VOL. 127 | NO. 231 | Tuesday, November 27, 2012
The Worldly Investor
Economic East vs. West
By David Waddell
Yin and Yang Since Election Day, stock indices have fallen sharply, reflecting the Washington non-consensus. As we enter another legislative sausage session, investors can’t help but recall the 20 percent drawdown that marked the last high-stakes negotiation.
Unlike the European austerity programs targeting the labor class, American austerity ambitions target the investor class, and that class is responding by selling. Frankly, after spending the last three weeks in Asia and being continuously exposed to growth-enhancing policies, I became a little envious.
Flying between Hong Kong and Shanghai, I had a choice of programming funded by area advertisers. Among the advertisers were developing Southeast Asian countries touting their tax advantages. Singapore has a 17 percent corporate tax rate and no capital gains tax. Hong Kong has a flat tax of 15 percent and actually refunded $769 to each Hong Kong citizen last year. Neither jurisdiction taxes repatriated profits. Anecdotally, in Hong Kong I visited a 12-story “wine cellar” filled to the brim with vast collections. Hong Kong eliminated wine duties in 2008 and has since become the No. 1 international marketplace for enthusiasts. The U.S. may have adopted a stance that taxes do not matter, but Asia has not only adopted the opposite stance – it is also advertising it as a competitive advantage to international business travelers.
Last week, China announced a new generation of Party leadership. Unlike the United States, the election process is shrouded in secrecy with 10-year terms. While the last generation included many engineers, this generation includes more corporate and entrepreneurial characters. The Party’s national ambitions appear in their very specific five-year plan. Principally, the Party acknowledges that China must evolve from being the world’s factory by encouraging domestic consumption and service industry development. The Party must also successfully orchestrate the urbanization of hundreds of millions of Chinese citizens. To accommodate these huge population flows, cities the size of Tokyo must be built annually, connected by miles and miles of high-speed rail. The current five-year plan dictates that 45 million urban area jobs be created and that unemployment levels not exceed 5 percent. China will also focus on leapfrog technologies, moving beyond copycat business models by dedicating 2.2 percent of GDP to research and development. To encourage investment, long-term dividend tax rates were recently cut to 5 percent. China may not have democracy, but it does benefit from government stability and transparent priorities.
So it’s East vs. West. While Asia may be labeled “developing,” the governance abilities and sovereign fiscal conditions of the West are “deteriorating.” I am not advocating that the West adopt authoritarian capitalism to fix this problem, but I am suggesting that leaders consider the global implications of their decisions. This century will be marked by human and capital mobility. Just as Tennessee and Texas benefit from the tax escalator in California, global governance and tax regimes will also lead to migratory patterns. If you have the occasion this legislative season, please remind your congressman!
David Waddell, who is regularly featured in the Wall Street Journal, USA Today and Forbes, as well as on Fox Business News and CNBC, is president and CEO of Memphis-based Waddell & Associates.