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the usual suspects

Kitty Miv, Editor
31 October, 2018

To open this week, I'm going to pose a question: In the future, which of these two leaders will be remembered most by future generations? George W. Bush or Mart Laar? No prizes for guessing which man is likely to get the most votes.

I'm assuming that few readers will be familiar with the life and work of former Estonian Prime Minister Mart Laar, or, indeed, will have heard of him at all. But while George W. Bush, as former leader of the world's largest economy, naturally made a larger impact on the international stage, he can't claim to have achieved a great deal in the area of taxation, aside from modest personal income tax cuts.

Indeed, on balance, president Bush arguably made things worse for US taxpayers. For many of the Bush tax cuts were legislated on a temporary basis, leaving taxpayers sweating every year or two over whether Congress would manage to put its differences aside and renew them.

Mart Laar, by contrast, helped pioneer a bold set of tax reforms in Estonia, including flat taxes on income, that have influenced tax policy across the world. Even president Bush professed his admiration.

Tax competitiveness seems to be ingrained in the DNA of Estonia. Because according to the Tax Foundation, it has the most competitive tax regime in the OECD. And while tax commentators bang on about the global impact of the TCJA in the US, America is still actually a long way behind, if the results of the Foundation's latest tax competitiveness index are to be believed.

Which leads me neatly into my next point: should such indexes be believed? We tend to take at face value the conclusions of indices measuring fiscal and regulatory fitness in each jurisdiction, such as those issued annually by PwC, the World Bank, the World Economic Forum, and the Heritage Foundation. But are they really reliable as indicators of relative competitiveness? There's not room here to begin analyzing the respective methodologies used to compile such indices. If I stumbled down that particular rabbit hole you probably wouldn't hear from me for another six months. But as with most things in life, the answer, I suspect, is probably not clear cut.

Broadly, these indices tend to agree on which jurisdictions are the most and least competitive. Your Hong Kongs, Singapores, UAEs and Irelands typically occupy the top spots, with developing and emerging economies in sub-Saharan Africa and South Africa the usual suspects languishing at the foot of the table.

But there are anomalies, which suggest that the results could depend on the method used to achieve them. For instance, Estonia is only 14th in PwC's Paying Taxes Index. And Latvia, 2nd in the Tax Foundation index, is slightly ahead of Estonia in Paying Taxes. Meanwhile, Luxembourg, in 4th place in the Tax Foundation index, is 22nd in PwC's, although Tax Foundation's does include only OECD jurisdictions.

So, maybe these indices are useful for taxpayers hoping to get a general flavor of where the best and worse places are to pay taxes. But, ultimately, there's probably no substitute for experience. Handily, given the topicality of the subject, the league tables concur that Italy's tax regime leaves a lot to be desired. Although, there are some disagreements, and principally how bad things are. The Tax Foundation ranks Italy 34th out of 35 OECD economies, so it's safe to say that there's room for improvement there. PwC, on the other hand, places the country in 112th place globally. That means it's (albeit marginally) easier for a business to pay its taxes in Lesotho (111th), the Federated States of Micronesia (110th), and the West Bank and Gaza (109th), which is hardly a ringing endorsement of the Italian tax system. In other words, opinions of Italy's tax regime range from dire to disastrous.

However, for all its controversial policies, one thing that Italy's populist coalition Government is trying to achieve is to give business taxpayers something of a break. For small firms and the self-employed, there's a flat tax in the draft 2019 Budget (thanks Mart), while larger companies could get a tax cut on reinvested profits. An automatic VAT hike, to be triggered when fiscal targets are missed, has also been cancelled.

So, here comes Italy then, poised to rocket up the tax competitiveness league tables! Watch out Estonia! Yes? Unfortunately, that's an unlikely scenario, at least for the foreseeable future. As Italy's taxpayers are doubtless all too aware, things aren't as simple as merely drafting a budget and pushing it through parliament, which tends to happen in most other countries in the world. Italy was already effectively on the EU's fiscal naughty step before the Budget was released, so it was hardly likely that it would be able to sneak a Budget full of tax cuts and spending hikes past Principal Brussels. Hence, it's been sent back into class to think about what it's done, and to try and get the Budget right this time. "Do you want to end up like your cousin Greece? Well then."

It's difficult to know where Italy goes from here. Will the tax cuts survive in their current form? Will they survive at all? The prognosis doesn't look promising. The EU's punishment of choice for fiscal transgressions is a fine, which is a bit like trying to cure someone of an illness by withholding their medicine. But as we've seen time and again, especially in the area of taxation, the EU rarely backs down on politically significant issues, no matter how controversial or unworkable the proposals might seem. Your move, Italy. If you've got any pieces left to play, that is.

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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