Kerr Neilson, the man described as Australia’s most astute company investor, also the man whose family has millions to gain personally from tax cuts, has called the case for the government’s plan to cut corporate taxes “hollow”.
“I’ve heard the words but not the evidence,” says the founder and managing director of Platinum Asset Management of the Enterprise Tax Plan. “I don’t fully understand why they want to drop the corporate tax rate. This idea that companies will not invest strikes me as rather hollow.” The proposals, he says, are unsophisticated in that they ignore other inducements such as accelerated depreciation, which is a tax break on its own. “Is it the tax rate which is restraining investment? It’s like saying that I’m not going to work so hard because I have to give too much money to the government. It doesn’t suddenly drive us to the couch and the TV. “We all want to have our hands out. All of us. Will it really induce us to work harder?” Kerr Neilson’s comments were made last week as we informed him Platinum was about to be named Australia’s best corporate taxpayer. His words are also a powerful repudiation of the rhetoric in government and the big business lobby which many believe pushes tax cuts as an article of faith rather than reform based on credible evidence. As he and his former wife Judith own more than half of Platinum’s issued shares – and the group has paid $241 million in tax over the three years of transparency data from the Tax Office – the Neilsons have more to gain personally from the proposed tax cuts than any of the big business figures presently calling for lower corporate taxes. It is not only a matter of civic-mindedness. Neilson is known as a hard-nosed investor and business operator whose team of analysts investigates companies and economies deeply before buying. Often contrarian, Kerr Neilson eschews market fads and buys large stakes in out-of-fashion stocks on global markets as well as high-growth stocks. It is fair to say that if Kerr Neilson can’t see the point in an unfunded corporate tax cut bill then there probably isn’t a point. Dubbed “Australia’s Warren Buffett” – a term he would no doubt eschew – this is somebody who spends his life evaluating companies and invests more successfully than most. Hence Platinum’s share market value of $3.5 billion and its profit margin of 77 per cent. Platinum shares tumbled 12 per cent in one trading session earlier this year when Neilson announced he would be stepping down from day to day duties running the company to focus on mentoring the analysts. Besides its disciplined approach of deep-value investing, Platinum now has half of its $28 billion in funds invested in Asia. As Asian economies have grown, so has the asset allocation by Platinum away from traditional investment destinations of Europe and the US into higher growth markets such as China.
By sector, tech stocks feature; Facebook for instance. When investing in companies Kerr Neilson looks for profit growth. It is this, future profit growth, which is the key “driver” of Platinum’s high investment returns. “The corporate tax rate used to be 47 per cent back in the 1980s,” he says, rejecting the tax lobby notion that if the corporate tax rate remains at 30 per cent, foreign companies will not invest in Australia. “The idea that businesses might migrate is not realistic. Individuals do (for tax purposes) but they are not creating work for others.” As for the contention that cutting corporate taxes will lead to wages growth, Neilson says the corporate tax rate has fallen in Australia since the 1980s but wages have not grown in step with the rise in corporate wealth.
“What I can tell you is, if you look at the S&P (US market index), the profit share between capital and labour has shifted towards capital. This is a clear trend. “Return on equity (ROE) has lifted from an average of about 6 per cent during the first 50 years of last century to around 12 per cent in the subsequent period of 68 years. Profit share for developed markets has shifted from around 44 per cent of GDP in the early 1970s to about 48 per cent now. “Both address the same subject which is that corporations have kept a greater share of the cake for some while now.” Roughly half of this “shift in the cake” came from labour productivity gains and one quarter from offshoring. “While there is a very long trend of improving profit share (for capital), we could see it swinging back towards labour because the unemployment rate is now at multi-year lows. “It strikes me that we are seeing a tightening of the labour pool (world-wide). There is full employment in the US. Germany is running very tight. Wages are creeping up and there is evidence of this in Japan too.” As a keen observer of corporate behaviour, Neilson also questions the business lobby shibboleth that less regulation inevitably is a good thing, particularly in the present era of globally dominant corporations such as the tech giants. “There is no question that if you leave companies to their own devices then they will exploit their position. Monopolies don’t contain their greed. Global monopolies have virtually no restrictions on their market size so regulatory intervention is now more important”. He sees two trends in regards of corporate tax. One, tax is increasingly a matter of global antagonisms: the rising EU antipathy for American companies (as evinced by the Apple enforcement in Europe) and tensions in the US about Korea and China. Secondly, governments will further come to grips with large-scale multinational tax avoidance. “It makes no sense for them (global tech giants) to masquerade behind licensing deals and so forth. There has to be some adjustments and it will become more and more difficult for companies to masquerade behind these arrangements. This (challenge) has been growing now for ten years”. Further to the issue of corporate entitlements, Kerr Neilson says the “corporate daisy chain” which has enabled the spiral in executive pay and the disproportionate share of wealth skewing to capital over labour, may also have peaked. “We have reached the end of a very long road where the senior executives are going through this enrichment”.
