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what's the answer to the tax credit conundrum?

Kitty Miv, Editor
01 February, 2016

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.

Tax credits seem to be the answer to everything these days. Indeed, it seems that in many countries, no social or economic problem is too large that it can't be fixed with a tax credit. The United States is a particularly avid user of the tax credit; it uses them to help people to care for their children and elderly relatives, obtain health care, educate themselves, supplement their income, save for retirement, pay for a home, power their homes more efficiently, and buy environmentally friendly vehicles, among other things – and this is just the individual credits. I'm afraid I might lose you if I list the tax credits for businesses as well.

On the face of it, tax credits seem like a marvelous idea. Who wouldn't object to being given a little financial help? But this is one of those rare occasions where I feel sympathy for the tax man, because for the poor old Internal Revenue Service, all these credits are a nightmare to administer. Tax credits are complex creatures because of the eligibility tests needed to ensure that they are claimed by the people or companies they are supposed to be claimed by. Consequently, they are prone to erroneous and fraudulent claims. For instance, the IRS was recently lambasted by the Government Accountability Office for conducting "minimal" oversight of the Low-Income Housing Tax Credit, available to private developers. It was also criticized by the Treasury watchdog TIGTA last May for allowing an estimated 3.6m taxpayers to receive more than USD5.6bn in potentially erroneous education tax credit claims in 2012. And we routinely hear that the agency is struggling to get to grips with Obamacare tax credits, while the scale of Earned Income Tax Credit fraud is truly staggering: almost a quarter of EITC payments in 2013 were improper, bleeding the Treasury of USD14.5bn, according to TIGTA.

So what's the answer to the tax credit conundrum? Why, more tax credits of course! Just last week, President Obama proposed a new tax credit to encourage a higher take-up of workplace pension schemes. Hilary Clinton plans a slew of new tax credits if she wins this year's presidential race, including credits to encourage employee profit-sharing, to promote investment in economically depressed areas and to defray the rising cost of healthcare. But it's not only Democrats who are possessed with a tax credit mania. Jeb Bush wants to replace Obamacare with a new health tax credit, and credits have been enacted under presidents of both political stripes in recent years. Predictably, some candidates on the right, such as Ben Carson, want to do away with tax credits as part of root-and-branch tax reform plans. However, the easy bit is giving people tax credits. Taking them away again is the hard part, as British Finance Minister George Osborne found out to his cost recently. Indeed, I think I can still see some egg on his face.

Belgium has had a bit of a bad rap recently, having been very publicly rebuked by the European Commission for allowing some multinationals to pay not very much tax. So I think it could do with a bit of a pick-me-up. So Belgium, here's an encomium for finally coming to your senses and recognizing the flaws in the insane EU financial transactions tax proposal.

When you think about it, the very reason why we're having the debate about corporate tax avoidance is because of the bankers. When everything was going swimmingly, in the Halcyon days before the financial crisis, fewer people seemed to care how much tax big companies were paying, or, to be more accurate, the media wasn't that interested in the subject so people didn't read or hear about it as much. Now, it sticks in the throats of many that ordinary taxpayers are paying to clean up the mess the bankers left behind. And I'm in agreement with the view that the banking industry, and key figures within it, haven't been sufficiently punished for past mistakes. Supposedly, the FTT is meant as a sort of compensation scheme – a small tax on the greedy world of finance, to be passed on to needy European governments. But it may well cause a whole load of collateral economic damage to achieve this.

Surely the FTT coalition is now on its last legs? Estonia couldn't bring itself to endorse the loose agreement struck by the participating member states in December, and Slovenia's involvement is somewhat uncertain after it appeared to reject an earlier agreement in 2015. If Belgium goes, perhaps the whole shoddy structure will come crashing down. Now that I'm looking forward to seeing.

And last, but certainly not least, Google. I'm not sure whether to laugh or cry when I hear politicians bleat on in righteous indignation about how multinationals in the tech sector get way with paying hardly any tax in the countries in which they do most of their business, like the UK, when it is those very politicians who set and oversee the tax rules that allow the Googles of this world to do just that.

I'm going to defend Google to a degree – which admittedly isn't a very popular thing to do – because what is a "company" if it's not a bunch of people? By people I mean employees, directors, and shareholders. Employees and directors pay tax on their incomes. They then go and buy many goods and services, much of which is also taxed, directly or indirectly. Shareholders pay tax on their dividends. Companies usually own assets of some kind, which will be taxed if sold at a profit. So the bigger the company, the bigger its tax footprint. Google isn't a huge employer in the UK – about 2,000 currently work for the company in Britain – but to say it pays no tax at all is slightly misleading.

Nevertheless, I can understand that cozy deals between tax authorities and big business don't look good at a time when the tax man is coming down on small businesses like a ton of hot bricks for relatively minor infractions, which seems to be happening in the UK by all accounts. Clearly something has to change, but I just don't think BEPS is the answer. As far as I'm concerned, BEPS will make the situation worse. It gives a lot of discretion to governments to implement the recommendations as they see fit, or not to implement them at all, which will leave more tempting gaps in the international tax jungle for multinationals to thread their way through. And at a time of fear about the global economy, it will make doing business and paying taxes far more uncertain than it is already in many countries. Maybe corporate tax should just be abolished altogether, and then the game of cat and mouse would cease at a stroke. I'm sure there's plenty of other things governments could find to tax instead.


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

Belgium sees sense

Kitty's Execrations

United States out of credit

United Kingdom self-righteous



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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