Bloomberg News

Companies Risk Voter Wrath in Profit-Wage Gap: Cutting Research

December 13, 2012

The public may shift from “banker bashing” to “corporate bashing” as companies go on a borrowing binge to help reduce taxes.

Amid historically low interest rates, companies have rushed to borrow to optimize their balance sheets and increase shareholder returns, Andrew Lapthorne, London-based global head of quantitative strategy at Societe Generale SA (GLE), said in a Dec. 12 report.

The funds have let online retailer Amazon.com Inc. (AMZN:US) pile up cash, said Lapthorne, while Oracle Corp. (ORCL:US), the world’s largest supplier of database software, has accelerated dividend payments and warehouse-club chain Costco Wholesale Corp. (COST:US) has released special dividends.

The looming challenge for such companies is that as profits as a share of gross domestic product hit new highs and the share of wages reaches new lows, the public’s patience may run out, Lapthorne said.

Many companies are holding borrowed cash abroad rather than spending it. That lets them avoid paying tax while deducting interest payments -- thus shifting some of the burden to taxpayers, Lapthorne said. He cites research suggesting such “tax shields” can be worth as much as 40 percent of a company’s debt.

“Fancy financial engineering may only bring the day of reckoning forward far quicker than many companies and investors expect,” said Lapthorne. “The risk for corporates, which have enjoyed 25 years of declining corporate taxes, is that all this financial engineering will put them right in the sights of cash- strapped governments.”

U.S. post-tax profits, for example, have grown at about 8.7 percent per year since 1990, he said. That’s one percentage point quicker than pretax profits. Already companies such as Amazon and coffee-shop chain Starbucks Corp. (SBUX:US) are facing criticism from U.K. lawmakers for using complex accounting methods to minimize tax liabilities.

“By maintaining cash piles abroad whilst borrowing on a subsidized basis at home, the already angry mob can only be encouraged,” said Lapthorne.

* * *

The secret of success for world leaders may lie in their ability to encourage something called the “thriving rate.”

That’s according to pollster Gallup Inc., which used more than 1 million responses to opinion polls on more than 100 factors in 160 countries since 2005 to divine what leaders should be tracking and targeting to satisfy their electorates.

The two best metrics are the share of population in full- time work and the percentage of people who describe themselves as thriving, Gallup’s Michelle Krogmeier, Elizabeth Mendes and Lymari Morales said on the company’s website this week. Both strongly correlate to gross domestic product per capita, they said.

Denmark performs well on such measures, with a 45 percent payroll-to-population share and 74 percent thriving rate. Central African Republic is the worst case, with thriving and payroll rates of 4 percent. The U.S. has a payroll rate of about 40 percent and thriving rate of about 50.

* * *

Newly appointed central bank chiefs fight inflation more aggressively in the first one to two years of their tenure to establish a reputation for price stability, according to a paper published this month by Matthias Neuenkirch of Germany’s RWTH Aachen University.

He studied 50 changes at the top of central banks in 15 countries from 1974 to 2008.

He concluded that new central bank chiefs are more inclined to raise interest rates, battling inflation more aggressively early on to establish an inflation-averse reputation.

“One rationale for this behavior is that governors anticipate public pessimism and, in an effort to avoid being perceived as weak, immediately work to establish a hawkish reputation,” Neuenkirch said.

The report may have added relevance in 2013 when the central banks of the U.K., Japan, Canada and India are all set to change hands.

* * *

Wide receivers in American football are the most likely to be arrested, according to a study by Stephen Bronars, a senior economist at Welch Consulting in Washington.

Bronars found wide receivers accounted for more than one out of six arrests in the professional sport over the past decade, which saw 489 National Football League players detained for offenses more serious than speeding and lesser traffic violations.

Wide receivers aren’t alone. Recent weeks have seen the arrest of Dallas Cowboys defensive tackle Josh Brent, charged with intoxication manslaughter following a car crash that killed a teammate.

Still, the arrest rate for footballers has averaged 2.9 percent, compared with 10.8 percent for men 22 to 34 years old. The rate has declined 40 percent in the last six years, Bronars said.

The average for NFL teams is 15 arrests per decade with the rate running as high as 36 for the Minnesota Vikings.

* * *

Shifting tax from the “unlucky” to the “lucky” could boost U.K. economic growth.

A study in this month’s Economic Journal concludes reducing the income tax rate and increasing inheritance tax could induce a “huge increase” in British economic growth. The authors were Harvard University’s Alberto Alesina, Gudio Cozzi of Durham University and Noemi Mantovan of Bangor Business School.

Taxing inherited wealth rather than incomes would redistribute wealth from those who are born “lucky” to the “unlucky,” said the authors.

The bet is this would reduce perceptions of unfairness in society and encourage people to be more productive, bolstering expansion, they said.

Europeans are typically more averse to inequality than Americans because centuries of feudalism, privilege by birth and lack of social mobility have led Europeans to question whether those who have money deserve it, the report said.

* * *

Global policy makers are in a race to devalue their way to prosperity, according to BlackRock Inc. (BLK:US)

Forty-five percent of U.S. economic growth since the end of the 2009 recession has been due to exports, calculates Rick Rieder, BlackRock’s chief investment officer of fundamental fixed income in New York. That compares to 19 percent in each of the two prior expansions. Overseas shipments accounted for just 3 percent of growth after the recession of the mid-1970s, he found.

The Federal Reserve is “easing to get the currency down,” Rieder told reporters Dec. 12. He predicts Japan and the euro area will be more successful than the U.S. in winning the race toward exchange-rate weakness.

* * *

A British consumer pays almost three times the tax for an Apple Inc. (AAPL:US) iPad tablet than an American does.

A study published Dec. 10 by accountants UHY Hacker Young Group found 16.7 percent of the price of an iPad in the U.K. is made up of taxes, compared with 5.7 percent in some U.S. states, while Australians pay 9.1 percent and Germans 16 percent.

The global average is 14.9 percent, said the report, which also calculated that Indians and Brazilians pay the highest sales taxes of the 22 countries studied.

To contact the reporter on this story: Simon Kennedy in London at skennedy4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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