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the problem has been recognized, which is half the battle won

Kitty Miv, Editor
08 March, 2017

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.

The German Government deserves much credit for the prudent management of its budget, and of its economic affairs in general, which has resulted in a record post-reunification budget surplus of EUR24bn (USD25.3bn). But I could also mark the country down for its extreme reluctance to share the surplus in the form of tax cuts. And there's plenty of scope for those. According to Paying Taxes, an average-size company in Germany hands over just under 50 percent of its profits in income, labor, and other taxes. What's more, individuals face a top rate of 45 percent, plus the solidarity surcharge and social contributions. The counter argument is that some of the best public services in the world must be paid for somehow, and that somehow is inevitably through taxation – a bargain accepted in northern Europe much more than it is anywhere else in the world. But there is of course another reason why "Mutti" Merkel is keeping such a tight grip on the purse strings. And that is Germany's role as the Eurozone's fiscal firefighter. Yes, we might not hear about the crisis in Greece, and the problems afflicting Italy, Spain, and Portugal so much anymore, but the fire is still smoldering below the surface, and many believe it could erupt again at any moment. There is an election coming up though. So we can expected the usual promises of minor tax relief, to be delivered through tweaking tax allowances and thresholds, but not much more than that I suspect.

To South Africa now, and much more than a few tweaks will be required to guide this country away from the rocks. If most estimates turn out to be correct, economic growth slowed to less than a crawl last year (0.1 percent), and such stagnation isn't going to help the Government rein in a budget deficit that looks likely to have exceeded 3.5 percent of gross domestic product last year. Indeed, if South Africa were in the European Union, it would have undergone the EU's dreaded excessive deficit procedure by now, and suffered the indignity of having Commission officials running the rule over its fiscal affairs. South Africa does of course have a very unique set of problems to deal with, mostly linked to the end of the apartheid system over 20 years ago and the assimilation of millions of economically and politically disenfranchised people into society. But on recent evidence, the Government looks to be the architect of many of its problems, particularly by letting spending outpace even the stellar growth in tax revenues. This has resulted in significant tax rises in the last three budgets, including the one announced recently by Finance Minister Pravin Gordhan. And the way things are going, more tax hikes are on the cards.

Things are looking more optimistic for the Philippines however, which is hopeful that a tax reform program will be completed by 2018. However, hope is the key word here, for I wouldn't hold your breath for a dramatic improvement in this country's tax environment. In fact, the scale of tax task is daunting. The Philippines finds itself languishing in 115th place in the global Paying Taxes index, with a tax incentive system so complex that it actually deters companies from the Philippines rather than encouraging them to invest there. And don't take just my word for it. The head of the Bureau of Internal Revenue said so herself in a seminar in New York not so long ago. And last year Finance Department spokesperson Paola Alvarez said that the Philippines and Thailand collect the same amount in VAT revenues, even though the VAT rate in the Philippines (population 102m) is 12 percent and Thailand's (population 68m) is seven percent. This, he said, "demonstrates the gross inefficiency of our system." Problems associated with tax inefficiency, a narrow tax base, and complexity seem to plague the tax regimes of emerging economies like the Philippines. Still, at least in this case, the problem has been recognized and acknowledged, which is half the battle won.

Not that developed economies have a better track record on tax complexity. They are just as guilty of undermining their tax bases with countless tax incentives, tax reliefs, and other narrowly targeted tax breaks and loopholes, which collectively tend to be known as tax expenditures. And, despite widespread realization that tax expenditures are starting to run out of control, there has been an almost complete failure to do anything about it. Canada, for example, has just released its annual tax expenditure report, which is supposed to keep track of such things. But I haven't seen much in the way of meaningful base-broadening measures in recent federal budgets. Indeed, they have all been peppered with new and expanded tax breaks of one form or another. The United States meanwhile "spends" around USD1 trillion a year on tax expenditures, despite numerous congressional reports and hearings on how this situation must be reversed. And even with the presence of the Office of Tax Simplification, tax reliefs in the United Kingdom have actually risen by 100 since the Government came into office less than two years ago to a mind-boggling 1,140. Now there's a misnomer if ever there was one! Perhaps the Office of Tax Complexity would have been a more appropriate name.


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

Germany surplus

Philippines optimistic

Kitty's Execrations

South Africa worrying

Canada spendy



Tags: Euro

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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