David Fuller and Eoin Treacy's Comment of the Day
Category - General

    The Real Problem Is We Are All Over-Taxed

    Here is the latter part of an excellent, common sense column by Allister Heath for The Telegraph.

    The great economist Ronald Coase taught us that corporations are only the best vehicle for economic activity when the transaction costs of working in a hierarchical, closely managed organisation is lower than the costs involved in getting freelancers or independent agents to cooperate. But tech means that the economics have tilted at least a little away from the corporation, and more towards smaller firms, contractors and freelancers advertising their wares via platforms, and this is panicking our social-democratic establishment, who fear losing the last levers they still retain over our society and economy.

    So they have enrolled the Government – including Philip Hammond, the Chancellor – in their quest to slow down change. Their strategy has been to point out the inconsistencies in current rules. Take the jobs market: some people are obviously employees, and others are pure self-employed freelancers.

    But what of workers who rely primarily for their income on a platform like Uber? The drivers own their own cars, pay for their own operating expenses and choose their own hours; almost all of them are happy. But are they really, fully self-employed, or are they part of some third way which isn’t (yet) recognised in law and in the tax code?

    It is obviously true that the present classification makes little sense. But sometimes it’s best not to change a broken system, for fear of making it even worse, and that is exactly what Hammond should have realised before he decided to raid the self-employed. The problem isn’t that the self-employed are “under-taxed” to the tune of £5.1bn a year, as many establishment economists have been saying. The problem is that employees are over-taxed to the tune of many more billions – overtaxed in the sense that a much lower overall tax rate, accompanied by a much smaller state, is, in my view, the only way Britain will prosper and thrive as an independent, free trading economy in the 21st century.

    But until the day that the Government can drastically slash taxes at the same time as it radically simplifies the system – the model recommended by the 2020 Tax Commission, which I chaired – it would be better for it to do nothing. It should certainly not seek to undermine or campaign against self-employment, on the spurious grounds that it’s an “inferior” form of employment.

    It should not seek to extend the welfare state’s net ever wider, showering the self-employed with more benefits. And the last thing it should do is plot to whack the likes of Uber with a 13.8pc payroll tax, which would be the logical (but job destroying and price raising) outcome of any system that sought to tax “platform workers” like the employed. This is a Tory government, and it is high time it began behaving like one.

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    Email of the day

    On Sturgeon submersion:

    Dear David,

    Allister Heath has recently written another article in the Telegraph entitled – Why Scotland’s dire economy is falling further behind the UK. It is well worth a read. For Sturgeon to get a motion through the Scottish Parliament to hold a Referendum, she will probably have to invoke the support of the Greens, as was done recently in order for the SNP to get their dire budget through. The point is that if the Green’s manifesto was to be enacted Scotland would be back in the 19th century in short order. I find it difficult to believe that even Sturgeon would stoop so low to get a vote as important as the right to hold a Referendum to drag the country away from its successful resting place of 300 years. I would have thought that was political suicide.

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    India's Nifty Index Rises to Record as Fed Keeps Rate Outlook

    This article by Ameya Karve for Bloomberg may be of interest to subscribers. Here is a section:

    “The U.S. Fed action was in line with market expectations and allayed concerns that the outlook comments might turn hawkish,” Hemant Kanawala, head of equities at Mumbai-based Kotak Mahindra Old Mutual Life Insurance Ltd., said on phone.

    “This is positive for emerging-market flows and overseas inflows to Indian stocks will resume,” he said.

    Resumption of foreign inflows and seven straight months of net purchases by local funds have boosted the valuations of Indian stocks to their highest level in more than six years. The Sensex traded at 17.3 times estimated 12-month earnings, the highest since November 2010.

    Foreign funds have purchased $3.5 billion of local shares so far this year after a record $4.6 billion outflow in the three months through December. Domestic funds have been buyers for seven straight months through February, including a record 138 billion rupees ($2.1 billion) in November.

    “In an environment where earnings haven’t been so exciting the valuations from the price-to-earnings perspective will always look expensive,” Kanawala said. “Price-to-book ratio is a better parameter in such cases.”

     

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    Hong Kong Stocks Jump to 2015 High as Fed, China Energize Bulls

    This article by Richard Frost for Bloomberg may be of interest to subscribers. Here is a section:

    Hong Kong equities are back at heights unseen since China devalued its currency in August 2015.
    A dovish Federal Reserve, China growth optimism and steady mainland inflows combined to fuel a 2.1 percent rally in the Hang Seng Index on Thursday, the biggest advance in almost 10 months. The gain also pushed the gauge firmly above the 24,000 level -- an effective ceiling for the past seven years. China Unicom Hong Kong Ltd. and Link REIT were among the day’s best performers, while Cathay Pacific Airways Ltd. was one of only two decliners after posting a loss on Wednesday.

    Hong Kong-listed equities are particularly vulnerable to shifts in sentiment toward U.S. monetary policy thanks to a currency peg with the greenback, while the increasing dominance of Chinese companies on the city’s benchmarks means national economic indicators have a powerful pull. With investors relieved the Fed didn’t increase the projected pace of rate hikes and fears of a Chinese hard landing receding, the serially under-performing Hang Seng Index may have room to rally further.

     

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    Treasuries Surge After Fed Maintains Forecasts for 2017, 2018

    This article by Elizabeth Stanton for Bloomberg may be of interest to subscribers. Here is a section:

    Treasuries surged after the Federal Open Market Committee raised interest rates as expected and maintained forecasts for additional increases for the next two years, dashing expectations it might signal a quicker pace of hikes.

    Yields were lower by five to 10 basis points at 2:45 p.m. in New York, with the five-year lower by 10 basis points at about 2.03 percent. Yields had risen to their highest levels in at least a year in the past week as market-implied expectations for a quarter-point increase in the fed funds rate approached certainty. Market focus was on any new language in FOMC statement, changes to member forecasts for the funds rate, or both. Most economists and strategists saw more risk of an increase to the 2018 median than to the 2017 median.

    Median forecast for 2019 rose to 3% from 2.875%, while 2017 and 2018 medians remained at 1.375% and 2.125%; 5Y yields reacted most sharply, falling as much as 11bp, and the 5s30s curve rebounded from 102bp to 109bp within minutes

     

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    Round Two still much more to come

    Thanks to a subscriber for this report from Deutsche Bank focusing on the oil marketing companies' sector in India. Here is a section:

    Although there is understandable scepticism given the government’s track record, our confidence on the implementation of free pricing for petroleum products stems from the following measures that the government has already taken: 

    The extinguishing of the diesel subsidy in October 2014 and the revision of prices in line with changes in international prices without any government intervention; 

    The increase in LPG and kerosene prices each month since June 2016; 

    Increases in the auto fuel price even during elections and in times of sharp price increases for crude; 

    The aggressive implementation of Direct Benefit Transfer (DBT) to LPG and kerosene to contain subsidies. 

    FCF yield improves by up to 280 bps over FY17-20 
    Operating cash flow for OMCs will likely be driven by improvement in marketing margins, rising refining margins and higher volumes. Over FY17-20, the FCF yield of state-owned OMCs should improve dramatically, by more than 280bps for IOC and BPCL. HPCL, with capex starting from FY18, will likely see its FCF yield decline by 130 bps. We expect the OMCs to generate robust free cash flows of about USD10bn over FY18-22E. We also estimate net debt/equity of OMCs to decrease further over FY16-22E – HPCL from 1.6x in FY16 to 0.6x in FY22, IOC from 0.6x in FY16 to 0.2x in FY22, and BPCL from 0.7x in FY16 to 0.1x in FY22.

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