Obama and Romney's Australian reach

Battling agendas outlined in the US presidential race will have significant repercussions for Australia, whoever wins. And a growing corporate tax reduction war is one of the biggest game changers.

Australia has a big stake in the 2012 presidential race, which will embrace issues never before seen in a Western country. For example US companies have at least $US1 trillion offshore and both candidates are going to try and attract that money back to the US by joining the global corporate tax reduction war. If they are successful the American dollar could rise and the Australian dollar fall.

Yet both candidates are being forced to slash spending on an unprecedented scale – again with implications for Australia.

This commentary is the first of a regular series we will write about the major events taking place in the US and issues emerging during the presidential race and their implications Down Under.

Mitt Romney has effectively wrapped up the Republican nomination, with conservative Catholic candidate Rick Santorum dropping out. Now that it’s just Romney versus incumbent US President Barack Obama, it’s easier – though not easy – to assess how the person occupying the White House might change the US economy.

Romney has outlined ten things he would do on day one of his presidency. It’s a list of five bills and five executive orders. The orders are kind of a presidential demand.

Of Romney’s five day-one bills, the most important is his plan to slash the corporate tax rate from 35 per cent to 25 per cent. But Obama is not far behind – targeting 28 per cent. Both Obama and Romney realise one of the reasons American companies shifted so much of their operations offshore is that the US corporate tax rate is not competitive internationally. When you include state taxes it’s the highest in the developed world. Countries around the globe are slashing their corporate tax rates to encourage investment from domestic sources and abroad. Even Japan, which has a legacy of high company tax rates, is going down this path.

Of course in Australia we may not have learned the US global lesson and next month’s budget may include a big attack on one of our biggest tax revenue sources – miners – which will almost certainly cause them to spend much more money offshore (Canberra's mining project hit list, April 19).

Between the high tax rates and the low consumer demand, American companies currently have much less incentive to invest at home and are more likely to compete in the global arena, particularly our neighbourhood, the Asia-Pacific, where growth is abundant.

It’s difficult to estimate, but it’s widely accepted that US companies have in excess of a trillion dollars sitting offshore in cash and investments because it’s not tax effective to bring it home. Big American corporates have been lobbying Washington about "repatriating” those profits at a heavily discounted tax rate; it’s called a "tax holiday”.

But Washington would have to explain why big companies were allowed to move jobs and investment offshore, only to receive a tax discount when their profits came home.

So the tax rate reduction is the only big lever that Romney or Obama can pull, and they are both yanking that lever very hard because both believe that if the trillion dollars returns not only will revenue rise but investment will boom – although at 25 per cent it’s still only around the global average. Nevertheless, it will level the tax playing field for American companies that want to put more resources in the US as opposed to say China, Japan or even Australia.

Both Obama and Romney believe that if the US consumer continues to recover and can absorb the coming fiscal contraction (we’ll get to this in a moment) and the domestic corporate tax rate comes down significantly, American companies could quickly discover there are profits to be made at home and withdraw investment abroad.

Former US president Bill Clinton, who is one of the more astute observers of the American economy, has been calling for cuts to the corporate tax rate for some time now. He lowered the corporate tax burden in the early stages of his presidency to rekindle investment from the recession in the early 1990s. It worked.

Obama listened but not only is his tax cut less than Romney's but he is looking to close a number of tax loopholes that have helped drive the effective tax take from the stay-at-home US corporations able to use the loopholes down to a forty-year low of 12.1 per cent, according to the Congressional Budget Office. Romney has been vague on this front.

While Obama agrees on the corporate tax cuts, Romney has other agenda items.

Romney plans to write bills to reinstate the Trade Promotion Authority to help encourage more free trade agreements, instruct the Department of the Interior to conduct an energy review, send federal retraining programs ‘back’ to the states and cut non-discretionary spending by $20 billion.

Of his executive orders he’s lining up Obamacare and red tape, looking for more domestic oil drilling, sanctioning China for its currency manipulation and "empowering” American businesses and workers (whatever that means).

His obvious preference is for more drilling for oil and gas, which could present some opportunities for Australian majors with a US presence, like BHP Billiton and Woodside Petroleum.

However, censuring of Chinese trade practices could easily put Australia and its companies in an awkward position, wedged between a crucial historical ally and an indispensable economic partner.

Health companies like CSL could be in for a slightly less good time if Romney makes any serious headway on repealing Obamacare, which is one of his a clear priorities.

Both candidates are framing all these issues in some way under the heading of economic management, which means the US budget deficit. In reality, these are all side issues.

As Alan Kohler explains (US sleepwalks towards a fiscal cliff, April 17) the US is facing the biggest fiscal contraction in its history, with income and payroll tax cuts expiring and the deadline for $US1.2 trillion in budget cuts drawing near.

Where are the cuts going to come from?

Eighty-two per cent of projected US government spending in the 2013 financial year is headed for social security, Medicare/Medicaid and defence. Meaningful cuts have to come from these three.

Obama has only really been willing to spend political capital on the last, defence. Australian shipbuilding company Austal has a contract with the US navy worth up to $US3.5 billion if they continue purchasing combat vessels. So far the navy said yes to four, with a maximum of 10 available.

If Obama were to win a second term and get serious about defence spending cuts, contracts like these could be shortened. The Joint Strike Fighter, which looks to be a lemon, is another obvious cut. But cutting defence spending in the US is a treacherous task.

Whoever wins the election, they’ll be relying on US companies bringing a shedload of money home to fill the gap left by the government’s budget cuts.