It’s a funny old world, with Swiss government bonds this week trading at negative interest rates. Switzerland is perceived to be such a secure investment destination that investors are prepared to take a knock on their investment because they are sure they will get (most of) their money back.
Markets may be in turmoil, but top companies continue to do very nicely, thank you.
Apple was recently reported to have more money than the American government and to be worth more than the combined value of Europe’s top 30 banks.
Company profit may be up, but confidence is low, unemployment remains stubbornly high and so does income inequality.
Such has been the sense of crisis, some market commentators are wondering whether Karl Marx was not right after all and capitalism has sown the seeds of its own destruction.
The well-off worldwide, led by Warren Buffet, have said they want to pay more tax, but in the United States the Tea Party-led Republican Party views the solution as being smaller government and lower taxes.
Standard & Poors, it should be said, was right to downgrade the United States’s credit rating, as Congress is ideologically divided and paralysed about how to meet the country’s debt obligations.
The United Kingdom had sustained riots and, in South Africa this week, we saw the ANC go to war with itself, at least for a day.
Depending on your point of view, you could see both of the above events as the work of lawless troublemakers or people marginalised by an economic system unable to accommodate them. In South Africa there are renewed calls for wealth taxes to address huge disparities between rich and poor, but also a strident response which says that we are already highly taxed and should focus on getting more value from existing spending.
South Africa has been spared the worst of the market crisis, partly because we earn much of our crust from burgeoning markets in Asia.
But the resources boom has brought a stronger currency than policymakers want, exacerbated by “quantitative easing”, in which the US Federal Reserve pumps tons of money into the system, bringing down borrowing costs and encouraging flight to emerging markets in search of higher yields.
‘Appreciating currencies’
The Reserve Bank reported losses of R2.2-billion in the past two years from interventions to depress the rand. The loss results from buying, say, US treasuries, at low returns compared to rand-denominated bonds.
The Guardian reported this week that many countries are grappling with appreciating currencies.
In Australia’s case this has re-ignited the debate on imposing a resource rent tax (RRT), a super-tax applied over and above the normal tax on resources profits.
The ANC is considering such taxes as part of its 13-country investigation into maximising the role of the state in the management of the country’s resources. The inquiry follows calls from the Julius Malema-led ANC Youth League to nationalise key resources.
The beret-donning Malema attended his disciplinary hearing this week wearing a T-shirt that proclaimed “Economic Freedom Fighters”.
The concern in Australia is that high resources prices have pushed up the Aussie dollar, which currently trades at more or less parity with the US dollar, actively encouraging the de-industrialisation of the country. BlueScope, the country’s largest steelmaker, reported a A$1-billion loss and said it would cut 1000 jobs.
One solution, proposed by US economist Ronald Findlay, is a minerals export tax, the idea being that this will boost international prices, allowing for local beneficiation at the lower, domestic price.
If such a tax were applied BlueScope would be able to source its inputs at the lower, domestic price and become more competitive, says Oxford economics lecturer John Feddersen, writing on the website The Conversation.
An issue is whether export taxes are World Trade Organisation compliant. Says Feddersen: “Legal hurdles within the WTO should not be the basis for dismissing such a proposal and there are countless global examples of similar measures.”
Windfall profits
The ANC committee investigating the role of the state is understood to have beneficiation and export taxes included in its remit.
Another issue related to taxing windfall profits is that they can be short term, a workable solution being to put the proceeds in a sovereign fund so that the benefits are spread over a longer period than that of the windfall itself.
The export tax, writes Feddersen, could be combined with the Australian government’s watered-down RRT.
Australian Prime Minister Julia Gillard is under pressure from the Australian Greens to raise the RRT, which is intended to bring in A$4-billion a year. A study by the Greens shows that Gillard’s version of RRT would bring in a $38-billion, a $115-billion less revenue over nine years than what was proposed by former prime minister Kevin Rudd.
“This would be a perverse outcome at a time when the mining industry is already putting a huge strain on the rest of the economy,” said Green Party leader Bob Brown.
Mining giant BHP Billiton this week reported a record profit of $23.9-billion on revenue of $71-billion and taxes of $7-billion.
“This week, BHP Billiton declared a record profit three days after BlueScope Steel announced it was abandoning its export business, closing steelworks and laying off 1000 workers,” the Sydney Morning Herald said in an editorial.
“A resources rent tax, properly drafted and implemented, would be one way to address this issue. We have argued that a tax on mining rents is entirely justifiable. Its proceeds, which would be substantial, might be invested in a version of the future fund to ensure Australia can benefit from the proceeds of mining after the present boom has subsided.”
BHP Billiton does not break its financial results down by country, so it is not possible to determine how profitable its South African operations are. It is a beneficiary of subsidised electricity prices at its South African smelters. Media24 recently won a court application to compel BHP Billiton to disclose the value of this contract. The company has said it will appeal the decision.
The ANC’s report on the role of the state in resource management will be completed by November, when it will hold its national executive committee meeting and will be up for adoption at next year’s policy conference at Mangaung.
BHP Billiton mum on its South African figures
BHP Billiton pays a considerable amount of tax in Australia (company tax, royalties and other production taxes) — A$8.5-billion in [the 2011 financial year], the company said in response to questions from the Mail & Guardian.
“The mechanics of the proposed MRRT [minerals resource rent tax] have yet to be fully defined. Draft legislation was released on June 10 and BHP Billiton continues to contribute to industry submissions on the design of the draft legislation.
“The proposed MRRT, if legislated as currently detailed, would increase the amount of tax payable by our Australian iron ore and coal businesses — the only businesses of BHP Billiton impacted by the tax — resulting in a negative impact on future earnings available for distribution to shareholders.”
On electricity pricing [in South Africa], it said:
“BHP Billiton’s supply contracts with Eskom are long term and the price BHP Billiton pays for power to the smelters is internationally competitive.
“The terms of the contracts are similar to many contracts of this nature in other parts of the world across various energy-intensive industries and are structured to benefit both parties over the life of the contracts by offering power companies the certainty of demand and thus underpinning their investment in power stations while offering industrial customers a guarantee of long-term and secure supply.
“In valuing such contracts it is important to consider the entire length of the agreement, because looking at one year in isolation can be misleading.”
BHP Billiton said: “We do not break out figures for the contribution of our South African operations to our overall profitability.”