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switching from austerity to growth

Kitty Miv, Editor
28 September, 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.

It is a measure of how profoundly the financial crisis affected the world that, only now, eight years after the collapse of Lehman Brothers, many governments are switching the focus of their fiscal policies from austerity to growth, according to the OECD.

One country that is trying to do so is Italy, which has been promising its beleaguered taxpayers tax cuts and tax reform on an almost weekly basis in recent times, without having quite the means to follow through on its pledges. So it remains to be seen whether the Government will be able to bring about the transformative measures announced in the very modern-sounding new industrial growth plan, "Industria 4.0."

If nothing else, the plan is a bold statement of intent from Matteo Renzi's Government, which is determined to take the Italian economy in a very different direction to the one it has been heading recently – namely from stagnation and paralysis to growth and modernization. This in itself is admirable, and taxpayers in Italy will no doubt welcome the introduction of the incentives outlined in the plan. But – and there is usually a but to be found where Italy and taxes are concerned – perhaps there are more deep-rooted problems that the Government should tackle first, before it attempts to dazzle investors with promises of big tax cuts.

From an administrative point of view, Italy's tax system remains somewhat chaotic, a problem reflected in its low score in PwC's Paying Taxes Index. Italy languishes in 137th place in 2016, just ahead of the Kyrgyz Republic. This failing was recognized in an OECD report published earlier this year, which concluded that Italy would have much to gain from improving tax administration.

Complexity and administrative muddle tends to give rise to low rates of compliance, which has certainly been the case in Italy for many years. However, Italy has tried to plug its colander-esque tax system by focusing on compliance rather than simplification. The result, said the OECD, are "assessments that reportedly are often uncollectable," and "no comprehensive strategy across the entities involved in tax administration to address this issue in a holistic manner."

There are few indications that this situation is going to improve very much in the short- to medium-term. Which makes me wonder if the EUR37bn (USD41.5bn) price tag attached to "Industria 4.0" is really affordable, given stubborn budget deficits and a generally under-performing economy relative to other Eurozone nations.

But if dealing with one tax administration isn't bad enough, try the United States, where of course tax doesn't stop at federal level because there are 50 states also waiting to ensnare unwitting taxpayers. Large companies operating across national and sub-national boundaries are largely able to cope with corporate tax compliance issues by employing teams of tax experts to figure out what the firm's tax obligations are and the best ways to fulfill them. However, for individual mobile workers, this issue can be very daunting and can even stretch the mental resources of companies that employ them. As the National Association of Manufacturers recently observed, the "increasingly mobile workforce is subject to an ever-changing hodgepodge of state tax laws, creating a compliance and fiscal nightmare for both companies and their employees on temporary assignments to other states."

And if this problem currently taxes the resources of a company, just imagine how self-employed individuals must feel: overwhelmed and living in perpetual fear of audits and fines, I should imagine – which is hardly going to encourage inter-state commerce and innovation.

So, the approval by the House of Representatives of the Mobile Workforce State Income Tax Simplification Act, which should hopefully substantially reduce these problems is certainly good news for mobile workers. However, these are by no means new proposals. They have actually been floating around Congress for a number of years, but without passing both chambers.

Following House approval of the latest version of the bill, it was received in the Senate on September 22. But history suggests the chances of its final passage are low. And also, the timing of the referral isn't the greatest, with the Senate set to adjourn for the election recess on October 7. Doubtless mobile workers have learned to be patient by now.

Strict enforcement by US states of tax residence rules has been characterized by some as a blatant revenue grab from mobile workers. But others have wondered if states are doing themselves more harm than good by doggedly sticking to the letter of the law. It would certainly be interesting to learn how much it costs states to enforce these laws, and whether that cost is outweighed by the additional revenues they collect. I suspect that there's not a lot in it. What's more, as mentioned, the economic impact might also be negative.

However, governments have a tendency to shoot themself in the foot by enforcing taxes that are expensive to collect, and that may have unintended economic consequences, especially when they are under pressure to increase tax revenue. You could say that Australia's "backpacker tax" – another tax on mobile workers – is a good example.

Australia is a major stopping-off point on the global backpacking trail, and many travelers find temporary work in the Lucky Country in order to fund their peripatetic existence. There is a case to say that these temporary workers should pay tax on income earned within Australia. The flip side of this coin is that many backpackers may in future avoid Australia altogether. And as the tourist industry has predictably warned, this could have a detrimental effect on tourism in Australia, not to mention the wider economy.

Farmers have also warned that they face a recruitment crisis if backpackers stop coming to Australia to work, and the National Farmers' Federation recently cautioned that "without the labor provided by backpackers, agriculture would face acute shortages." Indeed, the Government of Northern Territory has already suggested that just the idea of the backpacker tax has been enough to prompt a plunge in applications for seasonal jobs from foreign travelers, while Queensland has reported a 10 percent fall in working holiday visitor numbers. And who can blame those for wanting to stay away. After all, backpacking is supposed to be a fun, life-enhancing experience for those about to make their way in the world, and filling in tax returns is about as far from that as you can get.

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

Italy transformative

United States mobilizing

Kitty's Execrations

Australia backfires




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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