APD has also done damage to the UK's aviation and travel industry, and at least one airline has scaled down its UK operations in response to swinging increases in the tax in recent years. Yet, at the same time, the Government's avowed policy is to ensure that London remains Europe's major aviation hub. Go figure! At long last though, the UK Government appears to be listening, and confirmation of plans to overhaul the structure of APD just about merits an encomium from me this week. A complete rethink might have been a better idea though; surely, the way forward is to encourage research into clean-burning fuels and to reward the companies investing in them, not clobbering a family going on its annual vacation.

Offshore financial centers are often cast as the villains in the seemingly endless debate about tax avoidance. Except that it isn't really a debate anymore, is it? Tax evasion is universally condemned, and rightly so. And it is almost a heresy these days to say that there is nothing wrong with avoiding tax. But perhaps the real rogues in the piece are the "big islands", as OECD Director-General Angel Gurria recently described the large and not-so-transparent countries, which like to sit in judgment over supposedly opaque low-tax jurisdictions. Never mind the Cayman Islands and its famous (or infamous, depending on one's point of view) Ugland House. If you want anonymity, you could do much worse than incorporate a company in Delaware or Nevada. Granted, for the most part, we also don't know who the ultimate beneficiaries of offshore companies are, because such information is not public knowledge. But at least in the most reputable IOFCs, by law, this information is collected and held in a systematic way, and it is there for law enforcement authorities to scrutinize should they need to. This is more than can be said for a number of the holier-than-thou rich countries. The irony in all this is that politicians enter this territory thinking that they can't lose by vilifying tax avoiders and tax havens. Yet, often, it isn't the safe, high moral ground they think it is, as the UK's Labour Party has found to its cost. In fact, the tactic seems to have backfired spectacularly amid allegations that some of Labour's major donors have indulged in tax avoidance. Even the Miliband family themselves are under the spotlight. Depressingly predictable stuff. Meanwhile, the IOFCs have quietly got on with business, and it could be argued that some of them are now indispensable components of the world financial machine, directing investment between the major onshore economies, which in turn support taxable economic activity and jobs. (Read the 2013 Capital Economics report about Jersey's contribution to the UK economy if you're skeptical.) After another successful year for its finance industry in 2014, low-tax Jersey is now home to the largest number of non-UK companies listed on the FTSE 100 index. However, across all three of the LSE's markets, low-tax Guernsey has more non-UK entities listed than any other jurisdiction globally. It's been more than 15 years since the OECD turned its ire on the world of offshore, but pockets of it seem stronger than ever, which stands as a testament to the willingness of IOFCs to adapt to new political and economic realities. In fact, there were five percent more offshore companies in the world in 2014 than on the eve of the financial crisis. Offshore is dead; long live offshore!

The distorted debate about tax avoidance and tax havens leads me conveniently on to the next subject, which is the European Commission's renewed mission to ensure companies pay their "fair share" of tax. You hear the phrase a lot nowadays, uttered by politicians of all colors – that everyone must pay their "fair share." But what exactly is a "fair share" of tax? No-one ever seems to say. And if anyone did, people would inevitably disagree. But we can safely assume that when politicians (or in this case Commission bureaucrats) say that someone should pay their "fair share" of tax, what they mean is "more" tax. That's fine, but what this discussion needs is a good dose of honesty. The tax-paying public, I believe, are not so much fed up with multinationals and wealthy individuals because they reduce their tax liabilities (often substantially through legitimate tax planning) but because they are unable to also cut their tax bills to the same extent. I think this is an indictment of the behavior of governments, as much as anything else. People are exasperated at watching something like a quarter to a half of their salaries taken by avaricious tax authorities with virtually no say about how the money's spent. However, for governments, the tax avoidance issue is a convenient smoke screen, allowing them to invoke the morality card, outstretch their hand for more tax, and forget about the need for their own spendthrift ways to be reformed.

I dread to think what new ideas will be dreamed up by Brussels for its impending Tax Transparency Package, but you can almost guarantee it won't be in the EU's economic interests. I sometimes doubt the wisdom of the UK's euroskepticism. But perhaps, Britain, you're better off out of it.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 145th) 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:

Guernsey means business

Jersey proving them wrong

United Kingdom sees sense

And Kitty's Execrations:

European Union what's fair?



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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