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teetering on the brink of economic oblivion once again

Kitty Miv, Editor
06 November, 2014

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.

It's not easy to find positives where Greece is concerned, but this benighted country, which could be teetering on the brink of economic oblivion once again, came out surprisingly well in a recent report on the taxation of ICT goods and services - computers, cell phones, tablets, internet access and an array of other digitally-delivered services - around the world. While other industries continue to contribute more taxes to help pull Greece out of its fiscal Slough of Despond, the ICT sector is getting away rather lightly according to the report by the Information Technology and Innovation Foundation, which found that Greece is the only OECD country to feature in the top-20 of its league table, with an overall tax and tariff burden of less than 10 percent. Tragically, but at the same time unsurprisingly, the countries with the highest "digital drag" - those with the largest tax burdens on ICT goods and services - are mostly lower- or middle-income countries located in Africa, South Asia, and South America, with sub-Saharan nations prominent among them, i.e. those countries that would benefit the most from the productivity gains accruing from greater use of technology and the resultant economic growth. It is estimated that in countries with the highest tax and tariff rates on the ICT sector, annual GDP-per-capita growth is reduced by between 0.7 and 2.3 percent. The report points out that governments like to slap tariffs on ICT goods in the vain belief that it will spur domestic production of these goods. All that tends to happen as a result of such policies though, is that the local population is deprived of choice and forced to pay through the nose for sub-standard products. That's progress!

Looking a relatively short distance to the north, the announcement by Romania's Prime Minister Victor Ponta that the country's 16 percent flat tax is here to stay - for the time being at least - was encouraging news for a country that has had its problems and remains under the watchful eye of the IMF. Romania's economic fortunes have see-sawed since the end of Communist rule in 1989. With its dilapidated state-run industries dominating an obsolete economy, the country initially struggled to adapt to a brave new world of market forces and globalization. A painful recession ensued in the late 1990s, before an investment-led recovery brought with it strong GDP growth in the noughties. However, corruption and red tape continued to permeate the business environment, and the global financial crisis hit the country hard, forcing Romania to sign on to a USD26bn emergency assistance package from the IMF, the European Union, and other international lenders. Usually, this means taxes go up, and Romania's flat tax would normally be considered something of an extravagance by the likes of the EU under these circumstances. Romania though, seems to have got away fairly lightly on the tax front, with the IMF pressuring the country to tighten up tax administration and crack down on evasion rather than increases taxes, or dream up new ones. One only has to look elsewhere in Europe to see the correlation between high taxation and low or no growth (France and Italy), and vice versa (Ireland). I'm skeptical that such reasoning figured in the IMF's analysis of the situation in Romania, but it should hopefully serve the country well in the longer-term, nevertheless.

In an age when we are all seemingly expected to pay the maximum amount of tax the law tells us to, even though on many occasions the law is unclear, just where the line exists between "aggressive" (unacceptable) and "unaggressive" (acceptable) tax avoidance has yet to be resolved, and indeed could be drawn differently depending on which country is being looked at, and the government of the day. But governments are also stretching legal boundaries at the moment, not only in their desperation to get us to pay more tax, but also to encourage us to behave like perfect children - er, I mean citizens - by following all the rules and not giving Nanny any trouble. As a light-hearted digression, I was amused to read a few years ago about how municipalities in the UK were allegedly using surveillance laws intended to catch terrorists for all manner of trivial offences, if you can even classify them as offences in the first place. Examples included the family spied on to see whether they were lying about where they lived, a trick supposedly used to get their children into the state school of their choice, and the case of the "Dustbin Stasi," when another municipality used the legislation to crack down on those awful bourgeois reactionaries who take a cavalier attitude to sorting regular trash from recyclables (plastic in the garden waste? You're nicked mate!).

I've written before about how Her Majesty's Revenue and Customs is determined to tear up the Magna Carta in the year of its 800th anniversary by taking money and property before an offence has even been proven. Now its America's turn. As if FATCA wasn't bad enough, the Internal Revenue Service is making liberal use of CAFRA - the Civil Asset Forfeiture Reform Act of 2000 - to extract money and property from taxpayers it suspects of tax evasion. And "suspects" is the operative word here. Originally intended to help the Government bear down on the money laundering activities of drug traffickers, fraudsters and other undesirable criminal types, in essence this law targets "structuring," a practice whereby offenders make a series of small payments into a bank account to forestall the mandatory report that banks have to make to the Treasury on transactions of USD10,000 or more, thus in theory enabling said offending criminals to remain under the Government's radar. "Structuring" isn't, however, very easy to prove. So CAFRA allows the Government to use civil proceedings, which have a lower burden of proof than criminal ones, against suspected lawbreakers, including tax evaders. Although CAFRA tightened the original statute, adding a modicum of protection for those on the wrong end of this law, such as time limits and the need for a seizure warrant from a District Court (although the accused doesn't have to be involved in this procedure), the bottom line is that it assumes guilt over innocence, and is an easy way for the IRS to take what it thinks it is owed without needing to follow pesky due process. Unsurprisingly, the route one must follow to claim one's property back in the event that the Government makes a mistake is costly and time-consuming, and not many people bother. Which is probably why net asset forfeitures jumped from USD1.7bn to USD4.2bn between end-September 2011 and the same date in 2012. I wonder what Rousseau would make of all this? Time, perhaps, to begin redrawing the Social Contract.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 129th) 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 plus 1, 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 and now it's on plus 1 again.

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:

Greece computer savvy

Romania stays flat

And Kitty's Execrations:

United States uncivil




Tags: Euro | Government | Treasury | Asia | Law

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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