The Growing Tax Threats to Your Investment Portfolio
by Dr. Mark Skousen, Contributing Editor
Monday, May 24, 2010: Issue #1266
“To prohibit a great people… from making all they can of every part of their own produce, or from employing their stock and industry in the way that they judge most advantageous to themselves, is a manifest violation of the most sacred rights of mankind. Little else is required to carry a state to the highest degree of opulence but peace, easy taxes and a tolerable administration of justice.”
– Adam Smith, The Wealth of Nations (1776)
Famous last words. Today with Wall Street and the global markets tagged as greedy speculators who triggered the financial crisis, institutions and investors in the United States and abroad are facing a slew of new taxes and regulations.
For example…
~ Transaction Tax on Buying/Selling Financial Instruments: Both the U.S. Congress and European legislatures are considering imposing a new transaction tax on investments. Democratic Congressmen Peter DeFazio (Oregon) and Ed Perlmutter (Colorado) have introduced a bill entitled, “Let Wall Street Pay for the Restoration of Main Street Act.” Under it, the purchase and sale of stocks, options, derivatives and futures would face a 0.25% tax.
While the amount seems small, it’s expected to raise $150 billion. However, Princeton economist Burt Malkiel and other experts say it would reduce New York trading volume by 30% or more and could significantly increase the bid-ask spread on stocks.
~ Raising Taxes on Stocks: Both America and Europe also want to raise taxes on investment gains. President Obama wants to raise the tax on dividends and long-term capital gains to 23.8% (20% plus the 3.8% tax to pay for the healthcare bill). For the past eight years, this investment tax has been 15%, one of the few tax breaks for conservative investors and retirees. But that will disappear in 2011.
In Europe, German officials recently agreed to work toward a financial tax that would hit stock trades or the profits, salaries and bonuses of financial institutions. This levy would suck up to 1.2 billion euros ($1.5 billion) a year out of the financial industry.
~ Outlawing Short Selling: Last week, German regulators adopted the same strategy as Congress in 2008 by banning short-selling. It included bans on the short-sale of certain Eurozone government bonds and credit-default swaps, plus on shares of the 10 largest German banks.
But Europe would do well to remember the effect that these anti-business measures had in the United States. Wall Street shares sold off sharply, taking the global markets down, too. Governments are often the last to recognize the law of unintended consequences.
In short, one of the greatest threats to economic growth is taxation – specifically, taxes on savings, dividends, interest income, capital gains and estates. But how?
The Government Goes on the Attack… Against Itself
Simply put, these taxes ultimately destroy the investment funds for capital formation – and inevitably lead to lower economic growth.
With regard to the taxes on investors and Wall Street, legislators fail to realize that taxing dividends and interest isn’t simply a tax on the rich, who can afford to pay them… but an attack on capital formation and economic growth.
For example, an estate or inheritance tax isn’t so much a “death” tax as it is a destruction of investment capital. The money that is taken from a savings or investment account and sent to Uncle Sam is wasted capital that will never return.
In 1920, John Maynard Keynes warned that, “The virtue of the cake [savings] was that it was never to be consumed, neither by you nor by your children after you.”
But that’s precisely what taxation does. It consumes the savings/investment cake – the source of future wealth.
Lessons From Britain and China
Yet it seems the government is hell-bent on finding every means possible to tax these sources of wealth creation – all in the name of taxing the wealthy and those greedy speculators.
However, the laws of economics are iron-clad: A tax, albeit small, will increase bid-asked spreads, reduce volume and increase volatility. By how much? Britain provides some answers…
For many decades, Britain has imposed a 0.5% “stamp duty” on trades on the London Stock Exchange (LSE). However, the tax has slowed the growth of the LSE. In fact, Euronext, the European Union exchange based in London, recently surpassed the LSE in market capitalization due to its electronic efficiency.
Over in China, three economists examined the impact of a stamp tax increase from 0.3% to 0.5%. They found that trading volume declined by one-third, market volatility increased significantly and the markets became less efficient.
So where does that leave the United States?
The Next Tax to Hit America… And Where You Can Go to Avoid the “Tax Rush”
According to a Brookings Institution study, a stock tax will cost investors at least $138 billion in lost stock value alone.
In addition, my colleague, Alexander Green, notes another potential tax: “The real killer, which (in response to the out-of-control budget deficit) will be recommended by a bi-partisan panel after this year’s election is a VAT (Value Added Tax). This will hit retirees especially hard.”
So where can you go to dodge this tax torment and see how Adam Smith’s vision of “easy taxes” has been adopted?
Look to Hong Kong. It has no tax on dividends, capital gains, stock transactions, or estates, plus a relatively low flat tax on business and personal income. In fact, Heritage Foundation rates it as one of the fastest-growing places in the world, with the freest economy in the world.
Good trading – AEIOU,
Mark Skousen
P. S. I’m so concerned about the direction in which our country is headed that I’m holding a special “emergency” session at this summer’s FreedomFest event.
It’s called “Crisis in America: A Call to Action.” FreedomFest is the annual event that I host in Las Vegas and takes place this year from July 7-11. Participants include Steve Forbes, John Mackey (CEO of Whole Foods Market), Investment U’s own Alexander Green and David Fessler, plus many more. Get full details at: www.freedomfest.com or call Tami Holland at: 866.266.5101. More than 1,400 people have already signed up, so act fast if you want to join them, as I expect it to sell out soon.
- Tax-Managing Your Investment Portfolio: There’s Still Time to Cut Your Taxes
- Tax-Managing Your Portfolio: 5 Steps to Cut Your Taxes, Plus 4 Tax-Break Options
- The Harry Markopolos Interview: The No. 1 Danger Investors Still Face
15 Responses to “The Growing Tax Threats to Your Investment Portfolio”
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May 24th, 2010 at 12:53 pm
Didn’t Germany ban “NAKED” short sales? There is a big difference between short sales and naked shorts. In my opinion, there’s nothing wrong with short selling (as long as you can borrow the stock or commodity, etc.) but naked short selling should be banned globally. These are stock markets – not casinos. But then again, the big U.S. banks that control everything wouldn’t like that, would they?
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May 24th, 2010 at 1:06 pm
Good. I endorse using the term “Stamp Tax”. Perhaps it will remind the public of some events in U.S. history!
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May 24th, 2010 at 1:30 pm
If Hong Kong is the place to do your trading/investing to avoid taxes on dividends,options, etc, explain how one can can do this from the U.S.? Should one set up an off shore corp. and bank account and trade as a corporation? How do you locacate a brokerage house and a bank in Hong Kong? Can my existing portfolio be transfered to the off shore brokerage? Will I be able to trade options, stocks and currency options from my home in the U.S. by setting up pass word of the brokerage web site? What about other countries? I.E. Panama, Nevis, etc.Please respond. Thank you.
George K.
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Robert Gillies Reply:
May 30th, 2010 at 5:01 pm
You can move to Panama like I have done. And marry a Panamanian girl like I have done, Then you open a brokerage account in her name. The only problem is that half the women in Panama have bipolar so be careful. Also they might do more damage to your pocketbook than Uncle Sam. Actually I don’t have enough of money to benefit from Panama being a tax haven but it is a nice tropical place to retire. Sure beats Florida.
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May 24th, 2010 at 1:30 pm
Let’s remember that 3/4 of the volume on the NYSE is computer generated – called flash trading. This is not investing – it’s gaming the system. “Investment” is a small portion of the volume. So, the argument is that the hedge fund and mutual fund managers are simply hedging. Sorry, they can buy options to hedge. So what if the financial sector declines, the bonus situation to the insiders doesn’t benefit the stockholders anyway. If we are capital short now it is simply that greed, and I do mean greed, took over in the mortgage mess. So, please stop cheer-leading the financial community. They have violated whatever public trust was there and need to be severely curtailed.
Brian Paulson
Retried Investment Banker
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May 24th, 2010 at 1:39 pm
It would be informative if you would advise how to move your money to Hong Kong (for example) and how to move one’s self to Hong Kong (for example) and the cost of living, etc; —-Have you, or anyone you know, moved to Hong Kong? Or, anywhere else on the globe?
I ask these questions respectfully.
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May 24th, 2010 at 1:51 pm
We will have an opportunity on 11/2/10 and the first Tuesday of November, 2012 to change all of this Sociaistic state. We MUST do something about where we are headed. Vote early and often, particularly if you live in Chicago.
I’m old enogh to remember when you could buy a vote in Boston for 50 cents and a shot of whiskey. Too bad they now cost about $100,000 each.
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May 24th, 2010 at 1:56 pm
I don’t understand what you mean by “awaiting mderation”
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May 24th, 2010 at 3:21 pm
I’m all for the tax on stock trades. It won’t hurt individual investors since they/we don’t do a lot of trading. But it’s the traders, hedge funds, bankers who trade hugh volumes of funds for fast profits and who have no interest in the consequence of their trades on market movement who will have to give up part of their profits.
They have caused a lot of damage so let them pay for it. We need tough market regulation but that won’t happen.
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May 25th, 2010 at 1:12 am
This as a desperate effort to defend the indefensible. After the global meltdown, do defend the free market system in raltion to stock trading looks pathetic.
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May 25th, 2010 at 2:18 am
I sure would like to know how to go about investing in Hong Kong.
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May 26th, 2010 at 8:40 am
If left unchecked government is inherently socialistic, commanding more power and wealth from its citizens (subjects?). Increasing taxes increases the price of the taxed product or service, and by economic law the output/consumption is reduced. The economic engine that provides the tax can be so throttled that the tax rate may be increased but the net result is a decrease in total tax return! Trying to get around the variance by a flat fee tax can actually kill the economic engine completely and bring zero tax return. Politician have little or no understanding of economics. The Fair Tax Act has been available for years that answers the dilema, but has been denied even a hearing on the floor.
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May 30th, 2010 at 10:46 pm
With all due respect Dr. Skousen it might be helpful to delineate between genuine investment and speculation and the rigged casino game pulled by certain Wall St. firms like Government Sachs. The beginning of this article appears to provide carte blanche cover for everything that goes on on Wall St. Kudos to Brian Paulson’s comment.
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June 1st, 2010 at 8:49 am
Hi investment u,
I most confess to u that i usually enjoy your messages. In order not to waste much time, i will tell u that a good businessman most be ready to take reasonable and measurable risk when investing. In buiness, you must take risk due to to diversity in the economies in the world as it is not the same in must countries. Being in Nigeria doing business is not easy. The economy is very harsh but people with great guts still make it. I’m into fish farming now. Can u believe that when we started this business it was very difficult to recover even half of the investment, but today being the third year in the business i would say the business is now growing as we are now realizing some profits.
No business can operate in vacuum like i do say. You must go places and expand before u can succeed. From my experience, i believe mossst businesses today is a challenge and it involves risk. It is now left to u as an investor to now where your shoe pinches u and make amendments. Thanks.
Akinniyi E.R.
a.k.a Ebony.
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June 3rd, 2010 at 6:10 pm
There is as big a difference between short selling and naked short selling as there is between borrowing a hundred dollars and counterfeiting a hundred dollar federal reserve note. Also, I would be willing to pay a transaction fee if it would stop or slow the outrageous amount of rapid, computer-generated stock trading that is making a mockery of investing.
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