By MoneyMorning.com.au
McProfit Burgers and Nuggets…
Before we go on, don’t forget to check out Slipstream Trader, Murray Dawes’ latest free stock market update video on YouTube.
The cult of the social engineers continues.
“May those with super profits be hit by super taxes.”
Today, Ross Gittins writes in the Age:
“I think our companies’ present ruthless pursuit of profit at any cost is an excess that can’t last.”
Sounds like something straight out of Kremlin central casting… circa 1974.
And yesterday we read in the Age:
“A working group set up by the Treasurer, Wayne Swan, is planning a shake-up that would see most companies pay no corporate tax and a smaller number pay a much higher rate of ‘super tax’ on profits clearly above the odds.”
Our first query is, please define “clearly above the odds.”
Is 11% above the odds?
Or is it 32%? If it’s 32%, then why not 31%? If it’s 31%, then why not 30%?
The Age report continued:
“A working group member, John Freebairn from Melbourne University, told the conference the super tax rate could be as high as 40 or 50 per cent. He nominated McDonald’s and KFC as examples of companies able to make larger than normal profits because of the power of their brands.”
Mr. Freebairn asked, “How are they going to get those profits from Australians without doing it in Australia?”
Yet again, bureaucrats and academics are playing with things they don’t understand – private enterprise.
McProfit Burgers
So, we looked at McDonald’s [NYSE: MCD] income statement. It turns out Macca’s made a net profit last year of USD$4.9 billion. Or, USD$4.58 per share on a USD$96.01 share price.
Put another way, if you bought every share of McDonald’s today, and profits remained steady, it would take 20 years for you to get your money back. We’re not sure that counts as “excessive”.
But anyway, Macca’s profit margin is around 20%, based on USD$24 billion of sales.
That must be “excessive”, because according to Mr. Freebairn, that’s a super profit.
On the other hand, Aussie retailer, Myer Holdings Limited [ASX: MYR] made a profit last year of $159.7 million, or 27.8 cents per share on a $2.58 share price.
Myer’s profit margin is 5.7%.
Is that a super profit?
It must be. Remember how a “super profit” was determined under the dead Resource Super Profits Tax? That’s right, it was everything above the risk-free government bond rate!
Right now, the 10-year Aussie government bond yields 3.97%. So if the government uses the same definition of a super profit, any firm earning a profit margin above this level would be stung with a super profit tax.
This by our estimate pretty much covers most profitable companies.
But whatever the outcome… and whatever the method the bureaucrats use to measure super profits, you can guarantee it will completely ignore the fundamentals of why businesses exist – to make a profit.
Private Sector Pays for Public Services, Not the Government
The fact is, it’s this search for profit that creates prosperity… employs millions of Australians… and which – through taxation – pays for the so-called public services so many adore. But remember, without private sector profits there wouldn’t be public education, health and roads.
It’s not the government that provides those services, it’s the private sector. That’s why we believe in cutting out the middle man (government) and allowing individuals to deal directly with private companies for “public” services. (But that’s an argument for another day…)
The problem is that bureaucrats and academics don’t understand markets. They don’t like the randomness of ideas and the lack of formalised structure that makes free markets so wonderful.
Bureaucrats and academics don’t understand that in a free market things just happen. Consumers have a demand for things so they buy them… in other instances, businesses believe a demand will exist for something once they’ve created it.
For example, there wasn’t a demand for tablet computers until Apple and other technology companies created the product. They did some market research to find out if consumers would buy it… but there was no guarantee it would be a success.
That’s capitalism. And entrepreneurialism.
And it’s something bureaucrats and academics hate.
Free Ideas Not Committees
Simply because you can’t calculate ideas in a spreadsheet… you can’t have a meeting of bureaucrats and academics and other knuckleheads, and get them to come up with ideas in a committee. That’s not how it works.
We’re sure you remember the Fairy Ruddfather’s Australia 2020 Summit. You can check out the website here. Even the government has forgotten about it because no-one has bothered to make a note of the change of prime minister:
We won’t bother printing any of the final report here, because it’s irrelevant. We’ll simply make this point: while bureaucrats and academics talk about innovation, that’s all they can do… those with an innovative brain (entrepreneurs) just get on and do it.
In a recent weekly update for Australian Small-Cap Investigator we wrote that government projects will always be a dud because they try to ensure the project won’t fail… which inevitably leads to it failing.
By contrast, entrepreneurs know there’s a chance they’ll fail. But because they believe they’ll succeed they go for it anyway. The reward outweighs the risk.
A quote we think pretty much sums this up is from an old Nike commercial by basketball star, Michael Jordan in the 1990s:
“I missed more than 9,000 shots in my career. I’ve lost almost 300 games. 26 times I’ve been trusted to take the game-winning shot… and missed. I’ve failed over and over and over again in my life. And that is why… I succeed.”
The Nike slogan of course, is Just Do It.
Bottom line: you can’t win unless you’re prepared to fail.
It’s the secret to a prosperous economy. And it’s the secret to wealth for all. The social engineers may think they can create prosperity by stealing money from one group of people and giving it to another, but it won’t work.
As we’ve pointed out many times before, socialism leads to poverty, oppression and stagnation… while capitalism leads to wealth, freedom and innovation.
Cheers.
Kris
PS. My old pal, Diggers & Drillers editor Dr. Alex Cowie has been working on a special report and presentation. He outlines his ideas for helping investors survive and prosper over the next 10 years. It’s a report you won’t want to miss. Aaron will give you a peek inside his article, but make sure you look out for details in your email inbox later this week…
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From the Archives…
How to Profit from the Inevitable Return to Sound Money
2011-12-02 – Kris Sayce
Two Reasons the Market Should Have Fallen…
2011-12-01 – Shae Smith
Ditch Your Investor Pride to Avoid an Investing Fall
2011-11-30 – Kris Sayce
How to Play a Volatile Market for Profit
2011-11-29 – Kris Sayce
No Thanks to Central Banks
2011-11-28 – Kris Sayce
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