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the political spectrum is a veritable riot of color

Kitty Miv, Editor
03 October, 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.

BEPS may have led multinational entities to take a more cautious approach to tax planning in many parts of the world but governments are still attempting to wring any competitive advantage they can out of their tax systems.

The Dutch Tax Plan for 2018 and the accompanying Budget for next year is a classic example. Changes to the Dutch dividend withholding tax will improve the country's attractiveness as a holding company jurisdiction – just the sort of activity the Netherlands is often condemned for encouraging. So it seems like a contrarian measure to take in the context of BEPS and increasingly vocal complaints from transparency advocates that the Dutch corporate tax regime establishes the Netherlands as one of the world's largest tax havens.

But one of the many unintended consequences of the BEPS project has been the intensification of tax competition. We know this from the sudden upsurge in corporate tax-rate cutting over the last couple years. After all, there's nothing in the BEPS reports that says you can't cut corporate tax by a couple of percent here and there.

Indeed, perhaps another unintended consequence of BEPS is that it has highlighted the need for countries to compete on tax. Even despite BEPS, and the huge cultural change that is taking place with regards to tax avoidance, countries must consider that it's still necessary to compete, otherwise they would have stopped long ago. This might sound depressingly Darwinian to those with a more egalitarian view of taxation and its role in society, but as far as the fight for FDI is concerned, it's a jungle out there.

On the subject of nature, human beings have always erred on the side of reducing uncertainty in their lives. But judging by recent voting behavior, people are positively encouraging a bit of chaos. Gone are the days when there was a seemingly binary choice between center-left and center-right, between Democrats or Republicans, Labour or the Tories, Christian Democrats or Social Democrats, Socialists or Les Républicains. Various other political shades have crept in over the last few years, and now the political spectrum is a veritable riot of color.

The upshot of all this is that, increasingly, election results are inconclusive. A "hung parliaments" was the result of the United Kingdom election in June, and the recent election in New Zealand. Similarly, the German parliamentary elections produced no overall majority in the Bundestag as well as a politically weakened Chancellor. France has turned its back on the mainstream parties, but is showing signs of regretting the decision. Even the US could be said to have a "hung" Congress, with Republican factions as yet unable to unite over key policies – notably healthcare.

While these are exciting times for political commentators, they are something of a nightmare for taxpayers. Governments with clear majorities tend to have clear plans, even if most of the time the plans end up being executed only partially. But unholy alliances between parties of different stripes are often the source of policy paralysis, as the various participants seeks to reconcile what can sometimes be vastly differing positions on various issues, including taxation.

Germany is an interesting one in this respect. The CDU-led Government has stubbornly refused to loosen the fiscal reins in order to build up a budgetary buffer, in spite of successive pleas by economists to show a little mercy to long-suffering taxpayers. But the CDU is about to get into bed with a party calling for an aggressive tax-cutting policy in the form of the FDP. And joining them will be the Green Party, with its own distinct ideas on taxation.

Just how this will play out is uncertain. Some tax cuts are possible, with the CDU having pledged a moderate reduction in the personal income tax burden. However, if the parties simply can't agree at a more fundamental level, the most likely result will be little in the way of change. German taxpayers will be used to that.

Across the pond now and many US taxpayers would sympathize with the plight of their German counterparts, having been promised tax reform for what feels like 30 years, which just so happens to be the last time meaningful changes were made to the US tax code. And given that America's predominately two-party system can't get things done in the area of taxation either, German taxpayers should definitely avoid getting their hopes up with three diverse voices around the table.

Nevertheless, slowly but surely, a tax reform plan is crystalizing in the US. Back in July, Senior Republican leaders from the House, Senate, and the White House put their name to a statement agreeing a number of broad tax reform principles. Then, last week, the Republican Party rallied around a new tax reform blueprint which put considerably more flesh on the bones.

Given the lack of action on tax reform so far, this represents some progress. But we shouldn't get ahead of ourselves. Comprehensive tax reform will mean a comprehensive amount of detail – and plenty of opportunities for lawmakers to disagree. So far, there's been little detail to squabble over.

The Republicans are likely to need to get at least some Democrats on board in order to get a tax reform bill through Congress. And this is where the outlook suddenly begins to look depressingly bleak once again. Can the Democrats really be relied upon to help through a huge corporate tax cut, the elimination of the estate tax, and a reduction in the top rate of income tax, among other red lines they would have to cross? You've a better chance of seeing the sun rise in the west, I suggest.

Still, I suppose much greater feats have been achieved in the history of humankind, accomplishments that most thought impossible before they were attempted. So, hope springs eternal.

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

Netherlands competitive

United States crystalizing

Kitty's Execrations

Germany indecisive

New Zealand hanging

Ciao

Kitty


Tags: Government


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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