widening a country's tax base can lead to substantially higher tax revenues
Kitty Miv, Editor
24 August, 2015
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 OECD seems to be obsessed with tax-to-GDP ratios. According to the OECD, the reason that poor countries are poor is because they don't collect enough tax. The OECD says that emerging economies like Indonesia, Malaysia, and the Philippines could be more competitive – I repeat, more competitive – if they raised the level of tax revenue collected as a percentage of the economy in line with the OECD average, which is currently about 35 percent. Since when have high taxes been viewed as desirable and low taxation viewed with derision? – Since the OECD began driving the international tax agenda, that's when. And given the way that this thinking is accepted and rarely challenged by governments or the mainstream media, it is now the new economic orthodoxy. When do we ever praise a country for achieving prosperity without taking one-third to one-half of its citizens' income in tax? Rarely is the answer, because it's all about having a tax-to-GDP ratio of 35 percent nowadays. Low-tax countries are treated with suspicion. Under this new paradigm, low-tax countries effectively steal tax revenues from high-tax countries, and that's "not on." It doesn't seem to matter how much public money governments waste. Most of the rich countries have managed to get themselves into massive amounts of debt despite maintaining high taxes. Is this the fiscal model we really want the Indonesias and Malaysias of this world to aspire to?
In my view emerging economies could collect far more in revenue to invest in public services, health, infrastructure, and social security by widening their tax bases and stamping out inefficiencies in tax collection. India, for example, collects income tax from only 4 percent of the working population and suffers from epic bureaucratic inefficiency. As South Africa has shown, widening a country's tax base can lead to substantially higher tax revenues without the need for substantially higher taxes.
It is to South Africa I turn to next. In 2013, the Government set up a committee of tax experts to review the country's tax system. The overarching aim of this exercise is – in the words of the Government – to "assess our tax policy framework and its role in supporting the objectives of inclusive growth, employment, development, and fiscal sustainability." It's a sentence that could have been lifted word-for-word from an OECD report on tax-to-GDP ratios. But it's actually fairly easy to translate this official-speak: for phrases like "inclusive growth" and "fiscal sustainability," read "more spending and more tax." Being the cynic that I am, I suspect that the Government probably set up the Davis Tax Committee, as it has come to be known, in the hope that its conclusions would help to justify its argument for certain tax rises, particularly to mining taxes and VAT. The IMF was also commissioned to write a parallel report on the South African tax system, presumably to hammer home the need for more "inclusive growth" and "fiscal sustainability." The Davis Committee is refreshingly off-message however, concluding recently that there is no need for mining taxes or the VAT to be increased. Predictably, the IMF sees scope for more revenue to be raised from the resources sector. Given that the contribution of mining taxes has fallen to just 2 percent of overall revenues, this might not be such a bad thing after all; it would prevent the need for income tax and VAT increases, which would have a more widespread impact on the economy. The Davis Committee's conclusions also signal that South Africa's tax system is actually functioning better than many supposed. I wonder if the Government will see it that way. Usually the recommendations of tax reform panels are ignored by governments. This could prove to be an exception to that rule!
I've heaped a lot of praise on India in the year since the BJP Party came to power. But the Cairn Energy dispute is a reminder that, when it comes to tax matters, the Indian Government continues to move in mysterious ways. The Government is saying all the right things: that the tax laws should not be used to "terrorize" foreign investors. However, it's debatable whether the message is really getting through. Cairn Energy, exasperated with the Government's lack of interest in resolving its highly publicized tax dispute with the company, has resorted to launching arbitration proceedings via the dispute resolution mechanism provided for in the India/UK bilateral investment treaty. As Cairn's Chief Executive, Simon Thompson, implied when speaking on this matter recently, such developments are hardly a great advert for India. The Government is to be applauded for bringing to an end dozens of tax disputes with multinational companies. But, in reality, it has only scratched the surface. Finance Minister Arun Jaitley himself revealed last month that more than 37,000 tax dispute cases were pending before the various income tax tribunals, with INR1.45 trillion (USD14bn) in potentially outstanding tax at stake. Whether the Government is prepared to forgo such a large sum will test its pro-business credentials.
It turns out that the tax measures foisted on Greece as a condition of its latest bail-out are more extensive than first thought. But I maintain my position that this so-called rescue package is going to be in vain and Greece's creditors may be chucking good money after bad. I fail to see how sufficient sums of revenue will be raised and Greece's debt obligations met from a shrinking economy that is already one-third smaller than it was at the start of the crisis. Economically, Greece is well and truly stuck between the devil and the deep blue sea, between ever harsher and self-defeating austerity, and the journey into the unknown represented by the "Grexit." The problem is, while the Greeks don't want the former, they have been mostly unwilling to contemplate an EU exit too. But there are signs that that sentiment is changing. Former Finance Minister Yanis Varoufakis prepared a plan in secret for an orderly exit from the euro, a contingency for if talks between the EU and Greece broke down irrevocably. And now the breakaway left-wing Popular Unity Party is saying that the Grexit wouldn't be the catastrophe some people fear, if it were managed correctly. It might all go wrong, but then again Greece has a chance of redemption if it does decide to take the plunge – and that's got to be better than eternal misery.
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.
South Africa off-message
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