Friday, April 27, 2007
Practically, there are almost no hiring/firing obstacles in Denmark from the international point of view. The average non-wage labor cost equals 0,7 percent of the salary while firing costs equal 10 weeks of wages compared to the OECD average of 31 weeks of wages as a firing cost which employer has to bear. In IMD's World Competitiveness Yearbook in 2004, Denmark scored 7,79 out of 10 points in measuring the level of deregulation of the labor market where 1 means fully regulated labor market while 10 means completely deregulated labor market.
A new road map against unemployment: Reassessing the Jobs Strategy, OECD Observer (link)
Monday, April 23, 2007
Finnish and Estonian market have always been very active in supplying Russian market through shipping direct or indirect imports. This was firmly demonstrated in early 90s when Finland was hit by a severe external shock after facing a trade slump together with the downfall of the Soviet Union. Estonia was, on the other hand, trade-dependent on Russia in 1992 percent. Both, Estonia and Finland, have achieved admirable economic recovery based on supply-side economic policy, deregulation and market liberalization.
The advantages of indirect channel export are determined by the per unit costs of export. As a part of the EU, Finland and Estonia have lower tariffs and quotas in comparision with Russia. The common EU weighted average tariff rate was 1.7 percent in 2005 compared to the average weighted 8,7 percent in Russia. For example, if U.S. export company chose the indirect export channel option to Russia as a part of the entry strategy via Finland or Estonia, it could significantly mitigate the cost-push shock per unit of export. Finland and Estonia would also benefit from being positioned as a kind of trade agent between the U.S. and Russia. The import sector latter could benefit from better access to product markets exercised through neighborhood effects.
Sunday, April 22, 2007
However, the growth has been paced up by a gain in consumer spending offset by declines in residential construction and business investment. Housing may persist as the biggest growth obstacles. After hitting the core of growth impact, the forecast for the next period is reflecting a positive outlook and conditions to trigger higher growth. Accounting one third of the economy, consumer spending grew at a last quarter's annual rate of 3,5 percent - 0,5 percent less than in the last 3 months of 2006.
Spending on residential construction projects dropped at a 15 percent annual rate. The unexpected drop boosted the sales decline. Sales of new and previously owned homes slowed to an annual pace of 7,29 million last month which is the lowest rate in the last four months.
Consequently, the sales of existing homes dropped 4,3 percent to 6,4 million. Hence, some housing markets in states such as Arizona and California are becoming much tougher. Surprisingly, home building hasn't worsened last month.
Rising costs of fuel and flat home prices contributed its share to dragging down consumer confidence last month. Even a lessening in a tight labor market may have contributed to the downshift in GDP growth.
Despite the possible recession alarming, the U.S. GDP growth remains tight although it weakened in this period. The overall growth at the end of the year remains optimistic and so does the analysits' GDP growth forecasts. The problem at the housing market is the rigidity of prices which strongly influences the consumer confidence and hence housing purchases by the household. The overall effect, of course, affects the supply side as we may see in the U.S. growth report. The decline in consumer confidence is a strong shock to the supply side which, hence, confronts significant level of risk to further accelerate growth of housing purchases.
Growth Weakened as Homebuilding Slumped: U.S. Economy Preview, Bloomberg.com
Wednesday, April 18, 2007
authorities and the investment is held as a private asset. Corporate, pension fund, bank and insurance company investors in domestic distributing funds are taxed on income and capital gains distributed. The average applicable tax rate is between 16% and 25%, depending on the canton where the company is domiciled and on any special tax status of the company. Accumulated income is not subject to tax on an unrealised basis. Pension funds may be exempt from income tax if certain conditions are satisfied.
Concerned with London's prime dominance of European hedge fund industry, Swiss officials are considering a dramatic tax cut for top hedge funds from current approximately 45 percent to 10 percent. London is still the home of European hedge fund industry, currently accumulating 80 percent of it. However, Switzerland realized that global benefits from tax competition are enormously important for competitiveness, vibrant financial markets and the mobility of hedge fund assets.
Monday, April 16, 2007
In an interesting and lively discussion, it was easy to come to conclusion that there is actually no unified Scandinavian model. Nordic countries are very different respectively. In late 1980s and early 1990s,
Finland was hit by a severe external shock, facing high unemployment, rising inflation and falling GDP. The economic policy of deregulation, tax cuts and economy's liberalization galvanized Finnish economic success and rapid growth during throughout the 90s. In economic policy, Finnish policymakers successfully anchored the GDP spending level and cut it by an incredible 10 percent.
Sweden, once the second fastest growing economy in the world (after Japan), reached the third place in OECD Prosperity League. After the 1970, the economy was hampered by expansionary tax increases. The marginal income tax rate was moving closer to 90 percent until the emergence of economic crisis. Aftermath, product markets were liberalized, school vouchers introduced, and business environment unburdened. This enabled Sweden to accelerate its global competitiveness by openning itself to globalization and foreign investment participation.
Denmark, a country with one of the most flexible labor markets in Europe with practically no hiring and firing limits, has the lowest youth unemployment rate in the EU.
Norway, usually regarded as the "Saudis of the North", is able to sustain generous welfare policies mainly because of large oil and gas revenues collected in various forms of mutual generational funds. Despite the generous welfare resources, private health care was introduced as well while deregulated financial markets boosted the investment and competitiveness of Norwegian companies domestically as well as abroad.
By no doubts Iceland belongs to the group of most successful reformers. It enjoyed high-growth rates throughout the 90s despite a mild recession in 2002. In 2003 and 2004, Icelandic economy grew by an incredible GDP growth rate, 4,3 percent annually between 1995 and 2005. Behind economic success, there was the liberalization of financial markets and the privatization of numerous state enterprises and government agencies. Banking in Iceland sparked an incredible success. Today, the three largest Icelandic banks are among Nordic 15 most successful banks. Central bank was given an independence to curb the inflation and the entrepreneurial sector flourished. Credit ratings were high and enjoyed with confidence in international markets. Today, Iceland is still in the front of the most bite-roaring tigers. The country recently instituted the flat tax, nearly eliminated double taxation of savings and investment. Corporate tax rate was slashed from 45 percent in 1991 to 18 percent in 2002. And this explains much of Iceland's incredible success.
In summing the discussion, Nordic tigers have institutional framework built on the foundations of prosperity (rule of law, private property rights and sound money). Free trade and openness to globalization have enabled individuals and companies each Nordic country to absorb its separate comparative advantages (see: Finnair's Asian Route strategy) Further, the liberalization of the financial sector, deregulation, restrictive spending and the privatization of government enterprises have boosted each tiger to sustain robust growth rates and sound structural environment.
These are the features that the United States and other countries can learn.
Otherwise, there is only one simple formula concluding the story of the Nordic models: Admire the best and forget the rest. In fact, government cannot pursue success, but individuals do.
The forecast says that demand for energy-efficient IT could swiftly come out in fast-growing markets, such as India and China, rather than in Europe and the US.
This is a sign that fast-growing markets can absorb the comparative advantage of new economy much faster than their Western counterparts. In fact, Forbes reports that China has exceeded the expectations in human capital investment last year, forecasting to raise the GDP share contributed to R&D.
It also notes that China surpassed the U.S. in internet use.
Friday, April 13, 2007
According to several internationally issued reports, Slovenia is the most demographically sensitive and agingly unsustainable area in the EU. The birth rate is actually the lowest in the wider region while the number of early retired grows very fast. This means a flamed pressure on public finance which is the main source of pension liabilities settlement. It is estimated that by 2020, the negative demographic passage combined with a growing number of newcoming pensioners is about to start causing negative side-effects such as lower growth, and higher tax burden on employees and employers hampered by the overwhelming percentage of gross salary contributed to health care and public pension schemes. The costs of health for those whose age is above 65, are four times higher than the average cost of healing. As the health care sector is constantly getting technologically more and more sophisticated, the average life expectancy is increasing as well. The net effect is a rising tax burden levied upon employees and employers who actually finance public health care system and pension schemes via certain share of gross salary (in Slovenia: 22 percent of employee's gross salary goes directly into public health care scheme).
Regarding pensions, Slovenia faced a unique situation since it gained independence. In socialism, the goal of economic policy was to pursue full employment. As a matter of fact, when Slovenia geared up onto the road towards market economy, it was realized that a large share of employees employed in "social companies" (state enterprises) was made technologically redundant. The response of economic policy was to allow those employees to apply for pension and social security schemes and at the age of 40 and 50, a number of pensioners sparked briskly. The measures undertaken by the economic policy were levied on a permanent basis.
Going back to the original topic of this post, what Slovenia and its policymakers learn from Norway?
In Slovenia, KAD and Sod are the major capital asset funds.
The question is how will Slovenia fulfill pension liabilitiesand consequently implement pension reform.
Previously, Mićo Mrkaić wrote an excellent column describing how government asset funds (KAD, Sod) should be managed in order to settle a growing volume of pension liabilities. Unofficial estimatations show that the volume of generated pension liabilities is getting closer to 200 percent of the GDP.
To settle all the existing and future pension liabilities, Slovenia should invest government asset funds into securities negatively correlated with GDP growth because real GDP is the second source of settling pension liabilities. The abovementioned strategy is also a sort of insurance against macroeconomic shocks that could affect Slovenia. In general terms, Slovenian asset funds are ought to be invested in oil and energy because this startegy perceives a negative productivity shock lowering the GDP growth. If there is a sharp drop in oil prices, oil-exporting economies rapidly invested in oil and energy funds as their net value would brisk.
Norwegians used a similar strategy of investing into securites negatively correlated with the GDP growth. Due to enviable return opportunitiy, Norwegian fund managers decided to diversify the oil fund into global portfolios throughout the world. Such an approach implies a beneficial risk management position while it causes cost-push effects due to special measures and specifics underlayed in managing such an extensive fund. As every portofilo investor should behave, Norwegian fund managers and policymakers did not exercise a strategy of domestic investment.
Finally, recent investment strategies undertaken by Norwegian oil fund focused on investment into securities of small high-growth overseas companies listed on niche markets. Under the new guidelines, about NKr 1,070bn ($178bn) of the NKr1,800bn fund will be invested in equities worldwide, compared with around NKr 720bn under the old guidelines. Is such an investment strategy too risky? It depends on the enhanced relationship between perceived risk and expected return plus the experience of fund managers from the past especially on how to handle the volatility.
In Norway, government pension fund is entirely invested abroad. In 2006, it generated a 7,9 percent return in local currency terms in comparision with the average nominal 6,5 percent return from 1997 onward. The much smaller remaining portion of the fund, the Pension Fund - Norway, which invests in the country, reported a 11.7 per cent return. Together, the entire fund was worth NKr1,891bn at the end 2006. It is forecast to grow to NKr3,043bn by 2010.
Overall, risk management quality and portfolio investment strategies of the Norwegian pension fund is what policymakers in Slovenia can learn about according to the fact that Slovenia is far the most demographically threatened area in the EU and a country that will be severely shocked by the effect of aging population if necessary pension reform is still postponed (status quo) into the future time when the size of generated pension liabilities will quake the stability and sustainability of the public finance in the years to come.
Taking both, endogenous and exogenous factors into account, there is some particular asymetric reversion in this case. Slightly higher inflation rate comprises the enhancement of GDP convergence. In this case, it seems that the European Commission got frustrated by liberal economic institutions and competitive regulatory framework which enables Estonia to sustain higher growth rates on the basis of long-term estimation. In fact, Estonia has fulfilled all other listed Maastricht criteria. The country's macroeconomic situation is appraised by a low proportion of public spending and a strong fiscal "surplus" stance currently targeted at 1,8 percent of the GDP. Estonia has long been the pioneer of the culture of sound monetary practice on behalf of responsible policy-making of the Central Bank which brought the inflation pressures, emerging from expansionary monetary policy, effectively under control. Further, Estonia was the first ex-communist country to launch the liberalization of the financial sector. To avoid the real long-run inflation pressures, Estonia is ought to enhance the flexbility of labor market which could in turn, as a consequence of possible overheating, play a vicious role in triggering a pressure on inflation in claiming fiscal stimulus and wage growth through collective bargaining ignoring the productivity dynamics. Such a scenario happened in Slovenia in early 90s.
There is an open question touching the EMU rules which are ought to be respected by each member country. How can countries such as France ignore the Maastricht criteria, say, the budget deficit and an extraordinarily high GDP consumption rate? Instead of praising Estonian efforts to turn the fiscal stance into the surplus and maintain a low public debt, the European Commission denied Estonia, Latvia and Lithuania the Euro entry though slightly higher inflation rate did not follow from an irresponsibly behavior of the central bank but it resulted from what the European Commission and the EU are constantly talking about - GDP convergence in the framework of stability and vibrant macroeconomic environment.
There certainly are benefits from Euro and EMU membership such as the elimination of risk associated with having a separate currency, the ease of transaction costs and further fostering economic integration. But EMU membership demands a sound institutional framework and competitiveness to further boost producitivity which supports GDP growth rates. We can also see that in case of irresponsible fiscal policy and uncontrollably undertaken structural measures, Euro does not help to pursue streamlined objectives as in case of Italy, France and Germany.
Stefan Karlsson gave a thorough perspective on the question of Baltic integration into the Euro zone.
Thursday, April 12, 2007
As a transition country, Albania can take benefits from global tax competition by slashing the corporate and personal tax burden to attract more foreign investment needed to boost the economic growth and accelerate the pace of GDP convergence. If Albania wants to stay competitive in the global sphere, it has to attract more corporate inflow and this means more new net jobs, faster venture capital creation and possibly lower unemployment. The announced flat tax implementation contains a drop in employer's social security contribution rate from 20 percent to 10 percent by the start of 2008 respectively. The proposal suggests further cuts in capital gains and dividend tax which is a welcoming feature since it will not punish investors for their results emerging from productive behavior. In addition to boost competitiveness and sustainability, Albania will have to face the structural problems, mostly corruption and a cheapscape protection of private property rights which is a fundamental framework within which the economy works.
Swedish policymakers abolished the wealth tax imposed on assets in 1947, an interrupted symbol of Keynesian economic policy, which launched in 1932 when the country stepped onto the road of socialism. Wealth tax was levied on assets above 1.5 million kronor ($215,000) for singles and three million kronor for couples. The current rate is 0.75%, down from 1.5% last year. That's on top of income taxes, which range between 29% and a top marginal rate of about 60%. Wealth taxes used to be de rigueur in Europe, where there are only a few holdouts. France's is between 0.5% and 1.8% on assets above $1 million. In Spain, it's 0.2% to 2.5% on assets above $223,000. Several mega-rich individuals left the country including Swedish tennis star Björn Borg, ABBA’s Björn Ulvaeus, and the founder of Ikea, Ingvar Kampard. In early 90s, when the economic performance was marred by a falling level of the GDP, rising unemployment and high inflation, several economic reforms imposed liberalization on a broad range of product markets such as telecommunications and ICT industry. Those on the left, who have sought economic guidance from egalitarian Sweden, need to browse for a new role model. Recent tax reforms, focused on matching the conditions to spark economic growth and capital creation, have already come into effect. These days, Stockholm is flourishing by taking the benefits of lower tax rates and reduced tax burden followed thereby. In the early period after initiating long expected economic reforms, investment inflow rate increased unexpectedly, fueling the innovative capacity of Swedish economy which is luckily back on normal track, with many challenges yet to come-up in the future.
Monday, April 09, 2007
"The European Union is very split because of national interests everywhere. There is no common policy on military or foreign affairs. There is even a form of apartheid in Europe. Workers from Romania and Bulgaria, and even from Slovenia, are not allowed to work in Austria and Germany. It is not the question of whether they want to go or not, but they are not allowed to go. So how can you tell me that we are a European Community when part of the population is not allowed to seek labor in another country? It is a clear system of apartheid. The fact that nobody of the political elite of Eastern Europe is taking the case to the European Court, to the Court of Justice in The Hague, means that they don’t dare or care or they don’t understand. The Lisbon strategy objective stated that Europe should become the most competitive region by 2010. Forget it. The objective was right, but it will be missed, because of different national interests and due to non-qualified politicians that we carry around and who are dragging all the reforms. There is no way that we can become the most competitive region by 2010."
In the aspect of environmental component, Denmark peforms very well. It is known for an excellent legal framework in the world multiplied by a strong and respectable protection of intelectual property rights. The excellence of legal environment is well codified in some featured facts. For example, it takes an average of 5 days to start a business in 3 procedures at zero income per capita cost. The extent of the quality of legal environment is well seen in the ease of enforcing commercial contracts. In average, with 15 procedures, 190 days and 6,5 percent of debt cost, Denmark is qualified as the most business-friendly environment in the world in this respect with a little government-burdened regulation. A little bit worrying is the extent of taxation with a confiscatory 59 percent marginal income tax and 28 percent tax rate on corporate income. Danish capital markets are sound, broadly availible and well accessed. Refering to IMD's World Competitiveness Yearbook, Denmark is known for the world's lowest penetration rate of insider trading on capital markets.
In the field of technology, Denmark steadily deregulated and liberalized the sector of telecommunications by promoting the establishment of a well-functioning competition-based market for the supply of electronic communications and services. Though the local competition is not highly intense according, tech markets are deeply diversified as all forms of broadband internet ("high speed") access packages are availible in every municipality, predominantly using DSL. After liberalizing the telecom market, charge fees are among the lowest and therefore most competitive in the world with an emphasis on connection charge. Danish hardware design and manufacturing industry is globally well-regarded. Over 85 percent of hardware products are exported. The success of this industry is an outcome of a small and medium enterprises' partnership with academic researchers in producing diverse leading-edge products. In education, ICT is pushed beyond internet access ample toward ICT training. Denmark reached 5th place in the area of quality of the education system. Internet school access is well enhanced and highly innovative as it enables to obtain IT driver's license online. By and large, Denmark is a world leader in developing and innovating digital training, teaching and education. What gives the value of the miracle of Danish hardware design, ICT usage and innovative capacity is a collaboration between industry and university, ranked among top ten in the world and so is the innovation capacity, showing top comparative priorities to support knowledge-based growth and benefits of entrepreneurship such as the promotion of entrepreneurship education and venture capital which is essential to boost entrepreneurial revival besides a friendly tax environment, liberalized and accessible product markets and unburdened labor market.
Denmark is a nice example to absorb the learnings and lessons from innovation and tech miracle. To launch a strong and powerful innovation wheel, we need market incentives upon good educated staff, ideas, powerful (preferably small) innovation (design, engineering) team, supply-chain innovation, and excellent marketing support because it's not technology that pursues growth, but free markets, openness, market-based incentives and especially decisions to launch the investment and predict the return. Above all, WEF's Global Information Technology Report is a vibrant opportunity to get aware of the advantages of ICT in the potentials of digital economy and e-commerce in the future.
Interesting further readings;
Swedish ICT miracle: Myth or Reality?
What's behind the Finnish ICT Miracle?
The ICT in Nordic Countries 1995-2000
The 2007 State New Economy Index; Benchmarking Economic Transformation in the States
European Innovation Scoreboard 2006
Saturday, April 07, 2007
Estonia ranks as one of the freest economies in Europe and the world. In 1991, after the collapse of the Soviet Union, the country was economically devastated and financially bankrupted. The inflation rate hit 1076 percent annually in 1992, unemployment rate was nearly 20 percent and the economy was in 92 percent trade-dependent on Russia. On its way to economic recovery, Estonia exercised radical economic reforms resulted in a globally trademarked galvanized success. The reforms which included rapid privatization (95 percent of all government-owned enterprises were privatized), the adoption of the flat tax, the introduction of private property rights and the liberalization of the market returned an economic miracle surrounded by high-tech boom, sound business environment and sizzling economic growth.
"Look to your own affairs, get your countries complying with the targets you've proclaimed. And can I also say to the Australian public, that we should be very wary of European lectures on this issue."
Toward Environmental Sustainability, EPA, NSW
Financial Express reports that government is very unlikely to turn Mumbai into an international financial center (IFC) despite the report issued by executive committee concluding that far reaching financial reforms are neccessary for liberalizing the investment environment for domestic and international investors. One of the conclusions of the committee is that financial services in the city should not be supported by tax incentives but by a general regime of uniformly low marginal tax rates applied universally accross the board with as few tax incentives, exemptions and exceptions as possible.
Clearer tax policies and simpler tax regime are neccessary for a strong capacity of the financial sector to absorb its full-fledged potentials. Complex and roughly complicated tax regime surrounded by tax exemptions and tax exceptions increases both, (a) the compliance costs and (b) the time which businesses consume on searching how to avoid paying taxes. The measure effect goes in a direction in which businesses spent hours and days on fulfilling tax returns whereas they could spend it on strategic work and service operations to reached the wanted market goals.
There is many belly embodiments in India's financial tax code. There is, for example, a unique Securities Transaction Tax (STT) which businesses have to pay when they sell or buy a security of another company. The overall effect of degraded tax regime is seen in high effective taxation, forcing businesses to leave considered investment in the future as cascading taxes and duties reduce their capacity to fully absorb the innovative potentials and capacity underscored by a punitive tax regime. Securities Transaction tax is leaving a damaging impact. In recent decades, India has rapidly increased its trade and financial integration with the rest of the world. As this process continues, companies wishing to compete internationally in terms of ownership of foreign companies, are directly punished by this particular tax which undermines both; overall efficiency and competitiveness.
Numbers show that India's tax rates are moderate. Top corporate tax rate is 33 percent plus 10 percent surcharge on corporate profits. Other taxes included property tax, dividend tax and tax on insurance contracts which is another leap towards the underscoring of efficiency of the real business sector. The abovementioned committee has suggested a very low or zero tax on capital gains. This would definitely put India ahead of its global competitors in terms of competiting for inward investment. The report also suggested that limited liability partnerships be turned into tax-efficient pass throughs. Tax competition and the reduction of sharp tax wedge will probably play the major role in the future of economic reforms which India is ought to undertake to launch the level competitiveness on a higher platform.
Establishing the common European business tax base would have serious consequences as larger member states such as France and Germany would be bullying smaller members of the EU such as Ireland or Estonia to harmonize the level of taxation with German or French where productive behavior is heavily punished through excessive tax rates on corporate and individual income. Countries with the most favorable and business-friendly entrepreneurial environment are known after transparent and unburdened business environment. Ireland's 12,5 percent tax rate on corporate income embodies one out of several chapters of success story coined as the "Celtic Tiger". The aims of the EC (European Commission) toward tax harmonization are strongly backed by the majority of EU member states. Probably one of the real reasons behind this policy proposal of the EC is to punish the economies in which growth, entrepreneurship and investment capital creation flourish. Larger member states obviously dislike its smaller counterparts because tax burden (% of the GDP) is very high and due to fiscal pressure, tax rates on productive behavior (work, saving, investment) are very high as well.
By promoting tax harmonization, the EU largely violates one of its foremost founding principles; the free movement of labor, capital and services. Pushing tax harmonization agressively forward would impact the European economy in a very negative way. Competitiveness would sharply decline and the inward investment would probably be switched to somewhere else. Such proposals on behalf of the EC would largely increase tax burden in several member states known for the lowest tax burden in the region.
One issue that separates the EU is the issue of taxation. There is actually no uniform taxation, no common VAT and no common direct or indirect taxation. The Maastricht criteria setup the fiscal discipline required for the minimisation of public financial risk to adopt Euro and therefore enter the eurozone. In recent decades, policymakers in Brussels have pushed their proposals toward the harmonization of taxes which is, indeed, another wish on behalf of European "revenue-hungry" officials to eliminate tax-friendly incentives in booming economies such as Estonia, Cyprus and Ireland where tax rates on corporate income are in the lowest decile in comparision with the rest of Europe. Tax competition has sharply reduced corporate tax rates in Europe as a Maltese newspaper reports.
Thursday, April 05, 2007
The eradication of wealth tax is said to be based on limiting tax breaks which ought to be released in the next year's budget. Up until now, there has been a unique 1,5 percent tax rate on personal above SKr 1,5 million for singles while the level for cohabitees and marriage couples equals SKr 3 million. In the previous year, government collected SKr 4,8 billion from wealth tax. It is estimated that nearly SKr 500 billion venture capital is out of the country. The wealth tax has contributed to the low level of Sweden's investment and disappointing entrepreneurial activity until first fiscal and structural reforms were imposed in the early 90s. Among EU25, Sweden ranks 18th in terms of the percentage of citizens running their own business.
Sweden is one out of four OECD countries which tax personal wealth. Sweden's uniqtue wealth tax was introduced in 1947 and has left damaging consequences ever since as capital flight and brain drain skyrocketed. It taxed capital gains, luxury goods, inheritance and the well-off. Bjorn Borg felt compelled to move to tax-haven principality of Monaco, a residence to many successful Swedish individuals such as Anja Paerson, Kajsa Bergqvist and Christian Olsson. In the past decades, the wealth tax combined with complex, progressive and confiscatory taxation of corporate and individual income, many successful Swedes left the country. Ingvar Kampard, the founder of IKEA (Swedish global furniture store) was forced to leave Sweden to avoid the tax and setup overseas foundations managing his wealth. Mr. Kampard remembers those dark days of confronting tax bureaucrats in 1970s: "They said that all I want is profit and I replied that I was giving people jobs." In the last decade, several European countries have completely abolished wealth tax including Netherlands, Denmark and Finland.
The abolition of the wealth tax is a good step in a way of absorbing Swedish entrepreneurial potentials and reducing the overall tax wedge and burden in the share of the GDP. In empirical literature, there is hardly any strong evidence on the justification of wealth tax. In fact, wealth tax usually taxes goods with high price elasticity; mostly luxury goods which easily exercise tax avoidence and thus the negative side-effect of wealth tax tripples. Wealth tax burdens the productive behavior which is the basis of human capital creation, resulted in economic growth, structural advancement and stronger innovative capacity to absorb real competitive advantage and translate it into growth effort. It means fewer incentives to launch growth ideas and more incentives to avoid paying punitive taxes. The effect of the wealth tax, also negatively affects stock index and companies listed hardly see any particular reason to work on increasing capital gains and dividends to shareholders as an additional unit of capital accumulated means an additional tax burden to it.
Here's what experts say on the abolition of 'wealth tax':
"The big winners are, in the long term, all Swedes, because we need to have the conditions for jobs and companies necessary to match global competition. One issue is that little money stays in the country. There has been a big discussion in recent years about how globalization makes capital more and more non-national and harder to keep within national boundaries. This is a symbolic as well as a real move. It is important to have entrepreneurs and to offer them finance from other entrepreneurs. This will have a real impact on the willingness to invest."
- Anders Borg, Swedish Minister of Finance
"Many of those who made money here have made it from starting and building businesses and are keenly interested in supporting new businesses and young entrepreneurs."
- Tom Bergen, Swedish Venture Capital Association
"This is another step towards Sweden becoming a normal country."
- Maria Rankka, Timbro
Here's what you can read about this topic:
Sweden plans to scrap decades-old wealth tax in a move to stay competitive, Canada.com (link)
Sweden to abolish wealth tax, The Local (link)
Sweden axes wealth tax, Financial Times (link)
The Effect of Stock Prices of the Swedish Wealth Tax (link)
Wednesday, April 04, 2007
Monday, April 02, 2007
"Czech Prime Minister Mirek Topolanek has reportedly stated that his government's plan to introduce a flat income tax is a near certainty."
While 24 percent tax rate on corporate income is not the lowest in the region, Czech Republic has attracted numerous international investment due to its advanced labor force, low operation costs and advantageous geographical location in the center of Europe. Czechinvest announced a triggering value of foreign investment inflows worth US$ 4.6 billion. The largest investment project in 2006 was that of South Korea's Hyundai Motor Company, which invested over US$1.2 billion into a plant in the Moravia-Silesia region, creating 3,000 jobs.
Macroeconomic picture of Czech Republic shows a high budget deficit coupled with a high public spending rate approaching 40 percent. The government now proposes a 15 percent flat tax rate on corporate and individual income. For now, there is a progressive tax on personal income at a maximum of 32 percent. Published proposals so far include a flat 15 percent income tax with an increase in tax-deductible items from an average value of Kč 600 (€ 21.44) monthly to Kč 2,070 monthly, and an increase in child allowance from Kč 500 to Kč 870. For Czech Republic, statistics has shown a high tax burden in the share of the GDP. The newest reform proposal is ought to setup one of the lowest corporate tax rates in Europe which should have a positive impact on foreign investment inflows. However, the proposal also includes a double-taxation on a portion of individual's income, hampering the simplification of tax code, napping the marginal tax rate and burdening the compliance costs. The net effect of pure simplification of tax code is wider if a tax system does not include all sorts of deductions and loopholes, leading investors and individuals to hide the money meanwhile tax base shrinks when supply-side measures are simply eliminated or excluded.
Czech Republic is still a country in a metamorphosis from post-communist to free-market economy. In the light of meeting the Maastricht criteria, the Czech government should reduce the spending pressure on budget and adjust the temporary shock caused by tax reform by lowering the amount of public consumption and by cutting budget deficit while this would have a positive impact on Czech Republic's path to Eurozone.
Bradley Gardner: Tax reforms face rugged and long road to passage, Czech Business, 3/26/2007 (link)