Why Higher Taxes Help No One

CORPORATION TAX red Rubber Stamp over a white background.

And the rollercoaster continues…

According to Bloomberg, Trump will place more tariffs on Chinese imports. The US already has US$250 billion worth of taxes on Chinese goods.

This equates to about half of all US imports from China. Most of these taxes will rise on 1 January. And of course, China has responded in kind. China has tariffs on US$10 billion worth of US imports.

The heated trade debate has added another unknown into the current investing mix.

I personally thought this would all blow over. Tariffs are just another way put more money in the government’s pocket by robbing businesses and consumers of their purchasing power. Why would two countries, both trying to grow, hurt domestic businesses and consumers?

It seems I underestimated the stubbornness of leadership on both sides.

Trump wants China to stop cherry-picking American innovation and technology, while China wants things to remain as they are.

And because tariffs seem to be working so well (they aren’t), the UK is now wants to tax an easy target. Rich and successful tech stocks.

Income taxes were meant to be temporary

Any long time reader of Money Morning will know I HATE taxes.

Tax is just another word for stolen money. And if you don’t pay what the government demands, they’ll take away your freedom and put you in a cell.

I’m still astonished that income taxes even exist.

Income taxes as you know them have only been around for 219 years or so. And even then, people were originally only forced to pay 1–3% of their incomes, not 30–50%!

In 1799, the UK first proposed a temporary income tax. And to most people it seemed reasonable. There was a war going on. The government needed money to buy weapons and mobilise troops. It wasn’t seen as a big ask for a 1–3% tax.

The US did the same thing during the American Civil War. To raise money for the war effort, people with incomes over US$800 (about AU$30,884 in today’s dollars) paid a 3% income tax.

It’s wasn’t a huge ask and the cause (protecting the union and freedom) would benefit taxpayers in the long run.

But crucially, these were temporary measures. The UK and US would not constantly be at war.

Once the war was over, income taxes were history and governments would go back to raising money in other ways. Tariffs, duties and through the sale of public land.

In fact, the US Supreme Court in 1895 would rule that income taxes were unconstitutional.

Yet during the early 1900s, income taxes became the easy fix for runway government spending and budget holes.

And what happens when anyone gets more money? Do they save more and spend wisely? Almost everyone with increased income becomes lazy and spends more of it.

That’s exactly what’s happened with governments.

In just five years of permanent income taxes in the US, government revenues rose to the billion dollar mark for the first time ever. Two years after that, tax revenues topped US$5.4 billion.

Yet as tax revenues have gone up year after year, government spending hasn’t gotten any wiser. No matter how much money they’ve given, they just can’t seem to limit their spending to where it will create the most value for citizens.

And today, we all just take income taxes for granted. How does the saying go? Death and taxes are the only two certainties.

We’ve all been duped into thinking that this is all normal.

It why I think the recent news of UK taxes on tech companies is so dumb. Even with new stolen money, it’s very unlikely the government will wisely spend the proceeds.

if you’re on the hunt for some high-risk tech plays with massive potential, check out my free report.

Why taxing tech companies isn’t ‘fair’

You don’t need to look at a confidence index to see that investors are down on tech.

Recently, all of the FAANGs in the US, BATs in China and the WAAXs in Australia have fallen double digits from their 52-week highs.

The only one not to fall dramatically is Apple, Inc. [NASDAQ:AAPL], and even it is down 8.6%.

MoneyMorning 31-10-18

Source: Google Finance
[Click to open new window]

For the year however, a lot of tech stocks are still doing OK. And it’s because of these companies’ success that they’ve become targets of the UK.

The Australian Financial Review writes:

The British government will slap a 2 per cent tax on the turnover of digital businesses including Amazon, Google and Facebook, aiming to raise £400 million ($723 million) a year and setting an international precedent.

The move will be watched with interest by the Morrison government, which has publicly shared Britain’s frustration with the slow pace of international efforts to widen the tax net on the digital industry, and has launched its own consultation on whether to push ahead with a turnover tax on the sector.

UK Chancellor, Philip Hammond told their Parliament:

It’s clearly not sustainable, or fair, that digital platform businesses can generate substantial value in the UK without paying tax here in respect of that business.

It is only right that these global giants, with profitable businesses in the UK, pay their fair share towards supporting our public services.

Really? It’s not fair for the people of Britain that these tech companies exist?

It’s not fair that Google and Facebook create avenues for British businesses and entrepreneurs to increase sales, which helps them to employ more people?

It’s not fair that Amazon improves living standards by cutting prices, forcing other retailers to do the same?

What’s not fair is that Hammond seems to think Britain can steal from the rich and successful and give to what will inevitably be the undeserving.

What will the UK even do with the extra £400 million a year?

The nation almost tripled their borrowing in August. Sure the budget deficit is closing. But what’s the point when you’re just taking on more debt?

Some think the UK might increase net debt by £52 billion this year, adding to a total of £1,792.3 billion.

While these proposed taxes won’t come in until 2020, it’s another risk to consider for all the tech investors out there.

Down with taxes!

Harje Ronngard,
Editor, Money Morning

PS: Governments are even trying to crack down on cryptos. If anyone is making money from anything, they want a piece of the pie. Interested in learning more about the crypto world? Our crypto expert Sam Volkering has written a free report to help you navigate and potentially profit from the massive trend that is decentralised payments. Check it out here.

Harje Ronngard

Harje Ronngard

Harje Ronngard is the lead Editor at Money Morning. With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation.

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