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the Savings Tax Directive has been a total failure

Kitty Miv, Editor
10 July, 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.

Switzerland is probably fairly happy that international attention this week was being devoted to a French bank, for a change, and newly-announced figures for the money the country generated from applying the EU's Savings Tax Directive may also have created a small frisson of satisfaction among the country's financial leaders. For others, who don't understand why, at first blush USD570m doesn't seem to be a derisory amount of money to have extracted through a tax of 30 percent on interest payments, even if it was down 20 percent on last year, but hold hard: while there are no robust figures for total Swiss assets under management, a semi-official figure published last year suggests that they amount to about USD6 trillion, representing more than a quarter of global AUM. USD570m is 30 percent of USD1.9bn, which is an astronomically small proportion of USD6 trillion. Try it on your calculator: it's far less than a tenth of a percentage point. In other words, the Savings Tax Directive has been a total failure, and as will no doubt be the case with FATCA, the costs associated with implementing it are certainly greater than the returns it has generated. Tax authorities don't care about that: if it costs UBS 10 Swiss Francs to provide 1 Franc in extra tax, then they are still happy, not noticing the appalling waste of productive resources that has been inflicted on the private sector.

Now of course, the EU's Taxation Commissioner Algirdas Šemeta, himself one of the biggest single economic disasters to have been visited on the reeling European Union since its foundation, is ready with answers:

1. The revised Savings Tax Directive, which all member states have agreed to, will plug many of the holes in the first version of the Directive. Except that it has not been agreed until all third-party states agree to it, and many of them, including Switzerland, probably won't do so. Even if they do, savers (and banks) will quickly find ways around the new Directive just as effectively as they did with the last Directive.

2. Withholding taxes were only ever intended as a stop-gap measure while exchange of information regimes were installed worldwide, ensuring that the returns from all revenue-yielding assets are reported to home-country tax authorities. This is a true statement, as far as it goes, but that is not very far, because there is no world-wide understanding that beneficial ownership should be recorded, and it is a simple matter for the ultimate owners of assets to obscure true ownership. FATCA is an attempt to remedy that situation, as was the attempt by the Loch Erne G8 to establish acceptance of the need for beneficial ownership registers. But after initial agreement on such a goal, it has quickly become apparent that no country is prepared to hobble its investors in such a way, and least of all the United States, which doesn't even have a national register of companies.

Now, before this begins to sound like a panegyric in favour of tax cheating, let us be clear: the problem here is that no system short of 100 percent state control will be successful in imposing high taxes on individuals, and even that eventually fails comprehensively, as we saw with the USSR. People will not accept high taxes, not least because they are inevitably associated with high levels of state corruption or incompetence, and usually both at once. Human nature simply does not tolerate such an equation, and apparent exceptions, such as the Scandinavian democracies, operate only at the level of wage-slaves, who have no more choice than the residents of Omsk in 1960. All Norwegian ship-owners are based in Greece, Cyprus, the Isle of Man, or Vanuatu.

I am as bored with saying it as you are probably with hearing it: there is only one solution, which is to reduce government expenditure and taxes, hand in hand. No country in Europe is doing this, despite all their bleating to the contrary; and until they (or rather, their benighted citizens, who keep re-electing the same ineffectual leaders) understand this, there will be no salvation for Europe.

Unfortunately, the prevailing consensus among international organizations and (mostly bankrupt) governments is exactly the opposite of the set of attitudes that might lead to a sane economic order. Tax is good, they say. The more tax the better, so that we can afford more "entitlements" (aka electoral bribes). This week there is a perfect example of that from Ireland, despite its status as one of the more liberal Western democracies: "Ireland Not To Blame For Low MNE Tax Burden" says a prominent association. Excuse me! "To blame"? That says it all. They should be proud of that fact that MNE (Multi-National Enterprises, for the acronymically-challenged among you who thought it meant Micro and Nano Engineering) taxation is low in Ireland. In what weird universe have we ended up where more tax is better than less tax?

This is why the international organizations such as the IMF, the World Bank and the OECD are so dangerous. I read an article this week in the normally quite sensible Economist magazine which suggested that a new Bretton Woods conference is needed in order to construct a fresh rescension of the original set of institutions. It's true that they have become ossified, have been captured by high-spending bureaucrats, and have transmogrified into instruments of Big Government. But the answer is not to give them yet more power; what we need is a new crusade similar to the market-friendly impetus of the 1970s and 1980s as a result of which redundant mechanisms such as exchange controls were demolished.

But where are the Hayecks and the Friedmans of the noughties? or is it the teenies? The only Bretton Woods body that retains its original mission unsullied is of course the World Trade Organization, and one of the most inexplicable aspects of the current paradigm is the casual disregard in which this institution is held by politicians and economists who seem to derive more pleasure from denigrating it than in supporting its work, which has demonstrably resulted in a true bonanza of international commerce. Both Lamy and Azevedo are genuine free-trade warriors, but neither is a Keynes. Perhaps the world has grown too knowing for there to be another Keynes. No flowers will bloom in a field of PhDs. It is depressing.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 112th) 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:

Ireland in denial

Switzerland more cheese than holes




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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