Taxes are a good way to divide any group of individuals. There are a few that believe taxes should never be raised and almost be eliminated.. but despite the best attempts of Grover Norquist, most would agree that it’s not quite that simple. All countries have to balance the desire to have a balanced budget over the long term with the quest to offer services and to redistribute part of what the top earners are making towards those less fortunate.
I’ve written a few times here about my frustration with those that think raising taxes on the rich is the answer to everything. It’s not that taxing the rich is a bad idea but rather that it’s so much more complex than that. Making the debate seem so simple might help to win elections but it’s not the right way to manage a country.
In recent months, many Western countries have been under heavy pressure to fix their finances. In Europe especially, governments from smaller countries such as Greece, Portugal and Ireland to bigger ones like Spain and Italy are facing huge challenges. Why? Investors no longer trust that they are “risk-free”. It’s not so certain that Germany will come to the rescue and a default is certainly within the possible outcomes. That has led to surging yields on their debt leading to unsustainable interests being paid.
Backs Against The Wall
These countries are now desperate to find a way out of this as soon as possible. Even the US government, which is still much safer than all of those mentioned governments has been accumulating record deficits which has translated into record debt. Obama and Romney are now set to argue over how to rectify the situation.
Austerity vs Growth
The big debate in Europe concerns the best way to fix this big problem. Some such as Germany want austerity, which ends up being cuts in services and expenses while others like France and most of the troubled economies prefer a pro-growth approach where a stronger economy would lead to higher tax receipts and eventually a balanced budget. I guess some of both is required…
Raising Taxes
Somehow though, governments around the world think that raising the taxes might be the shorter term solution to their problems. It’s happening everywhere and is seriously worrying me. Let’s look at a few examples:
-The US has been pushing hard on money earned by their companies and citizens outside of the country. It is the only country to tax individuals that live outside the country and has been pushing hard on increasing their revenues on taxes from expats. Faced with many that are not coming clean, the IRS is offering special deals for those that do. In terms of companies, the IRS is working on legislation that will prevent companies from tapping their offshore cash stockpiles
-The United Nations has been looking at the possibility of taxing the ultra-rich and while the idea is certainly worrying, I don’t think anyone seriously think countries would agree to such an idea.
-France remains scheduled to move ahead with its 75% tax on income over 1 million Euros in a year.
-The recent health care changes, named Obamacare have successfully passed the Supreme Court, but only once they were considered as taxes
Taxing Should Be Done With Extreme Caution
The French government will scare away companies that were thinking of setting up a shop in France.. these are exactly the type of things that will hurt the economy in the long term… It frustrates me to no end that so many people don’t get this. Not only does taxing (especially at extreme levels) reduce incentives for individuals but it puts a bigger share of the economy in the hands of the (inefficient) government. Governments should not enact policies simply because they are “popular” or easy to move through. It should be about long term growth more than anything else.
I’m not saying they should not be raised. Many tax loopholes should be eliminated and there are certainly some taxes that should be added to favor new energy, etc. But in the past 30 years, the top 1% has gone from paying 19% of the total federal taxes to over 37%…. how much more do you expect them to pay? The entire bill?
Next Time You Hear About Raising Taxes…
Please ask yourself or the person that is discussing it… “Does this tax increase make sense or is it just a desperate move by an even more desperate government”.
Long LinkedIn (LNKD)
Short Pandora (P)
What If…We Were Months Away From The Next Depression….
I sometimes feel like I’m not myself. If you knew me, you would know that I’m this guy who smiles all day long, who loves life and tries to live every minute to its fullest, who always sees the glass as half full, etc. But when I look at the economic outlook or discuss things with friends, I’m simply unable to see how things could not end in a disaster. Give me one reason to think that we will be back near full employment with decent growth in the near future and I’ll have 10 reasons why we won’t. It’s looking very bad.
Depression?…
I didn’t think much about it but when I watched this video discussing the parallels between the current economic crisis in Europe and what happened in the 1930s, it’s difficult to not turn negative.
We all know that major economies such as Spain and Italy are in deep trouble, are unable to finance their debt at sustainable rates and will need a bailout. We also know that if tiny economies like Greece and Cyprus had so many problems getting bailouts, getting one for Spain or Italy seems like mission impossible.
In a more global economy than ever before, a European collapse would be more than enough to bring down everything else too.
The US government has more debt than at any time in its history, major deficit problems, an unsustainable health and social security system and a government unable to tackle issues…The housing market continues to look fragile.
The Japanese government has an insane debt level, an aging population and will need to start cutting down on those deficits but how?
The global financial system which is built on confidence and faith continues to become more shaky after collapses from Lehman, Bear Sterns, major losses by JP Morgan, etc. European banks are still carrying sovereign debt as if it was risk-free when we all know that many of those countries will need to default. Since all of those banks are linked together, the collapse of 1 or 2 major players could be enough to create major issues all around.
What To Do?
Honestly, if there is even a decent chance that we are headed for a new depression, shouldn’t we start preparing? Some have been doing it but it’s not easy to prepare a portfolio for a nightmare scenario. I’m certainly one who would say that I hold the secret recipe. I would however stress the following:
–Holding cash (cash is king in so many different ways)
–Limit leverage (those investment strategies that require borrowing can turn against you in a depression like scenario)
–Diversify your portfolio (having different types of assets, multiple companies, international diversification, etc)
–Limit your exposure to banks and financial companies (they have incredibly complex balance sheets and seem like a poor risk/reward)
–Reduce your debt level
–Hold some exposure to hard assets such as gold, etc
I’d love to hear your thoughts on all of this and if you are preparing your portfolio for such a depression. I recognize that it’s far from a probability but it’s not as unlikely as most would think it is…