Statist Tax Fantasies Unmasked: Two-Third of UK Millionaires Vanish

Once again, reality has made an abject spectacle of popular statist’s fantasies about “class warfare” or “soak the rich” tax policies where tax rates are seen as having linear effects on tax revenues. 

The axiom “if you tax something, you get less of it” seems to have been proven valid anew.  

In Britain, 2/3 of millionaires swiftly vanished (or in just a year!) in the face of 50% tax rate increase. 

From the Telegraph, (bold mine)

Almost two-thirds of the country’s million-pound earners disappeared from Britain after the introduction of the 50p top rate of tax, figures have disclosed.

In the 2009-10 tax year, more than 16,000 people declared an annual income of more than £1 million to HM Revenue and Customs.

This number fell to just 6,000 after Gordon Brown introduced the new 50p top rate of income tax shortly before the last general election.

The figures have been seized upon by the Conservatives to claim that increasing the highest rate of tax actually led to a loss in revenues for the Government.

It is believed that rich Britons moved abroad or took steps to avoid paying the new levy by reducing their taxable incomes…

Far from raising funds, it actually cost the UK £7 billion in lost tax revenue.

The above account shows that amplified elevation of tax rates equals a considerably smaller tax base and significantly lower tax revenues. Maybe politicians should learn about the Laffer curve or the elasticity of taxable income.

In terms of politics of taxation, the Philippines seems to have a parallel experience: When taxes on gold sales were substantially raised, this prompted for a surge in gold smuggling and a similar collapse in tax revenues.

The same phenomenon will likely beset the local version of the proposed sin taxes, which is being pushed by international agencies as Moody’s and the IMF. 

As side note, is the Philippines in a crisis for them to keep intervening by pushing absurd policies (higher mining taxes, SMS tax etc...) and whetting on the insatiable spending appetites of local politicians for a debt financed consumption driven model of economic development?

Yet the blowback from its legislation will likely boost the informal economy and lubricate further corruption, in the same way sin taxes failed in the UK,

We should learn from the lessons from the unmasking of, or the blatant failures of political magical thinking.

Taxing Greeks: Separating Reality from Fiction

This terse article gives us a glimpse of the mechanics of how wealthy Greeks has successfully been able to avoid paying taxes

From the Wall Street Journal Blog,

That Greeks have a penchant for evading taxes isn’t exactly news — when tax collectors started comparing swimming-pool ownership with incomes, wealthy Greeks camouflaged their pools. And because hidden income is hidden, figuring the size of the tax dodge is difficult.

Armed with data from one of Greece’s ten largest banks, economists Nikolaos Artavanis, Adair Morse and Margarita Tsoutsoura recently set themselves to the task. The banks, with tens of thousands of customers across the country, provided loan and credit-card application and performance data. That not only gave the economists access to self-reported incomes, but also allowed them to infer the banks’ estimates of true incomes — which are likely closer to the mark.

The economists’ conservatively estimate that in 2009 some €28 billion in income went unreported. Taxed at 40%, that equates to €11.2 billion — nearly a third of Greece’s budget deficit.

Why hasn’t Greece done more to stop tax evasion? The economists were also able to identify the top tax-evading occupations — doctors and engineers ranked highest — and found they were heavily represented in Parliament.

It’s always easy to portray the solution to fiscal problems, through statistical estimates, as merely one of enforcement procedures of tax policies.

Unfortunately, such simple minded approach escapes the premises of people’s reactions to repressive social policies and to the parasitical relationships which underpins their political institutions.

As for some of the professional Greek elites, as noted above, their tax shields may have been derived through their participation in the political hierarchy.

Mainstream economists seem to forget that they are dealing with real people, who by nature will look after their interests by adapting to the realities of the evolving political economic environment.

And it is for this reason why top-down or centralized policies inherently fails.

Austerity in Spain?

Juan Carlos Hidalgo at the Cato Institute investigates claims that Spain has been suffering from “austerity”

Writes Mr. Hidalgo, (bold emphasis mine)

There is a wide consensus that Spain’s economic troubles are the result of an enormous housing bubble—even bigger than the one that hit the U.S.—that burst in 2008. Just the year before, Spain boasted healthy fiscal indicators: a general government budget surplus of 1.9% of GDP and a gross consolidated debt of just 36.2% of GDP. However, once the bubble burst, government revenues collapsed and stimulus spending was injected into the economy, resulting in a fiscal deficit of 11.2% in 2009 and a gross debt that has increased over 30 percentage points of GDP in just 4 years.

Paul Krugman and The Economist argue that this evidence shows that, unlike Greece, Spain wasn’t fiscally profligate. However, the devil is in the details. Spain did run budget surpluses prior to the crash, but those surpluses weren’t caused by restrained government spending, but by ballooning tax revenues (thanks to a growing housing bubble). If we look at total government spending in the last decade, we can see a steady and significant rise until 2009:

* Using GDP deflator.
Source: European Commission, Economic and Financial Affairs.

Government spending in nominal terms increased at an annual rate of 7.6% from 2000 to 2009. Ryan Avent at The Economist says that “the push for austerity began in 2010,” and thus we have to look at nominal spending after that year, when according to Avent, it fell “substantially” due to austerity measures. In reality, it went down by just 1% in 2010 and a further 3.6% in 2011. If these cuts seem “substantial” to Avent, then a yearly average increase of 7.6% for almost a decade must be staggering.

Moreover, if we look at spending in real terms, using constant euros from 2000, there hasn’t been any decrease in the level of government spending.

If we look at government spending as a share of the economy, Spain appears as fiscally prudent: Spending was 39.2% of GDP in 2000 and exactly the same figure in 2007. However, as has been noted by Juan Ramón Rallo, Ángel Martín Oro and Adrià Pérez Martí of the Juan de Mariana Institute in a recent Cato study, “the data should be interpreted with caution, given that the GDP was growing at an artificially high rate.” The point is proven by the fact that when the economy came to a halt in 2008 (it grew by just 0.9%), government spending as a share of GDP leapt 2.3 percentage points to 41.5% in just one year. Government spending as a share of the economy remained constant during much of the 2000’s not because the government was spending too little but because GDP was growing too fast.

Moreover, once the crisis kicked in, government spending as a share of GDP reached a peak at 46.3% in 2009 (due to a combination of still more stimulus spending and a contracting economy). It later fell to 43% in 2011, still a higher share than in 2008. Government spending in Spain has indeed come down in the last two years, but not in a dramatic fashion as some people would have us to believe.

What about taxes? As has been the case in Britain, France, Italy and Greece, in the last two years the Spanish government increased taxes to tackle the soaring deficit: personal income tax rates went up in 2010 and two new brackets of 44% and 45% were introduced for higher incomes. Tax credits to self-employed workers were revoked. The VAT rate went up from 16% to 18% and excise duties on tobacco and gasoline were also raised. All these tax increases took place before the large tax hike introduced this year by the conservative government of Mariano Rajoy, which turned Spain into one of the highest taxed countries in Europe (and explained at length in this Economic Development Bulletin).

In short, austerity in Spain, described by Paul Krugman as “insane,” consists mostly of significant tax increases and timid spending cuts.

So Spain’s economy has been enduring economic strains hardly from spending cuts but mainly from HEFTY TAX INCREASES, rigid labor regulations and the welfare state.

On asphyxiating labor environment the Economist noted last February,

Spain’s labour laws, which date back to the Franco era, have condemned half the workforce to unemployment or to temporary jobs while the rest enjoy ironclad contracts and huge redundancy pay-offs. The new law blurs this insider/outsider divide and may thus get more people into stable employment. The decree comes on top of a January agreement by unions and employers to limit pay rises over the next three years. Mr de Guindos thinks most Spaniards see the need for labour reform. But its success in terms of growth may depend on unions’ choice between protecting jobs and keeping up their members’ pay.

The same statist FALSEHOODs have been thrown to Greece, where supposed “devaluation” from an “EU exit” would have posed as “elixir” to Greek economic woes.

Yet the ramifications from such absurd mainstream propaganda has been to SPUR a stampede out of the Greek banking system or systemic “bank run” or “capital flight” into safe havens as Germany and the US, as Greeks feared the loss of savings from forcible conversion of their euros to “drachmas”.

And the same tax hike prescriptions from statists has led Greeks to drastically avoid paying taxes.

In short, statist medicines have been blowing up right smack on their faces.

Yes, polls have it that 80% of Greeks want to stay in the Euro!!!

Statist imbeciles engage in deceptive phraseology to promote their political religion. As George Orwell once wrote,

In our time, political speech and writing are largely the defence of the indefensible... Thus political language has to consist largely of euphemism, question-begging and sheer cloudy vagueness… Such phraseology is needed if one wants to name things without calling up mental pictures of them…The inflated style itself is a kind of euphemism.

The great enemy of clear language is insincerity. When there is a gap between one's real and one's declared aims, one turns as it were instinctively to long words and exhausted idioms, like a cuttlefish spurting out ink. In our age there is no such thing as ‘keeping out of politics’. All issues are political issues, and politics itself is a mass of lies, evasions, folly, hatred, and schizophrenia. When the general atmosphere is bad, language must suffer.

False prophets, these statists, are.

Phisix: Primed for an Upside Surprise

In our age there is no such thing as 'keeping out of politics.' All issues are political issues, and politics itself is a mass of lies, evasions, folly, hatred and schizophrenia. -George Orwell

It’s the advent of the holiday season. Since the public’s attention will likely be diverted towards the coming festivities, the common intuition is to expect less of an active market which usually has been marked by lean trading volumes.

Central Bank Actions Should Amplify Seasonal Factors

Yet still, the seasonality factor favors December.

While seasonal forces may yield some influence on the marketplace (such as triple witching hour[1] and window dressing[2]), one cannot depend on its statistical accuracy, given the manifold factors involved, particularly the politicization of the marketplace.

However, the current financial and economic environment, which has been distinguished by near record low interest rates and global central banks heavy on the pump[3], are most likely to provide continued support to, and bolster the seasonal effects, on financial assets.

Most of the world’s major economies have been operating on negative interest rates as shown by the chart above[4].

Except for Brazil, even nations with positive real rates have not significantly been above zero. And that is if the statistics used to measure inflation has been accurate. Usually measurements of inflation have been understated.

And considering the politicized nature of the present state of the global financial markets, persistent volatilities should not be discounted.

And accentuated volatility has the tendency to attract short term traders despite the holiday season.

The EU Fiscal Union Masquerade

The EU crisis will continue to partly hold sway on the developments in the global markets.

Over the week, global equity markets gyrated on vacillating expectations brought about by conflicting statements by politicians and bureaucrats.

Growing expectations for more aggressive participation by the European Central Bank (ECB) in acquiring bonds through Quantitative Easing (QE) has helped buoyed global markets. However ECB’s chief Mario Draghi dispelled the popular clamor for a carte blanche approach which doused cold water on the markets that sent commodities and equity markets tumbling[5]. This resonates with US Fed chair Ben Bernanke’s recent jilting of market’s expectations over the telegraphed QE 3.0 at the end of September which incited a mini-crash[6].

Political factors have restrained the actions of both central banks. Prior to the FOMC meeting last September, Fed chair Ben Bernanke came under fire from various political fronts, which most likely prompted for him to backtrack on his pet QE 3.0 program.

Meanwhile Mr. Draghi’s ambivalence could be seen as extracting political leverage at this week’s EU summit for EU member states to accede to a “fiscal compact”.

Despite the recent volatility, the scale of the losses has not been similar to that of the Bernanke episode last September.

Perhaps markets may have digested on the other credit easing measures adapted by the ECB, particularly, a cut in interest rate, unlimited access to two long-term refinancing operations (LTRO), a reduction in reserve requirements and the lowering of credit rating threshold which expands the eligible collateral base.

This weekend hallmarks a “fiscal compact” that would most likely reconfigure the European Union. The main points of summit agreement can be found here[7].

However, contrary to popular wisdom, the ‘fiscal union’ elixir will likely prove to be an illusion to the current EU Debt crisis.

Any political system that becomes highly dependent on the redistributive process that overwhelms on society’s productive sectors will fail.

To analogize the current developments, in the words of the illustrious Ayn Rand,

When you see that trading is done, not by consent, but by compulsion - when you see that in order to produce, you need to obtain permission from men who produce nothing - when you see that money is flowing to those who deal, not in goods, but in favors - when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you - when you see corruption being rewarded and honesty becoming a self-sacrifice - you may know that your society is doomed.

Great examples of failed union states would be the Soviet Union or Yugoslavia or the Roman Empire.

And considering that the major directives undertaken towards resolving the debt crisis has been to mostly raise taxes[8] and to engage in more monetary inflation, we can expect that these policies would translate to growth retardant economies that would be marked by lesser investments and sustained high unemployment rates.

Using Italy as an example, author Joe Studwell writes[9],

Meanwhile Frau Merkel and Sarko are coming up with a scheme to sanction countries like Italy that don’t stick to budget targets. This plays to German political opinion, but completely misses the point.

It treats Italy as a debt problem. But it isn’t. Italy is a growth problem that can only be resolved with legal system, bureaucratic and labour market reforms that make growth possible. Italy needs to be made to work institutionally.

Aside from misdiagnosis by EU’s politicos, the one-size-fits-all therapy would signify the proverbial cure that could be worse than the disease.

And perhaps in acknowledging these flaws, the United Kingdom has vetoed plans for her inclusion in the treaty because of the EU-wide tax on financial transactions[10] which essentially would mean a loss of control over financial regulation.

Moreover, the fiscal union shaped by current political crisis exigencies postulates that the disciplinary mechanism to uphold on the treaty will likewise be insufficient and subject to various legal loopholes.

Similar to the current failings of the EU, errant member states of the EU such as Greece, who fudged her statistics to gain entry to the EU via complex currency and credit derivatives, and of other reports of creative accounting and manipulated statistics[11] by other EU nations, will possibly continue to plague an even more centralized European Union. We don’t expect Germany to send her army to delinquent members to enforce such penalties.

And any sign of temporary stabilization will result to political leaders of the EU states to relax on attaining fiscal balance which represents the moral hazard of the bailouts.

Further, treaty provisions and regulations will likely be arbitrary and predisposed towards the interests of politicians and bureaucrats.

And instead of dealing with the lack of competitiveness and impediments to economic growth as a result of bureaucratic red tape, welfare state, high tax regime and obstructive regulations, the political direction has essentially been to apply the same set of policies that has brought them to the current state of the crisis.

At the end of the day, the proposed remedies for a fiscal union, along with the additional money loaned by the EU to the IMF[12] to be lent to EU’s crisis affected nations (sort of an escrow arrangement), will only represent cosmetic changes that serves as veneer for the ECB to engage in more monetary inflation, and to transfer and expand the political power to EU technocrats at Brussels at the expense of the freedom and civil liberties of citizens of the EU member states.

The ECB’s balance sheets has rapidly been ballooning as shown by the chart from Danske Bank[13]. A new EU will likely prod the ECB to increase purchases.

This band aid approach may provide an ephemeral calm to the financial markets from which the effects of inflatonism will likely become more visible.

Bearish Chart Patterns Nearing Reversal

The Philippine benchmark, the Phisix has been in a consolidation phase and seems on the path to reverse the bearish technical indicator known as the ‘death cross’.

Following the September-Bernanke shakeout, the Phisix has been rangebound since the rally which climaxed last November.

The 50 day moving average (blue) has worked to narrow on the 200 day moving averages (red). Once the 50 day regains the upperhand or successfully crossover the 200 day moving averages then the bearish death cross transitions into a bullish golden cross.

Many use technicals, as the above, to analyse and predict the phases of markets. Yet it seems likely that “death cross” may not be living up to its putative billing. The current death cross has not led to a bear market.

And a reversal would mean a whipsaw or a chart pattern failure. This only would prove my point that sole reliance on chart patterns would translate to inaccurate reading of the markets.

Mechanical chart reading fundamentally ignores the vast differentials between past conditions with the present and future conditions. Also, mechanical charting has dubious statistical accuracies in terms of prediction success rates, as well as, feeding upon our mental impulse to seek patterns, or cognitive bias known as clustering illusion—seeing a pattern in what is actually a random sequence of numbers or events[14]

Most importantly, mechanical charting fails to account for the indispensable role of people’s action which ultimately determines price trends.

In the current case, negative interest rates and intensive money pumping by global central banks and the politicization of markets aimed at propping up asset prices, to keep banks and governments afloat, will continue to influence people’s reading, evaluation, interpretation and analysis of prices and their attendant actions to allocate scarce resources via the money medium.

As I previously wrote[15], (emphasis original)

The prospective actions of US Federal Reserve’s Ben Bernanke and European Central Bank’s Jean-Claude Trichet represents as the major forces that determines the success or failure of the death cross (and not statistics nor the pattern in itself). If they force enough inflation, then markets will reverse regardless of what today’s chart patterns indicate. Otherwise, the death cross could confirm the pattern. Yet given the ideological leanings and path dependency of regulators or policymakers, the desire to seek the preservation of the status quo and the protection of the banking class, I think the former is likely the outcome than the latter.

And any further material uptick by the Phisix will likely accelerate such reversal process.

To add, people who say that the Phisix will remain rangebound could be taken in for a big surprise.

If I am not mistaken, even the US markets could be on a path similar to the Phisix. The US version of the ‘death cross’ could be reversed once the S&P slams past the resistance portal of 1,262-1,285 and beyond.

And given the continuing growth in monetary aggregates and material signs of improvement in the US credit markets, we should expect these conditions to be reflected on equity prices.

Bank Loans and Credit as measured by activities in all US commercial banks[16] as well as commercial and industrial loans have been ramping up.

Outside any shocks from the EU or China, US equities seem poised to move higher.

Charts are useful when used as guide rather than as principal determinant in the evaluation of the risk-reward tradeoff and the accompanying actions to attain portfolio management goals.

And the further point is that a chart pattern reversal should add to the bullish sentiment as many technically based traders or investors will most likely reenter the markets. At least you have been ahead.

Regional Activities and Market Internals Exhibit Upside Potentials

Since every financial asset competes to attract one’s money, then a functional correlationship exists with all other asset markets around the world.

Then observing price actions of other asset markets especially those which are closely related should be a worthy exercise.

Given the price action of our neighbors, I think it would be a folly to write off a potential yearend run.

The chances for an emergent upside seem to increases once we examine the developments in the region’s markets and of the market internals in the Philippine Stock Exchange.

Only Malaysia (FBMKLCI; light orange) has been (3.9%) down on a year-to-date basis, while Indonesia (JCI; green), Phisix (PCOMP; red) and Thailand (SET; dark orange) have been marginally higher 1.52%, 2.17% and .12% respectively as of Friday’s close.

So far Thailand’s SET, among the three, has been the most aggressive having risen by nearly 7% over the past 2 weeks.

Given the seemingly tight correlations (based on trend undulations rather than numerical coefficients), one can’t discount the same belated actions on the Phisix, on Indonesia’s JCI and Malaysia’s KLSE. On the other hand one may argue that Thailand may fall along the line with rest.

However given that Southeast Asia’s relatively lesser debt exposed or leveraged economies, the region’s financial markets are likely to be more receptive towards negative real rates policies which should induces speculative activities.

So far, Indonesia and the Philippine banking sector has the least exposure to real estate loans in the region[17]. This implies that the region’s bubble cycle could be in the formative stages, and may have more room to climb.

Yet the price actions of the region’s bourses seem to be replicated or mirrored in the sectoral performance of the Phisix or the Philippine Stock Exchange.

All sectors appear to be in a consolidation phase. However there seems to be emergent signs of restiveness. The banking sector (black candle) has been the best performer over the past two weeks as revealed by the recent attempt to gain higher grounds.

This has been followed by mining (light orange) and the property sector (violet) while services (red), holding (teal) and the Commercial Industrial (blue) have moved almost in tandem with the Phisix.

Additionally, market internals appear to be also manifesting some signs of notable improvements which may compliment the sectoral activities.

Net foreign buying averaged on a weekly basis seems to be on a sustained upswing since June of this year.

If net foreign buying will accelerate or improve further, then much of these fund flows will likely be directed to elite Phisix member components.

A boost on the Phisix is likely to buttress general sentiment.

Average daily trade on a weekly basis also has been incrementally improving. This sentiment indicator seems to be exhibiting signs of confidence gaining momentum.

Any sustained rally in the Phisix which may come during the yearend or during the first quarter of 2012 will likely translate to a broad market rally.

Bottom line:

While the holiday season may lead to less active markets which could be manifested by leaner volume of trades, they could also serve as windows to accumulate or position. But this is no certainty as current market volatility may induce more trading activities.

Nonetheless given the concerted global credit easing efforts and the predominantly negative real rates worldwide, I think current conditions may suggest of a potential sizeable upside swing in the equity markets of the region and in the Phisix.

My guess is that such moves may also be reflected on commodity markets.

Again global market activities will hold sway or materially affect activities in the regional and local financial markets. And the conventional “kick the can down the road” policies by major developed economies and by China may generate heightened demand for risk assets over the interim.

---

[1] Investopedia.com Triple Witching

An event that occurs when the contracts for stock index futures, stock index options and stock options all expire on the same day. Triple witching days happen four times a year on the third Friday of March, June, September and December.

[2] Investopedia.com, Window Dressing

A strategy used by mutual fund and portfolio managers near the year or quarter end to improve the appearance of the portfolio/fund performance before presenting it to clients or shareholders. To window dress, the fund manager will sell stocks with large losses and purchase high flying stocks near the end of the quarter. These securities are then reported as part of the fund's holdings.

[3] See Global Central Banks Ease the Most Since 2009, November 28, 2011

[4] US Global Investors Investor Alert - You Can’t Print More Gold, usfunds.com December 9, 2011

[5] See ECB’s Draghi Balks at More QE, Global Equity Markets Tumble, December 9, 2011

[6] See Bernanke Jilts Markets on Steroids, Suffers Violent Withdrawal Symptoms, September 22, 2011

[7] Guardian.co.uk European Union summit agreement: the main points, December 9 2011

[8] See European Debt Crisis: Taxing the Economy to Prosperity December 10, 2011

[9] Studwell Joe Wrong Menu, Joestudwell.com, December 5, 2011

[10] DailyMail.com A day for Britain to salute Mr Cameron, December 9, 2011

[11] Wikipedia.org National statistics, European Sovereign Debt Crisis

[12] Bloomberg.com IMF Seeks Funds for European Debt Crisis, December 11, 2011

[13] Danske Bank Euro tensions to continue, Weekly Focus, December 9, 2011

[14] Rationalwiki.org Clustering illusion

[15] See How Reliable is the S&P’s ‘Death Cross’ Pattern?, August 14, 2011

[16] Federal Reserve Bank of St. Louis, US Financial Data Economic Research Bank Loans and Credit and Commercial and Industrial Loans

[17] Worldbank.org Navigating Turbulence, Sustaining Growth WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2011, VOLUME 2

How Tax Policies Affect Investments

From Steven M. Davidoff at the New York Times (bold emphasis mine)

Apple has a cash problem. It’s not just that Apple has too much cash, $76 billion as of June 30. It’s rather that the bulk of that pile, estimated at $41 billion, is held abroad.

Apple does not want to bring it back to the United States for several reasons, primarily because of the tax consequences, but also because of its own growing foreign presence. Apple is not alone — this problem is an increasing one in corporate America. And the answer may not be more big, all-cash acquisitions, like Google’s $12.5 billion offer for Motorola Mobility.

In an analyst report in May, JPMorgan Chase estimated that 519 American multinational corporations had $1.375 trillion outside the United States. The problem is particularly acute among technology companies, which historically tend to hoard cash because of the cyclical nature of their business.

A recent Moody’s report noted that Microsoft held $42 billion abroad, or more than 80 percent of its cash. Cisco Systems has $38.8 billion, or almost 90 percent of its cash. Google — at least before Monday’s deal — had nearly $40 billion in cash, with more than 43 percent of it held abroad

Tax policy is driving much of this trend. For multinational corporations, cash earned abroad cannot easily be remitted to the United States. If it is paid back to the United States, it is subject to a dividend tax that can rise to as much as 35 percent. Companies are loath to pay this tax because while they can offset it with taxes paid abroad, the companies still end up paying a relatively high tax rate.

Again, tax policies are seen as one of the major forces in prompting for distortions of investment decisions. This greatly affects the allocations of resources or the economy.

In the case above, money which should have been used for more investments or for paying off shareholders in the US has been hoarded overseas.

On the other hand, globalization is an issue too. (bold emphasis mine)

Yet it is not just a tax issue. Many United States companies want to keep cash abroad to focus on high-growth regions for investments and acquisitions.

A recent Standard & Poor’s study found that 50 percent of sales by companies in the S.&P. 500-stock index are outside the United States. Interestingly, the report also found that these companies paid more in foreign taxes than to the United States government. For Apple, 60 percent of its sales are abroad, and like these other companies, its foreign sales are expected to only go higher.

So, for those who expect that a change in tax policy would prompt Apple and other companies to put their cash piles to use in the United States, don’t be so sure. Even if there were no dividend tax, a large portion of this cash would stay abroad as these companies focus on higher growth overseas for investment.

Of course there many other domestic factors involved too which contributes to investment or resource allocation dynamics, this comes in the substance of monetary policies, regulatory climate, growing heft of political distribution of resources (seen via deficits) and etc.

The above evinces that world is complex, with variable interloping factors at work and simply can’t be ‘modeled’.

Point is: political actions affect the economy, most of them negative.

As a caveat, this not only applies to the US but everywhere including the Philippines. Thus, we have to be vigilant with politicos calling for more regulations or taxes or other interventionist measures.

US Capital Markets: Dominance Erode as Investors Shift Overseas

In the world capital markets, the US appears to be losing its leadership

Reports the New York Times (bold highlights mine)

Reva Medical did what a small but increasing number of young American companies are doing — it looked abroad for money, in Reva’s case the Australian stock exchange.

After an eight-month road show, meeting investors and pitching the prospects of a biodegradable stent, the 12-year-old company sold 25 percent of its stock for $85 million in an initial public offering in December.

“There are so many companies that require capital like our company, and they don’t have access to the capital markets in the United States,” said Robert Stockman, Reva’s chief executive. “People are looking at any option to stay alive, which is what we did.”

Reva’s example shows that nearly three years since the financial crisis began, markets in the United States are barely open to many companies, leading them to turn to investors abroad. Denied a chance to list their stock and go public here, they are finding ready buyers of their shares on foreign markets.

Nearly one in 10 American companies that went public last year did so outside the United States. Besides Australia, they turned to stock markets in Britain, Taiwan, South Korea and Canada, according to data from the consulting firm Grant Thornton and Dealogic.

The 10 companies that went public abroad in 2010 — and 75 from 2000 to 2009 — compares with only two United States companies choosing foreign exchanges from 1991 to 1999.

The trend reflects a decidedly global outlook toward stocks, just as the number of public companies in the United States is shrinking.

From a peak of more than 8,800 American companies at the end of 1997, that number fell to about 5,100 by the end of 2009, a 40 percent decline, according to the World Federation of Exchanges.

The drop comes as some companies have merged, or gone out of business, or been taken private by private equity firms. Other young businesses have chosen to sell themselves to bigger companies rather than go public.

Here’s why...

Again from the New York Times, (bold emphasis mine)

A variety of factors explain each company’s decision to list on a foreign exchange, like the increased regulatory costs of going public in the United States. Underwriting, legal and other costs are typically lower in foreign markets, companies say.

The Alternative Investment Market, or AIM, a part of the London Stock Exchange intended for small company listings, is a popular destination for some American companies. The cost of an initial public offering there is about 10 to 12 percent of total capital raised, compared with 13 to 15 percent on Nasdaq, according to Mark McGowan of AIM Advisers, which helps American companies list on AIM.

In addition, the extra annual cost of maintaining a public listing, including complying with Sarbanes-Oxley rules, can be typically much higher in the United States: $2 million to $3 million each year depending on the size of a company compared with a cost as low as $320,000 on AIM or $100,000 to $300,000 in a market like Taiwan, according to advisers.

There are concerns that some foreign exchanges attract companies because their oversight may be less stringent. But companies insist standards are high.

A more important factor than cost, said Sanjay Subhedar, managing director of Storm Ventures, a California venture capital firm, is that investors in the United States who traditionally participate in I.P.O.’s and the banks that underwrite the offerings are no longer interested in share sales by small companies.

Institutional investors like mutual funds want the liquidity of larger offerings with abundant buyers and sellers, he said; bank underwriters want to focus on the more lucrative fees that bigger deals generate.

So fundamentally the article cites compliance cost, cost of listing and maintenance and liquidity as direct costs for the erosion of the dominance of the US.

True, direct compliance costs have been a major hurdle.

Many see that the cost-benefit trade off of the Sarbanes Oxley act (SOX) has been weighted towards costs. In short, the law has been economically unviable and has prompted for unforeseen consequences.

Companies have been spending billions of dollars a year to comply with the SOX with little benefit in return.

Richard Karlgaard of Forbes magazine exhorts for the repeal of SOX

Dump Sarbanes-Oxley. Enacted in 2002 to prevent the next Enron scandal, Sarbox has thrown sand into the gears of entrepreneurship. It has severely slowed the U.S. market for IPOs, since companies earning less than $200 million in revenue can't afford the legal and accounting costs of being a public company today. Deprived of capital, young companies not named Facebook or Twitter prematurely stagnate or sell out. Investors are deprived of opportunity, and the nation is deprived of independent companies that surpass the $1-billion-in-revenue mark.

But there are other indirect factors that also contributes to such dynamic

There is the expanding risk of changing the rules of the game midway or “regime uncertainty” as government intrusions adds onus to the business climate by the contorting expectations and upsetting the balance of risk-reward tradeoffs. This penalizes existing firms and provides disincentives for prospective ventures.

Part of which have been policies that push for boom bust cycles which engenders widespread malinvestments or misdirection of resource allocation.

Another is the effects of policies to devalue. Eroding value of the US dollar may have prompted US companies to go overseas and tap (or arbitrage on) savings denominated in foreign currencies.

There is also the crowding out effect where companies spend money on lobbying to protect their political interests than for expansion.

The Business Insider gives an example of how tech companies have been spending to placate the political deities of Washington.

All these interventions add up to the intensive diversion of productive resources, raise the cost of doing business and consequently reduce the public’s appetite to invest, thereby adding to pressure on jobs creation.

It doesn’t stop here. Taxes have also been a significant part of these growing costs.

Tax Laws have been mounting as government intervention increases.

Chart from Taxes for expats

Also US government’s social spending will likely mean higher taxes.

From Heritage Foundation

And this has already been hurting small businesses which makes up the biggest share of jobs creation.

From Small Business Trends

Total compliance cost for the US economy on current regulations has been estimated at $380 billion per year

So much money has been lost to politics.

As supply-side economist Art Laffer writes at the Wall Street Journal in June of last year

On or about Jan. 1, 2011, federal, state and local tax rates are scheduled to rise quite sharply. President George W. Bush's tax cuts expire on that date, meaning that the highest federal personal income tax rate will go 39.6% from 35%, the highest federal dividend tax rate pops up to 39.6% from 15%, the capital gains tax rate to 20% from 15%, and the estate tax rate to 55% from zero. Lots and lots of other changes will also occur as a result of the sunset provision in the Bush tax cuts.

Tax rates have been and will be raised on income earned from off-shore investments. Payroll taxes are already scheduled to rise in 2013 and the Alternative Minimum Tax (AMT) will be digging deeper and deeper into middle-income taxpayers. And there's always the celebrated tax increase on Cadillac health care plans. State and local tax rates are also going up in 2011 as they did in 2010. Tax rate increases next year are everywhere.

So with the prospects of tax increases, capital investments are likely to be constrained (manifested by declining number of public companies) or will shift outside (raising capital overseas).

Bottom line: The eroding dominance of the US capital markets signifies a symptom of an underlying disease- government interventionism (mostly via inflationism)

Example of Unintended Consequences From Tax Hikes

As we earlier noted in Competitive Global Tax Structures As Major Investment Determinant, tax policies play a significant role in shaping an economic environment.

Here is an example how policymakers underestimates the public response to tax increases.

This from the Wall Street Journal, (all bold highlights mine)

``Illinois Governor Pat Quinn is the latest Democrat to demand a tax increase, this week proposing to raise the state's top marginal individual income tax rate to 4% from 3%. He'd better hope this works out better than it has for Maryland.

``We reported in May that after passing a millionaire surtax nearly one-third of Maryland's millionaires had gone missing, thus contributing to a decline in state revenues. The politicians in Annapolis had said they'd collect $106 million by raising its income tax rate on millionaire households to 6.25% from 4.75%. In cities like Baltimore and Bethesda, which apply add-on income taxes, the top tax rate with the surcharge now reaches as high as 9.3%—fifth highest in the nation. Liberals said this was based on incomplete data and that rich Marylanders hadn't fled the state.

``Well, the state comptroller's office now has the final tax return data for 2008, the first year that the higher tax rates applied. The number of millionaire tax returns fell sharply to 5,529 from 7,898 in 2007, a 30% tumble. The taxes paid by rich filers fell by 22%, and instead of their payments increasing by $106 million, they fell by some $257 million.

``Yes, a big part of that decline results from the recession that eroded incomes, especially from capital gains. But there is also little doubt that some rich people moved out or filed their taxes in other states with lower burdens. One-in-eight millionaires who filed a Maryland tax return in 2007 filed no return in 2008. Some died, but the others presumably changed their state of residence. (Hint to the class warfare crowd: A lot of rich people have two homes.)"

At the end of the day, when the society's productive agents get fed up by the sanctions imposed by the government to pay for profligacy, misdeeds or for the maintenance of the interests of bootlickers, the law of unintended consequences applies.

Others calls this "Atlas Shrugged"