Achieving competitive tax rates

The BCA and assorted others are calling yet again for tax cuts and tax reform.

It reminds one rather of the famous 1960s cartoon (Petty I think) depicting two large businessmen in their club with one saying to the other: “how can we waste billions on sending men to the Moon when the whole world is crying out for company tax relief?”

But reform is going to be hard if the yardstick is making Australian business taxes internationally comparable with – for example the US.

Whatever the official rates in the US most companies don’t pay them and various rorts manage to transfer huge sums from taxpayers as a whole to corporations. When the head of W.R. Grace was called in to review government waste and recommend cuts in US government services it was pointed out that he really had no personal axes to grind because neither he, nor his companies, had paid tax for years.

Now GE – the world’s biggest company by market value – has boosted earnings by 18%. This achievement is largely the result of paying tax, according to the FT, at a rate of 3%. Most of the benefit came from outsourcing operations to India but a lot came from the $137 billion bundle of tax breaks passed by Congress last year.

Now can Peter Costello match that? And will Hugh Morgan think it goes far enough?

It can’t go on?

For a year or so various economic commentators have been predicting that the fool’s paradise which is the US economy can’t go on. In fact it has and – remembering Keynes – it is possible that the liquidity of the nay-sayers will evaporate before the irrationality of the market ends.

But an interesting sign of the times was reported in the Financial Times ( January 24) reporting on a survey of 65 central banks controlling some 45% of global official reserves. The survey was conducted by Central Banking Publications and found that central banks are shifting reserves away from the US towards the eurozone. With the US current account deficit likely to get very close to $700 billion this year that suggests that maybe it can’t go on.

The survey suggests the growth of official reserves will slow in the next year indicating that the recent renewed confidence in the US dollar might be a little misplaced.

Some progress reports

A few weeks ago Miscellany suggested Jeb Bush might be the next Republican candidate for President and over the past few months we’ve been talking about US and UK pension

funds probably being the sources of the next great financial scandals and upheavals.

We noticed that the Lexington column in The Economist (15/1) has been speculating on the same subject pointing out that it was always Jeb who was regarded as the Bush family standard-bearer, not W. The bad news is that Jeb is probably both more conservative than W. as well as being smarter.

When visiting Australia a few years ago Dick Morris the former Clinton press secretary suggested we might see a presidential succession of Bush, Clinton, Bush, Clinton. If the suggestions that the family want Jeb to hold off for a while come to pass, what odds would you get on Bush, Clinton, Bush, Clinton, Bush?

Meanwhile on the pensions front the same edition of The Economist reports that defined benefit funds in the US are currently $450 billion under-funded and the Government Pension Benefit Guarantee Corporation is some $23 billion in the red. State Government pension funds have liabilities exceeding assets by $366 billion.

Meanwhile the Financial Accounting Standards Board wants US companies to properly account for pension liabilities in their accounts. (see the FT 20/1 for details) That was okay while the boom was inflating pension fund values and new George W. legislation allowed companies to take contribution holidays but worrying now.

Now it’s all coming home to roost. The most likely outcome will be slashed benefits for retirees and a government bailout which will make the S&L scandal look like small beer.

Social security and ageing populations

Conservatives around the world – including Peter Costello – are softening us up for various horrible scenarios as our population ages and the baby-boomers became the new grey power advocates.

Cutbacks in services and entitlements, hard choices etc etc are the universal prescriptions.

Most of the scare-mongering is based on modeling of economic impacts and that depends on the assumptions which are built in. Tim Colebatch and Ross Gittins, among others, have punctured various Treasury forecasts by challenging the assumptions.

In the US a similar campaign is building up around the Bush plan to privatize social security and give some of the retirement funds to those folk who are responsible for the pension deficits discussed in the previous item.

Now Miscellany’s Manhattan friend has sent a January 18 op ed piece from Newsday in New York by George N. Spitz, a former NY mayoral candidate. Spitz looks at the Bush campaign assumptions and notes that all the gloomy forecasts for social security are predicated on a decline in productivity in the US, depression-level economic growth, low fertility (in the land of the Christian fundamentalist already?) and high unemployment.

While all may come to pass if someone doesn’t do something about George W.’s economic policies they are not the sort of assumptions the Republicans would be articulating in the next mid-term elections.

But, as Spitz says, just think of all the campaign donations from the financial institutions which stand to benefit.

The Sunday Telegraph

Miscellany never sees the Sunday Tele but on Sunday in Sydney the hotel at which we were staying delivered it to the room.

Thinking it might be useful to at least know something about the Piers Ackerman milieu we flicked through it only to find a column by former ALP secretary and Senator, Stephen Loosely. As Crikey has pointed out Loosely does various things including lobbying for James Hardie. But what caught our intention was the Loosely column from Washington on George W.’s inauguration. Crikey readers should study it. Any person who can find an original thought and/or a plausible prediction is probably in line for NSW Right preference for some pre-selection at some time or other, but for the rest of us – a really tough ask.

Peter Fray

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