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tax doesn't discriminate, and it doesn't show much compassion either

Kitty Miv, Editor
15 February, 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.

As the famous expression, usually attributed to Benjamin Franklin, goes, "in this world nothing can be said to be certain, except death and taxes." But what about tax after death? It's probably safe to assume that in Franklin's world, death was a blessed relief from tax. However, as it turns out, sometimes the two are not mutually exclusive, at least in the eyes of some tax authorities. In Canada for example, death is no excuse for not filing your tax return, according to the Canada Revenue Agency. Not that you are expected to submit a return from beyond the grave. That would just be silly. No, under Canadian rules this unfortunate task falls to the legal representative of the deceased, as it no doubt does in most jurisdictions.

I suppose by the strict letter of the law, if you shuffle off this mortal coil in the middle of a tax year, and there is income left to be taxed, then that income must be taxed. And since death and taxes don't discriminate (with regards to the latter, it's governments that discriminate rather than taxes themselves), it's a rule that applies to everyone, regardless of status. Nevertheless, I'm highlighting this story because it shows just how ubiquitous tax has become in the world we inhabit today. Dealing with the tax man is now accepted as one of mundane duties that a grieving family must do as they tie up the affairs of their loved ones. Yes, tax doesn't discriminate, and it doesn't show much compassion either. Franklin would probably be appalled at how things have turned out.

Indeed, it's almost impossible now to conceive of a world without taxation in one form or another. States have simply become too big and all-encompassing, and they need feeding with vast amounts of revenue (as well as state borrowing) to keep them alive. Some people argue that governments should be a lot smaller, that they should butt out of people's lives unless absolutely necessary. Yet, we're never going to be completely free from taxes, because nations need to defend themselves, and bombers, frigates, and tanks don't come cheap these days. This is before we count the cost of training the men and women who operate them. And let's face it, we're never going back to the days when education was a purely private venture. Health care? Well, that's more debatable. But someone has to pay for roads to be built and maintained. Even if the construction and repairs are done by a private contractor, it's almost always the taxpayer who foots the bill. Same goes for the trash. And the street lights. Even in so-called no-tax jurisdictions, revenue has to come from somewhere, and usually it comes from company registration and license fees, and various sales, property, and excise taxes. I could go on, ad nauseum.

However, just imagine, if you can, a country that did away with tax. I don't mean Dubai. True, it's almost a tax-free state for some, but even here, banks and oil companies pay tax at a fairly high rate. No, I mean the United States! I understand I'm wandering into the realms of fantasy here. But stay with me. What if Congress voted to cancel the tax code? Think that would never happen? Better think again! For a bill to cancel the US tax code by the end of 2019 has just gained its 100th co-sponsor. I should add that the bill comes with an important proviso: that Congress must agree on a tax reform plan before the appointed deadline to prevent the tax code axe from falling. So in essence it's a bill to focus minds on the seemingly intractable issue of tax reform, rather than a bill to cancel the tax code per se. And it probably won't pass. But still it got me thinking. US taxpayers spend more than 6bn hours and USD168bn per year completing tax filings, according National Taxpayer Advocate Nine E Olson's 2013 report to Congress. And things have probably got worse in the three years since. So what would they do with all that spare time and money if the federal tax code vanished? Indeed, those of us who make a living from the tax industry in one capacity or another would have quite a lot of time on our hands. Well, there'd be plenty of vacancies in the military, and I've always fancied having a crack at driving a tank. Ok, the nation would be more or less defenseless, but just imagine – no more sweating over your 1040.

Now back to harsh reality, and it doesn't take a genius in economics to work out that putting up taxes in a sinking economy is hardly going to be a recipe for economic success. Unless, that is, you are of a technocratic bent and work for a central bank, probably located in Frankfurt. It was somewhat refreshing therefore, to read the contents of a working paper from the European Central Bank, which came to the not completely unsurprising conclusion that tax hikes are unlikely to reduce a nation's debt if those tax hikes merely exacerbate that nation's economic problems. In short, austerity taxes are usually self-defeating.

The uncomfortable truth, according to the conclusions of the working paper, is that cuts in government expenditure have a far more powerful effect on the fisc than increases in taxation. But governments don't want to hear that do they? Indeed, if you were talking to a group of Eurozone treasury ministers (I wonder what the collective noun is for that – a "fudge" perhaps...) about the ECB report, at this point they would probably cup their ears with their hands, and wail "blah, blah, blah! I'm not listening! I'm not listening!"

So who do I execrate? Portugal has ruffled feathers in Brussels by proposing to ease austerity taxes in its draft budget for 2016, which is worthy of an encomium on its own. Greece, on the other hand, is proposing to tax its way out of the crisis by raising social security contributions and establishing a new 50 percent top rate of personal income tax. This is so the Government can water down extremely unpopular – but money-saving – reforms to the public pension system. I can see exactly why this proposal appeals. It's asking the rich to pay their share towards Greece's rescue, rather than some of the country's most vulnerable inhabitants. But the Tsipras Government is as a result falling into the same trap highlighted by the ECB report i.e. it is hiking tax to duck politically poisonous decisions on spending. It's far from the first time a government has looked for the easier option, and it certain won't be the last.

 

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

United States ultimatum

Portugal disobedient

Kitty's Execrations

Canada cold

Greece ducks

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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