Wall Street sig­nals that the in­ter­est rate as­set value ad­just­ment is not com­plete.

The Weekend Australian - - BUSINESS REVIEW - ROBERT GOTTLIEBSEN

Wall Street has re­sumed its de­cline, sig­nalling that the in­ter­est rate as­set value ad­just­ment is not yet com­plete and VIX in­dex melt­downs are set to con­tinue. But there is still some good news for long-term in­vestors around Aus­tralia: they have dodged a nasty bul­let.

The large cor­po­rate tax cuts ad­vo­cated by gov­ern­ment politi­cians, in­clud­ing the Malcolm Turn­bull and Scott Mor­ri­son, would have dealt another blow to those sav­ing for re­tire­ment and re­tirees re­ly­ing on shares for in­come. Aus­tralian re­tirees can be thank­ful that the cross­benchers and ALP are block­ing the leg­is­la­tion.

The gov­ern­ment ar­gued that Aus­tralia must re­duce its cor­po­rate tax rate to fol­low the US and that would cre­ate jobs, growth and in­vest­ment. Frankly, I think that is baloney given the col­lat­eral blows to re­tirees. And I was de­lighted that at this week’s Mel­bourne Min­ing Club Orica chief Al­berto Calderon broke ranks with other chief ex­ec­u­tives and bod­ies like the Busi­ness Coun­cil and warned about blindly fol­low­ing the US in our tax strat­egy.

Calderon used care­ful, mea­sured words to sug­gest a much bet­ter direc­tion for a tax rev­o­lu­tion that re­ally would cre­ate jobs. The Calderon plan fol­lows the rec­om­men­da­tions I have been ad­vo­cat­ing, so, as you would ex­pect, I agree with him. I will re­turn to the Calderon plan later.

First, let’s look at how the gov­ern­ment’s tax cut leg­is­la­tion was aimed at mak­ing life more mis­er­able for re­tirees, and then look deeper at what is hap­pen­ing in the US as a re­sult of the tax cuts.

Com­mon­wealth Bank’s hal­fyear re­port il­lus­trates the planned re­tiree/su­per­an­nu­a­tion saver blow but the same prin­ci­ples ap­ply to all banks and most large com­pa­nies. The bank’s cash earn­ings per share in the half year were $2.72 and it paid a div­i­dend of $2, or 73.5 per cent of the cash profit.

That div­i­dend was fully franked on the ba­sis of a 30 per cent tax rate. So if the tax rate fol­lowed the US and be­came 21 per cent (the gov­ern­ment’s plan was ac­tu­ally for a smaller re­duc­tion), the frank­ing credit would fall by al­most a third, so the div­i­dend would be worth a lot less.

So, the purists would say that CBA could in­crease its div­i­dend by the amount of the tax cut. But if it did that then there would be no money for in­vest­ment or job cre­ation.

The whole ba­sis of the Prime Min­is­ter and Trea­surer ad­vo­cat­ing lower cor­po­rate tax re­volves around work­ers get­ting more money, more jobs and more in­vest­ment. But much of that money comes out of the pock­ets of re­tirees and su­per­an­nu­a­tion savers.

While in the US the tax cuts are work­ing, the Amer­i­can sit­u­a­tion is to­tally dif­fer­ent. They don’t have frank­ing cred­its.

Over a long pe­riod, US prof­its have been ris­ing yet wages haven’t budged much. Part of the rea­son for this is that Amer­i­can work­ers have been ex­posed to com­pe­ti­tion from Chi­nese and other low-cost work­forces as part of glob­al­i­sa­tion. But re­search by Jonathan Tep­per shows that in the past, when the Amer­i­can econ­omy turned around af­ter a down­turn, there were wage in­creases. But this time around there has been an enor­mous con­cen­tra­tion in cor­po­rate bar­gain­ing power.

Tep­per says that between 1996 and 2016 the num­ber of listed com­pa­nies in the US fell by about 50 per cent, from more than 7300 to less than 3600. That means em­ploy­ees don’t have the same choice of em­ploy­ers and their bar­gain­ing power is re­duced.

Ma­jor in­dus­tries in­clud­ing brew­eries, tech, air­lines and in­sur­ance have very few ma­jor play­ers. How­ever, the lat­est tax cuts in the US spurred wage rises from cor­po­ra­tions, but I sus­pect that the de­mand for labour in the US has risen so spec­tac­u­larly that there is now a squeeze and many com­pa­nies are mak­ing a pre-emp­tive strike. And without frank­ing cred­its, there is not the same pres­sure to give the tax cuts back to share­hold­ers.

Calderon con­firms that if com­pa­nies did not in­crease their div­i­dends to match the fall in tax then re­tirees that rely on im­pu­ta­tion cred­its would be hit. The Orica chief sug­gests there are com­ple­men­tary and al­ter­na­tive ways to en­cour­age lo­cal and off­shore com­pa­nies to in­vest in Aus­tralia. He sug­gests Aus­tralia cre­ates tar­geted in­cen­tives, such as ac­cel­er­ated de­pre­ci­a­tion and other cap­i­tal al­lowances, plus re­search and de­vel­op­ment in­cen­tives. To have a ma­jor CEO go against his peers to adopt a com­mon­sense ap­proach is some­thing I find en­cour­ag­ing.

If we do want to re­duce the com­pany tax rate, then we will need to do it as part of a to­tal change in tax. We would also need to re­duce in­di­vid­ual taxes and prob­a­bly al­ter the tax mix with a greater re­liance on GST. Those sorts of fun­da­men­tal changes are sim­ply not avail­able to us at this point.

Mean­while, I am a sup­porter of frank­ing cred­its although most coun­tries in the world have not fol­lowed us. Frank­ing cred­its elim­i­nate the dou­ble tax­a­tion of prof­its and that is a very fair sys­tem.

Aus­tralian in­vestors need to keep fight­ing for it.

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