Personal Wealth Management / Politics

All Over the Map on Taxes

Recent news and plans on taxes show politicians globally seem to misunderstand some pretty basic concepts.

If you tax something, you get less of it.

This simple premise underpins many criticisms of governments’ attempt to rejigger taxes, generally applied to upward moves. While it’s no doubt simple to grasp, politicians frequently seem to struggle with the concept. But politicians globally often seem equally challenged in understanding exactly what they’re taxing—and their moves’ potential implications.

Friday, the US House of Representatives voted to approve extending the payroll tax cut through 2012’s close. Presuming President Obama signs the bill (likely), this means the 2% reduction in payroll taxes will remain in place. While we’re in favor of the move—permitting consumers to keep more of their cash is economically sound—we’ll not overstate the impact. It’s a very minor positive. And a US-specific one at that, meaning the global impact is still smaller.

Fears of major deleterious consequences on consumer spending arising from a potential reversion to higher payroll taxes were overwrought from the get-go. Reality is consumers being taxed less doesn’t mean they’ll actually spend more. After all, the move doesn’t dictate you’ll only get the income boost if you spend the funds. So when you tax incomes less, you don’t necessarily get an equivalent consumption boost—some folks save, others pay down debt. But without doubt, a minor plus from the government is worthy of an attaboy.

Elsewhere globally, politicians’ puzzling behavior on taxes continues unabated. Take Japan. Here’s a nation still recovering from last year’s massive earthquake and tsunami—a recovery that’s progressed fairly nicely. And even before the earthquake, the Japanese economy wasn’t exactly booming. Yet last night, politicians decided they could do with incrementally less spending—with the cabinet approving a doubling of national sales tax rates from 5% to 10%. A direct tax on spending when the government probably doesn’t want to reduce consumption seems rather silly. And relatively speaking, a bigger silly move than America’s small payroll tax jigger. And a regressive one. But again, thinking globally, even the impact of very silly tax hikes starts getting muted. The plan still needs parliamentary approval—and some seem to get the move is a headscratcher and are opposed.

The EU seems even more confused regarding taxation. (Probably because there are 27 countries’ worth of politicians!) Recently, EU leaders decided they want less carbon emitted from airplanes flying to Europe—planning a tax as the means. The tax base is determined by the distance of the flight to Europe. This plan’s been met with a fair amount of controversy in the US, China and elsewhere—most nations around the world oppose the move, seeking to avoid having companies domiciled in their territory taxed.

Whatever your view of the carbon-emissions issue, a less-than-global carbon emission tax isn’t a tax on carbon in effect. It’s a tax on miles flown to reach Europe—nearly perfectly illustrated here by a major logistics firm. Should the tax come to pass, they plan to re-route their flights—flying more miles in total, but fewer directly to Europe. So overall, what you get isn’t less carbon emitted—it’s less mileage flown to Europe.

Passenger airlines might have more difficulty re-routing, but they can pass costs on to consumers—increasing the expense of visiting Paris or Rome. So, the EU could see less carbon, but in the form of fewer carbon-based life forms visiting the Eiffel Tower. Or carbon-based life forms visiting with a bit less carbon-based paper money to spend.

In many nations, taxing banks has gained political favor. There’s the EU (again). And in the wake of recent debate over Australian banks not passing along an interest-rate cut to borrowers, some down-under now propose an excess-profits tax on banks. Let’s see if we understand: The goal in both the EU and Australia is to reduce bank profitability. Assuming this works, why exactly that’s a desirable outcome is utterly beyond us. After all, 2008’s global financial crisis wasn’t due to profitable banks. And unprofitable banks tend not to increase lending as much as profitable ones. Now, at this point, an Aussie bank tax is in the realm of op-ed columns and academic discussion. Hopefully, that’s where it ends.

Tweaking taxes is popular politics and frequently triggers debate—for myriad reasons. But ultimately, politicians seem to have little conclusive grasp of the intended—and unintended—consequences of that tweaking. Yes, if you tax something, you get less of it. But what exactly you get less of may not match the plan. In this case, maybe you get 2% wealthier Americans shunning Europe for a trip to Tokyo, where they don’t spend more because sales taxes increased costs. Genius.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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