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we'll lend you money as long as you don't tax us too much

Kitty Miv, Editor
12 June, 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.

We are seeing a series of improbable developments in Japan, as previously unthinkable changes seem to be swallowed wholesale by an economy which was thought to be on terminal life-support. There now seems to be wide acceptance that it will be possible to make further cuts in corporate tax rates while continuing to beef up sales taxes. Even the IMF agrees that this is the correct strategy, while of course continuing to insist on the need for measures to address the country's indebtedness: 240 percent of GDP and rising. Due to the fact that a very high proportion of the debt is held by domestic savers, who have historically been prepared to accept low interest rates, the average rate paid by the Government is a mere 1 percent. But the budget deficit this year is likely to be 11 percent of GDP, far above a sustainable level, and debt service mops up nearly a quarter of current government spending. Given that Japanese tax revenue amounts to only 28 percent of GDP (ten points less than in the US and twenty points less than in Europe), the bargain between citizens and Government seems clear: we'll lend you money as long as you don't tax us too much. What happens though if savers break ranks, and refuse to continue to support the debt burden at today's low rates? The answer given by Abenomics seems to be that a dash for growth will pull the country out of its current economic malaise before the worm turns.

A deeper question perhaps is to ask whether Japan can continue to be that immune to global pressures. Low interest rates are a worldwide phenomenon at present, as witness this week's rate-chopping exercise by Mario Draghi. There is not much temptation for a Japanese saver to betray her Government's national interest when the alternative is so unattractive. But the era of low interest rates will soon come to an end – it is already remarkable that so much printing of money and quantitative easing has not led to higher inflation, perhaps only because of lack of private demand for money during the debt crisis – and when it does, rates will shoot up. Japan is on a tight-rope, therefore, and you have to hope that Shinzo Abe will be able to get to the other side before the illusion shatters. From that perspective, the IMF, for once, is right, and the overriding need is for the Government to take more money from its citizens, rather than continuing to borrow it. I never thought I would say such a thing, but: "Diseases desperate grown by desperate appliance are relieved."

I was complaining last week about the anti-consumer behaviour of the US Department of Commerce (DoC), and it is good to see that New Zealand's Government is sufficiently economically literate to consider a public interest test in cases of proposed anti-dumping duties. This is a step towards my proposal for an international review panel for anti-dumping actions, but I am not silly enough to suppose that any large country will follow New Zealand's example. And the moment that a left-wing administration takes power, they will abolish the test, of course. Let's wish New Zealand fifty more years years of Rogernomics! Meanwhile the appalling DoC is continuing to dig away at the grave of free trade, in the process infuriating its trading partner China.

A tax on advertising is possibly an even more egregious offense against free trade principles than are anti-dumping duties. I thought that such dippy ideas had been junked along with Gosplan and the Marxist-Leninist Millennium, but I was wrong, because here it is, surfacing again in the EU's equivalent of a Marx Brothers comedy, that's to say, the Hungarian Government. They are seriously considering a tax on the revenue of media organizations of up to 40 percent. I really don't know where to begin with this one. Presumably there is some undercurrent of moral disapprobation going on: that was certainly the case in the USSR, where advertising was seen as as a reprehensible feature of capitalism, and taxing it was therefore a virtuous expression of good Communist principles. But Hungary isn't Communist. It teeters on the edge of becoming a dictatorship, and seems to have some fairly nasty fascist leanings, neither of which appear fitting for a Member State of the EU; but its economy is ruggedly capitalist. So what is the logic of trying to destroy the ability of companies to communicate with their customers? Especially perverse is the idea of taxing media companies more if they are more successful. Anyway, the results of this foolish proposal are easily predictable: first, all media companies will leave immediately and conduct their business in Hungary from outside the country. There is nothing the Hungarian authorities can do about this, within the single market. Second, advertising agencies will follow the media companies and will do business with them elsewhere. Those Hungarian media companies that cannot physically move – a newspaper with a printing plant in Budapest, say – will set up advertising sales subsidiaries outside the country and will offer space at knock-down prices to those subsidiaries in order to minimize the amount of in-country advertising revenue. And so on. You can work it out for yourself. There will be minimal revenue from the tax and very high enforcement costs. And all that is if the EU even permits the proposal in the first place, which is unlikely. What is wrong with these people?

Here's another old-fashioned conversation going on across the border in Hungary's one-time imperial partner, Austria, with a cross-aisle coalition government at loggerheads with itself over whether to finance tax cuts for the poor with extra taxes on the rich. As in many countries in Europe, this discussion focuses on what is called "bracket-creep" or "cold progression" in German, that's to say, the automatic rise in taxation that follows on from inflation-linked wage increases if tax brackets don't change. But hold on a minute, just a few kilometres away, Mario Draghi is doing his utmost to encourage inflation, because (as he sees it) there isn't enough of it. So how can there be bracket-creep if there is no inflation? It is just a nifty idea that left-wing negotiators have fixed on in order to bash the rich. Well, Gordon Brown found out about bashing the rich during his short and disastrous tenure of Downing Street. It doesn't work! But the news hasn't filtered across to Central Europe: Fog in the Channel: Continent Cut Off!

 

Kitty's Encomiums and Execrations

Methodology: each week (this is the 108th) 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 neutral, 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:

Japan living dangerously

New Zealand has principles

And Kitty's Execrations:

Austria with coalition paralysis

Hungary loses it

 

Ciao

Kitty



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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