Thursday, June 2, 2011

Economics 101: Tax Them, and They Won't Come

The brain-trust running Egyptian economic policy (assuming, that is, there actually is an economic policy) are, to be blunt, idiots. In the midst of halted growth and a near total collapse in domestic and foreign investor confidence, the Ministry of Finance has announced an intention to apply a ten percent capital gains tax and raise corporate taxes so as to fund the country’s notoriously inefficient system of subsidies on fuel and food staples. The result? A greater than three percent loss in equity values in the first hour of trading post announcement, higher bond yields and yet another hit to the credibility of the country’s financial reputation.

Then there is the bright idea of instituting a minimum wage increase that will set minimum pay above the average wages of many East Asian countries…surely something that will augment competitiveness and encourage investors to look to Egypt, given the already exciting investment climate of stagnant consumer spending, an industrial and service sector in recession and basically nothing to suggest the country is a more appealing investment destination than the already difficult place it was pre-January 25, apart from the vague foreign aid commitments that will further crowd out the private sector from the economy.

But wait, all of this might not be what it seems, since the capital gain tax is “just a proposal” and the minimum wage may not be consistently applied. So on top of bad policies, investors and employers can look forward to inconsistent and non-transparent policies.

All this is being done in the name of the amorphous concept of “social justice” on which all political parties now seek to recklessly out-bid one another. Egypt cannot afford populist voyagers - it is in need of sane decision makers.

Squeeze too hard...and they will run

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