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What do Sen. Chuck Schumer, D-NY, President Barack Obama and all the Republican presidential candidates have in common? They all want to fundamentally reform the corporate income tax. President Obama proposed cutting the corporate tax rate from 35 percent to 28 percent. Sen. Schumer wants a major reduction to taxation of corporate income abroad. Sen. Ted Cruz, R-Texas, says he would abolish the tax altogether as president replacing it with a 16 percent business flat tax and Donald Trump would reduce the corporate tax rate to 15 percent.
Unfortunately, nothing is happening. Thats not for lack of a good reason to make this reform a priority. For several years now, the United States has had the highest corporate income tax rate in the developed world, with a national statutory corporate tax of 35 percent. The United States also has the highest combined rate (39.2 percent) when the federal rate and the average rate among the states are added. Japan used to have the highest combined rate (39.8 percent), until it got it down to 36.8 percent in April 2012.
Even such high-tax nations as France have lower rates. However, the real competition comes from Canada (26.1 percent), Denmark (25 percent), the United Kingdom (20 percent) and the many countries, such as Ireland (12.5 percent), with rates below 20 percent. Moreover, competition is intensifying. Last June, the UK announced that it would cut its rate from 20 percent to 18 percent in the next five years. Its now saying that it will lower the rate even further, to 17 percent. These reductions are the final stage of drastic cuts implemented since 2007, when the countrys companies faced a 30 percent tax rate. Thats a second wave of reduction since the rate was as high as 54 percent in the 1980s.
Now contrast this with the United States. In the 1980s, policymakers responded to the pressure put on by many countries lowering their corporate rates by decreasing Americas rate from 49.7 percent to 33 percent. However, since then, the US has fallen asleep on the switch (and even raised the rate by 1 percentage point in the 1990s) and is now widely out of sync with internal competition. In 2015, the average corporate rate for countries in the Organisation for Economic Co-operation and Development was 25 percent, down from 48 percent in the early 1980s.
As if that were not enough competition for American companies, the US government burdens them with another layer by taxing them on a worldwide basis. In that system, income from American companies is subject to US taxes whether its earned in Seattle, Paris or Singapore. By contrast, most wealthy countries dont tax foreign business income; about half of OECD nations have territorial systems that tax firms only on domestic income. In other words, US exporters face a much less competitive tax system than most of their biggest competitors.
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-- Published: Tuesday, 22 March 2016 | E-Mail | Print
By Frank Holmes
During a trip to New York last week I was able to talk gold and commodities on Bloomberg TV, and also had the pleasure of hearing Canadian Prime Minister Justin Trudeau address Wall Street investors in the Bloomberg studios the same day. Trudeau discussed his plan for new infrastructure spending of C$60 billion over the next 10 years, as a means to lift the countrys highly oil-dependent economy. Trudeau answered questions on his countrys federal fiscal deficit and I was able to ask him about the amount of Ontarios debt in particular. Ontario has twice the debt as the state of California and only half of its population.
In the US, states are held to a strict balanced budget standard when it comes to fiscal taxation and spending, while the federal government can let the budget go into deficit spending. In Canada, however, its the opposite, and the provinces seem to have abused their debt levels, but Trudeau is ready to help.
The former Prime Minister of Canada, Stephen Harper, never smiled like Justin Trudeau. But he was a great defensive leader, and his conservative leadership allowed the country to successfully weather the financial crash of 2008. Now the current government can leverage that strong balance sheet to stimulate economic activity.
During the Bloomberg conference, Trudeau sought to reassure his audience that he will remain cautious on spending.Creeping Taxation and Negative Interest Rates Ignite Global Caution
Compliance and regulation measures have intensified from the financial sector to the food industry, from the US all the way to Brazil. Many CEOs of banks, as well as brokers that I have spoken with recently, have lamented on the financial burden of excessive regulation and the indirect taxation that comes along with this rise in rules on steroids. Regulations are fueled with good intentions; however, the unexpected consequences like slow global growth need to be adjusted.
In Brazil, the government promotes short-term government bonds to fund its bloated government workforce. The anti-capitalist nature of Brazils government extends to extreme limitations on public markets, where new companies can only go public by offering shares at $1,000. And Ive shared with you before how Colombias citizens are taxed at every turn.
Meanwhile, central bankers around the world captured headlines last week, and it looks as if easy money is here to stay for the time being, as well as high taxes and regulations. The prevailing message was that global economic conditions have not improved well enough to support any significant changes to monetary policy, which now has interest rates around the globe at near-zero or, in some cases, subzero levels.
The week before last, the European Central Bank (ECB) came out with deeper cuts to already-negative rates and steeper purchases of bonds, from 60 billion euros to 80 billion euros. This was followed on Tuesday by the Bank of Japans (BoJ) decision to leave negative rates unchanged as it assesses the impact of its controversial policy, which shocked global markets when it was unveiled in January. Likewise, the Bank of England decided on Thursday to keep interest rates at the historic low of 0.5 percent.
As I (and many others) expected, the Federal Reserve also put rates on hold, even as the US economy is showing signs of improvement in employment, housing and inflation. According to Fed Chair Janet Yellen, a soft global economy made a rate hike too risky.
Be that as it may, our emphasis on central bank actions is way overdone and in many ways a distraction from whats really important: balanced fiscal policy. Today, many investors expect central banks to jumpstart the global economy, and indeed their decisions can have huge consequences. But they cant do it alone. What we need is a commitment to streamline regulation and relax taxes, with prudent spending on economy-boosting infrastructure, manufacturing and construction. Until that happens, it doesnt matter how low policymakers drop rates or how much debt they purchase.Tailwinds to Global Growth
Ive written before about how we use the purchasing managers index (PMI) as a forward-looking indicator. Its like using the high beams on your car, to see where the economy is headed three or six months from now. In the latest PMI update from February, the reading trended downward to 50.
Industrial production data came out last week down 0.5 percent in February. As Ive discussed numerous times, industrial production is a subset of GDP, both of which indicate where the markets have been.
click to enlarge
Regulations and high taxes are headwinds to global growth. Whether we are looking ahead or looking back, the data are showing slowdown in the global economy. We need a fiscal policy intervention to be the tailwind that pushes the economy in the right direction. We hope that the Trans-Pacific Partnership (TPP) will be signed soon, eliminating many tariffs and restrictions to trade, but it is currently held up by protests from unions. Once passed, we are optimistic the TPP will facilitate and accelerate global trade.Gold is Smiling
The most welcome news was that the core consumer price index (CPI)which excludes food and energyrose 2.3 percent year-over-year in February, representing the fourth straight month of inflation and the highest rate since October 2008.
click to enlarge
As Ive pointed out many times before, gold has tended to respond well when inflationary pressure pushes real interest rates below zero. To get the real rate, you subtract the headline CPI from the US Treasury yield. When its negative, as it is now, gold becomes more attractive to investors seeking preservation of their capital. The yellow metal has risen more than 18 percent so far this year.
Other precious metals have also been strong performers in 2016, with silver up 13 percent, platinum 11 percent, and palladium 8 percent.Good Ol American Ingenuity from Silicon Valley to US Energy Fields
The US Energy Information Administration (EIA) reported last week that hydraulic fracturing, or fracking, now accounts for a little more than half of current US crude oil production. In 2000, fracking wells produced only 2 percent of the national total. Today, they make up over 50 percent of oil outputa figure that will likely continue to climb as technology improves.
click to enlarge
But since the end of 2015, overall oil production in the US has begun to taper down. Last week I shared with you the fact that Decembers year-over-year change in output turned negative for the first time in five years, a sign that US producers are finally responding to low prices.
This decline in production is reflected in the chart below, which also shows that Iraqs share of the global oil market has grown comparatively more than Saudi Arabia and Russias.
click to enlarge
The anticipated production freeze between those two countries, therefore, probably wont have as significant an impact on oil prices as markets are hoping for. It will only ensure that the two-million-barrels-per-day global surplus wont get any worse.
Plus, theres no guarantee such a freeze would stick, let alone could be agreed upon. Iran has already called the proposal ridiculous and plans not to reign in production until it reaches pre-sanction output levels, and Saudi Arabia is unlikely to let its chief political adversary in the region gain the upper hand.
As Ive said before, short of geopolitics, the likeliest path to oil recovery is to coordinate a production cap on a global scale. The chances of that happening, however, are slim to none.Tax-Free, Stress-Free Income with Calm Investing
No matter what happens with the Feds interest rate decisions, be sure to register for our webcast on March 30. Learn about the power of municipal bonds in uncertain rate environments.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
By clicking the link(s) above, you will be directed to a third-party website(s). US Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.
The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals. The weights of components are based on consumer spending patterns.
The Purchasing Managers Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.
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-- Published: Tuesday, 22 March 2016 | E-Mail | Print | Source: GoldSeek.com
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Early results from CBCsVote Compass show that Manitobans care deeply about taxation this provincial election.
Although the civic engagement tool is not considered an opinion poll, Vote Compasss findings are based on 3,029 respondents who participated in Vote Compass from March 15 to March 21, 2016.
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Manitoba political analyst Chris Adams said the results revealManitobansare breaking away from the typical election concerns.
Health care is traditionally a very high issue area for voters across North America and we know in particular in Canada, said Adams.
In this election, it looks like taxation has really superseded both the traditional ones, health care and education.
The first Vote Compass results suggesthealth care and the environment trail closelybehind taxation. Education is the sixth most important issue.
Adams said those who tend to think about taxation on election day tend to vote Progressive Conservative in Manitoba.
Thats not very good news for the NDP right now, he said.
Adams added the NDP and Liberals could take some comfort inthe fact Vote Compass suggests theenvironment and health care are among the topthree important issues for Manitobans.
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The Australian Government recently announced it's "committed to addressing the 'double taxation' of digital currencies." Earlier in the week the Hon Scott Morrison MP, Treasurer of the Commonwealth of Australia, reportedly stated that digital currencies, including bitcoin, will be exempt from Goods and Services Tax (GST) as part of changes intended to boost the fintech sector.
We will ensure access to concessional tax treatments for venture capital investments in fintech firms, will take action to prevent the double taxation of digital currencies - we wont be taxing digital currencies.
- Hon Scott Morrison MP
A report called "Backing Australian FinTech" was simultaneously released, which outlines the Australian Treasurys response to fintech development priorities. Among the responses was one to amend the Goods and Services Tax Act of 1999.
"The Government recognises that that the current treatment of digital currency under GST law means that consumers are 'double taxed' when using digital currency to buy anything already subject to GST," states the Treasury department. "The Government is committed to addressing the 'double taxation' of digital currencies and will work with the industry on legislative options to reform the law relating to GST as it is applied to digital currencies."
The problem all started in August 2014, when the Australian Taxation Office (ATO) issued a guidance paper and ruling on the taxation of Bitcoin and other crypto-currencies, viewing bitcoin transactions as a barter arrangement with similar tax consequences.
The ATO stated that Bitcoin is neither money nor a foreign currency: "The supply of bitcoin is not a financial supply for goods and services tax (GST) purposes. Bitcoin is, however, an asset for capital gains tax (CGT) purposes."
Commenting on the ATOs move, the Head of Indirect Tax at KPMG, Dermot Gaffney, questioned whether the authorities risked over-regulating digital currency, and potentially killing off this new source of disruption and competition in Australia's financial services industry.
"This would be a little like my bank taxing a withdrawal of funds from my account as a supply, subject to GST at 10%, and if I was in business (and the transaction is for business purposes) I would get a credit," Gaffney explained. "I would further pay GST when I used the funds to purchase taxable goods and services in Australia, and so on. But if I am just a consumer (or the transaction is not for business purposes) the tax will be an absolute cost, and in effect restrict the wide spread adoption of such currencies."
The ruling disappointed many businesses accepting bitcoin, and put companies still using digital currency in Australia at an economic disadvantage. Personal finance company, CoinJar, quickly relocated to the UK following the ATOs ruling.
"The UK relocation will mean CoinJar customers will no longer be subject to 10 per cent GST (Goods and Services Tax) when they buy bitcoin using our services. HMRC (Her Majestys Revenue and Customs) in the UK exempts digital currency trading from value added tax (VAT), so new and existing CoinJar customers will not be levied any additional taxes."
The UK put bitcoin outside the scope of VAT almost six months before the ATO's ruling. The ATO's treatment of cryptocurrencies seems "at odds with the fundamental principles of a consumption tax," Gaffney added. "Commentators are saying that if VAT does apply it could have the adverse effect of lessening government revenues by weakening economic momentum and that tax legislation cannot hold back emerging business models - yet that is happening in Australia."
Following the industry response, the Australian Treasury issued a whitepaper in March 2015, admitting "new ways of transacting, including crypto-currencies such as bitcoin, were not contemplated when the current tax system was designed." The paper cites bitcoin as a challenge when determining how to appropriately tax companies.
Opposing the ATOs view, the Australian Senate Economic References Committee published a report on digital currency in August 2015, recommending that digital currencies, including bitcoin, be treated as money for the purpose of GST. The ATO advised the committee that amendments to GST Regulations would then be required.
"The committee is of the view that digital currency should be treated as money for the purposes of the goods and services tax. As such, the committee recommends that the government consults with the states and territories to consider amending the definition of money in the A New Tax System (Goods and Services Tax) Act 1999 and including digital currency in the definition of financial supply in A New Tax System (Goods and Services Tax) Regulations 1999."
- The Senate Economic References Committee
This wasn't the only problem Australian bitcoin businesses have faced. Many have struggled to establish, or maintain, banking relationships.
Australian banks have increasingly taken a 'de-risking' approach, following the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF), leading to 'de-banking.'
According to a World Bank Group survey both Money Transfer Operators (MTOs) and banks report an increased trend in closed and/or a restricted accounts between 2010 and 2014. A significant portion of MTOs declared that they can no longer access banking services.
"Data collected indicate that account closures for money transfer operators (MTOs) have become more pronounced over the last few years in some countries, including Australia, Canada, France, Germany, Italy, Mexico, the UK, and the US."
- World Bank
A 2015 report by the Australian Transaction Reports and Analysis Centre (AUSTRAC) confirms that the number of remittance businesses using foreign-owned banks has also grown over the last two years. AUSTRAC is Australias financial intelligence unit with regulatory responsibility for anti-money laundering and counter-terrorism financing.
Responding to this ongoing problem, in addition to committing to abolishing the double taxation of digital currencies, the government will also "improve banking access for digital currency companies," by incorporating digital currency into the AML/CTF regulation. The government has established a roundtable of banks, regulators, government and industry participants to address the ongoing 'de-banking' problem of digital currency businesses.
"The largest remittance network providers (RNPs) have all been impacted by the bank account closures of some of their affiliate businesses and in some cases the RNP itself. Many have secured a bank account with another institution to conduct their remittance business."
- Australian Transaction Reports and Analysis Centre
If digital currencies are exempt from GST and digital currency companies have better banking access in Australia, the country will back on track to compete for businesses with Europe. In October 2015, the European Court of Justice, Europes highest court, ruled that bitcoin transactions are exempt from VAT under the provision concerning transactions relating to currency, banknotes and coins used as legal tender.