If we keep taxing capital heavily, it will happen.
dailyspeculations.com
17-Feb-2006
Update to Low Tax States and Stock Performance Study, By Dr. Alex Castaldo, Vic Niederhoffer & Vincent C. Fulco
A recent Barron's article (“Revolution on Wheels” by Karen Hube, 02/13/06) highlighted an emerging demographic trend of individuals fleeing high tax states for those which provide for higher retention of one’s disposable income. The focus on this migration caused us to revisit a December 2005 study of the aggregate performance of public companies domiciled in similarly low tax states. The premise for our study was that companies in business friendly environments were more likely to be strong stock performers. Simply put, lower corporate taxes mean the owners of the firm get to retain more of their hard earned and costly capital which can be paid out or put back into productive use thereby perpetuating value creation. As for employee incentives, our research supports the notion that states with low corporate taxes also maintain low individual taxes. This should lead to a corporation’s enhanced ability to attract highly educated, productive employees seeking to retain more of their paycheck as the Barron’s article suggests is happening at a quickening pace. Moreover, state governments ongoing de facto pledge to keep taxes low can signal that they are pro-enterprise and pro-stockholder.
The findings of our earlier study bore out our speculation. We examined indices created by Bloomberg for companies in Arizona, Nevada, North Carolina, South Carolina and Florida. The indices are a diverse and deep set with as many as 400 constituent members. Representative companies include Altria Corp. (MO) in North Carolina, Office Depot (ODP) in Florida, AVX Corp. (AVX) in South Carolina and Dell Corp. (DELL) in Texas. From the respective index’s inception to 12/05/05, we found that every index out-performed the SPX by a wide margin; ranging from 16.14% in the case of North Carolina to 137.85% for Arizona.
The updated results remain equally impressive as the companies underlying the state indices continue to handily beat the SPX.
SPX Out Perf.
State Start StartDate Cur CurDate PrcChg PrcChg vs.SPX
Arizona 229.94 12/31/1999 529.22 2/10/2006 130.16% -13.77% 143.92%
Nevada Not Avail.
North Carolina 100 1/2/2002 127.56 2/10/2006 27.56% 9.73% 17.83%
South Carolina 100 12/31/2001 148.3 2/10/2006 48.30% 10.36% 37.94%
Florida 100 12/31/1999 135.16 2/10/2006 35.16% -13.77% 48.93%
Texas 178.89 12/31/1999 395.19 2/10/2006 120.91% -13.77% 134.68%
If the data is segregated more finely into annual performance we find the following:
States’ Percent Outperformance vs. SPX
Year YTD
State 2000 2001 2002 2003 2004 2005 2006
Arizona 2.45% 30.59% 6.44% 41.60% 21.14% 8.80% 2.97%
Nevada
North Carolina 6.75% 1.30% 3.74% 0.58% 1.11%
South Carolina 9.15% 2.37% 9.55% 10.44% -1.65%
Florida -11.48% 24.63% 7.32% 14.34% 14.69% -0.75% 1.93%
Texas 28.62% 6.49% 9.97% 9.34% 20.00% 19.74% 5.73%
Average 6.53% 20.57% 7.93% 13.79% 13.82% 7.76% 2.02%
SPX Return -10.14% -13.04% -23.37% 26.38% 8.99% 3.00% 1.50%
Russell 3000 Return -8.52% -12.62% -22.81% 28.73% 10.08% 4.28% 1.96%
* S&P 500 and Russell 3000 returns included for reference purposes.
With underperformance by Florida based firms in 2 periods, there were 24 out of 26 winning periods annually.
Note: We used price weighted stock indices provided by Bloomberg that track the performance of each state. The companies are headquartered in the state (or have a substantial portion of their operations there) and have a minimum market cap of $15 million. We used 12/31/1999 as a start date or the first date the index is available. The indices include from 45 to 400 companies and are price-weighted indexes.
Follow-on comments by Vincent C. Fulco
Since its been well established that the extraordinary performance exists, we thought it would be interesting to look at the actual tax burden faced by the typical company residing in the states under review vs. a peer group of companies residing in high tax states mentioned in the Barron’s piece. While the high tax states were noted in the context of high individual income taxes, we correctly surmised that, other than Utah, the states also have some of the highest corporate taxes.
State Income Tax Rates- Fiscal Year 2005
US Average 6.68%
Low Tax States Under Study
Vs. Natl.
Rate Average
AZ 6.97% 0.29%
FL 5.50% -1.18%
NV 0.00% -6.68%
NC 6.90% 0.22%
SC 5.00% -1.68%
TX 4.50% -2.18%
Ave Ave
4.81% -1.87%
States Mentioned in Barron’s Article
Vs. Natl.
Rate Average
ME 8.93% 2.25%
D.C. 9.98% 3.30%
NY 8.78% 2.10%
HI 6.40% -0.28%
RI 9.00% 2.32%
WI 7.90% 1.22%
VT 9.75% 3.07%
OH 8.50% 1.82%
NE 7.81% 1.13%
UT 5.00% -1.68%
Ave Ave Differential
8.21% 1.52% -3.39%
Source: Small Business Survival Committee
Companies in the low tax states enjoy a benefit of 1.87% vs. the national average tax burden. More impressive is the full 3.39% differential vs. competitors in the high tax states. Ask a businessperson what they would do for an additional 3+ pts of profit margin. It is as if one were running in a footrace and given at least a 30 second head start.
There are numerous reasons worth considering for why these lightly taxed firms’ stock performance is so robust. It is an elemental point of business that the more profit flowing to the bottom line, and the more sustainable those profits, the more valuable the franchise becomes. Another reason could be that funds not allocated to state taxes are available for debt service, higher capital expenditures or R&D investment relative to one’s peers in higher tax states; all activities that improve a firm’s future financial condition and flexibility. A healthier corporation is more likely to add employees, grow their operations and pay above market wages. From the government’s perspective, if we assume the level of low corporate taxes is a proxy for a state’s commitment to maintaining an attractive, hospitable business environment, one can see the positive tone leading to increased capital formation, risk taking and lower capital gains taxes. The last of our theories is that of improved employee productivity which can take many forms. At the corporate level, one can conjecture that with the aforementioned commitment to a reduced state tax bite, it may be less necessary to allocate finance staff and resources to handle complex and changing tax regulations. This human capital can be redirected to improving one’s competitive advantage; typically through sales, marketing, strategy and product development.
Besides explicit stock performance, other tangible measures of a more benevolent tax regime can accrue in the form of improved profit margins, higher levels of sales and income per employee, higher returns on R&D expenses and improved capital utilization among others. It really comes down to the creation of a virtuous circle of improving financials leading to stock performance leading to better opportunities for the company, i.e. raising cheaper capital, being able to purchase acquisitions with high priced currency (stock transactions).
In an increasingly transparent and interconnected world, capital, whether intellectual or monetary, is highly transferable and can seek the best environment in which to reside and grow. If the 5 years of stellar returns from the companies in our study is representative, state governments, particularly those which are increasing the already onerous burdens, should heed the market’s message.
(Another article)
....Excerpts from the first chapter, on Noam Chomsky, give the flavor. Subsequent chapters cover Michael Moore, Al Franken, Ted Kennedy, Hillary Clinton, Ralph Nader, Nancy Pelosi, George S###s, Barbra Streisand, Gloria Steinem and Cornel West.
NOAM CHOMSKY
... To hear Chomsky describe it, the Pentagon has got to be one of the most evil institutions in world history... You might think that Chomsky, being a linguist, worked for the MIT Linguistics Department when he joined the faculty. But in fact, Chomsky chose to work for the Research Laboratory of Electronics, which was funded entirely by the Pentagon and a few multinational corporations. Because of the largess from this "menace to human life," lab employees like Chomsky enjoyed a light teaching load, and extensive staff, and a salary that was roughly 30% higher than equivalent positions at other universities. Over the next half-century, Chomsky would make millions by cashing checks from "the most hideous institution on this earth."...
.... Chomsky describes himself as a "socialist" whose goal is a "post-capitalist society worth living in or fighting for." He has called capitalism "a grotesque catastrophe"... This man of the people, who is among the top 2% in the US in net wealth, moved his family out of Cambridge MA -- hardly a working class district to begin with -- to the even more affluent wooded suburb of Lexington... He made the move around the time forced busing was being imposed on the Boston area; Lexington was exempt from the court order. Today, America's leading socialist owns a home worth over $850,000 and a vacation home in Wellfleet, MA, valued in excess of $1.2 million. And don't look for oppressed minorities in either neighborhood. This self-described admirer of the Black Panthers, who says intellectuals must combat "all forms of racism" and complains that America "excludes" blacks from large parts of the country, owns a home in a town with a black population of 1.1%...
... A few years back he went to Boston's venerable white shoe law firm Palmer and Dodge and, with the help of a tax attorney specializing in "income-tax planning," set up an irrevocable trust to protect his assets from Uncle Sam. He named his tax attorney (every socialist radical needs one!) and a daughter as trustees... He has assigned the copyright of several of his books, including multiple international editions. Chomsky favors the estate tax and massive income redistribution -- just not the redistribution of his income. No reason to let radical politics get in the way of sound estate planning...
... Over the years, Chomsky has been particularly critical of private property rights, which he considers simply a tool of the rich... Intellectual property rights are equally despicable. According to Chomsky, for example, drug companies that have spent hundreds of millions of dollars developing drugs shouldn't have ownership rights to patents. Intellectual property rights "have to do with protectionism," he argues... But when it comes to his own published work... It would not be advisable to download the audio from one of his speeches without paying the fee, warns his record company, Alternative Tentacles (did Andrei Sakharov have a licensing agreement with a record company?)... Go to the official Noam Chomsky web site and the warning is clear...
... In October 2002, radicals gathered in Philadelphia for a benefit entitled Noam Chomsky: Media and Democracy... For a fee of $15 you could attend the speech and hear the great man ruminate on the evils of capitalism. For another $35 you could attend a post-talk reception and he would speak directly with you. During the speech, Chomsky told the crowd, "A democracy requires a free, independent and inquiring media." After the speech... a writer for the lefty Philadelphia City Paper tried to get an interview with Chomsky. She was turned away. To talk with Chomsky, she was told, this "free, independent and inquiring" reporter would need to pay $35... |
