Blog: You, us, everyone

I am in favor of a 0% tax rate!

The Biden administration put forward a proposal to almost double the capital gains tax for the richest Americans. The proposal echoed a big disapproval from private investors, Wall Street, Silicon Valley partners, and financial lobbyists geared up to influence the oncoming legislation in its early stage. The proposed law would raise the capital levy 39.6% for those with incomes of over USD1 million and a maximum of 43.4% for ultra-earners. This step puts the United States of America onto the top of the list of countries taxing most capital gains and revenues.

We see three major impacts:

1. Venture capital: The tax decision might disfavor venture capitalists who rely on huge capital gains to offset non-starters. If the levy goes beyond a given level, then venture capitalists will be unwilling to finance some opportunities, and this will eventually reduce the virtuosity that reigns in Silicon Valley.  
2. Capital Market Efficiency: With the new law, holding onto long-term investments becomes less attractive, and therefore interest in the equity market as such may decline over time. We would expect, if no amendments are brought forward, that the euphoria on the stock market will cool down and ultimately the market will become less efficient. There is ample evidence from other countries where lawmakers levy a high capital gain tax. For instance, in France gains on property sales are fully tax-free, pending status, only after 25 years. As a result, a property merely changes hands while a person is alive, and more importantly, the property loses value because of minimum maintenance.
3. Capital use: The Biden administration argues that spending for education and the healthcare system are underfunded. We doubt that a higher tax rate will change the allocation ratio. Allocations are made as a percentage of the global budget. In the US, the federal government provides 7.7% of the global budget for education. To improve the entire educational system in a sustainable manner, the federal government would be expected to spend up to 15% of the global budget for a number of decades. 

Back to the future – a system with no taxes!
I am a strong believer in a no-tax system! This is not because it would make rich people richer, so ultimately all of us, but because it would increase our global responsibility towards the people next to us and to the system we have built. 

One could argue that 0 % tax is social irresponsible as less favored people were to suffer more. Yet, I believe that only the opposite can be true! An inclusive world automatically incorporates each individual at its respective value and socially less favored people would automatically be incorporated in the local communities to which they belong to – which is, for sure, not the case today.

The present system is disfavoring the poorer people

According to gathered evidence, it can be concluded that if the gains you make are associated with some kind of levy or mandatory charge, the payer estimates that they have the right to use the system since they paid the tax for doing so. For example, up to 1992, adhering to healthcare insurance in Switzerland was not mandatory. As a result, the healthcare premiums were modest, there was competition, and the system was performing. Ever since the introduction of the mandatory insurance program, charges have gone up more than six-fold while at the same time minimum coverage levels were reduced.

Typically, when mandatory coverage was promoted, it was said that the overall responsibility would increase and that costs could be reduced. By no means—this was not true! What happened over the years is that doctors disengaged with patients since the leitmotif was “business first”. In the same vein, I would expect that richer people will continue to disengage with the rest of the world and this is leading us, ultimately, to some kind of ghettoisation. BTW, no taxes also means no subsidies which consequently leads us to become a little more self-assertive.

In the meantime, the earnings season continues and beat ratios − at both the sales and earnings levels – and all that is highly impressive. Given that markets are elevated, earnings reports are especially key, with investors rewarding companies that beat estimates, while penalizing those that miss more. Encouragingly, so far corporate guidance has been positive, which is in turn further fueling the market. This is further supported by last week’s purchasing manager indices, which came out better than expected at the same time as Europe’s vaccination campaign accelerates.