I hope everyone had a great weekend. This week our article is focusing on definitions and terms we have gone over during our first foray into financial health. A glossary has been asked for on several occasions and this is our first shot at it. To start this off we browsed our first few articles and went through the words and terms that we included that we felt should be included. If you have any questions on a definition or want anything else defined, please shoot us a note and we’ll add it in. Requests for definitions thus far include but are not limited to: online brokerage, returns, market, economy, hedge fund, mutual funds, and S&P 500. Like everything, the more input we get, the better!
Weekly Pulse
Over the last eight weeks the Canadian government has spent more money than any 8-week period since WWII. There are really three primary ways for our government to find the money they are spending: they can borrow the money via debt, they can increase taxes, or, they can simply create more. We’ll touch more on borrowing and creating money in the future but today’s pulse is on taxes and how taxes can be used to pay back the money the government is spending.
Taxes are used to pay for our roads, pay for our schools, our government salaries, and in this case, have paid for a nearly unprecedented economic stimulus package (also those other costs don’t just disappear). The country is facing massive job losses and uncertainty so the thought of increasing everyone’s taxes doesn’t exactly “fly”. But, one tax that does seem to be gaining traction is a wealth tax.
The overall percentage of taxes paid are often disproportionately lower for those who are wealthier.
Wealth taxes are something you might hear about while following the US elections but perhaps less so, or at least less publicly, here in Canada. A wealth tax is an annual tax of the super wealthy, defined in this case, as a person who holds over $50 million in assets. The premise behind a wealth tax is that the overall percentage of taxes paid are often disproportionately lower for those who are wealthier. This is because there is a far lower tax rate applied to making money (capital gains and dividends) than the tax rate applied to income.
Wealth taxes are not new. However, the number of OECD countries with an active wealth tax has decreased from 12 in 1990 to only 4 in 2017. The OECD is the Organization for Economic Co-operation and Development – think most of Europe and North America and a couple other wealthier nations. It has been reported that governments have removed wealth taxes due to administrative concerns and the fact that the tax failed to do its job: generating new jobs and boosting the economy beyond what it would be without the tax (click for reference).
In a recent poll of 2000 people, the poll shows that 67% of all Canadians support a wealth tax while 17% are unsure of what it really means (note the small sample size). This support is spread across political parties and is a very high number as far as polling data goes.
Governments have removed wealth taxes due to administrative concerns and the fact that the tax failed to due its job: effectively generating new jobs and boosting the economy
During a crisis, populations generally rally around their governments and therefore there may be more confidence in legislating a wealth tax now. The problem is legislation like this will not just evaporate after the crisis and can be very hard to overturn once in place, therefore we need to think about this as not just a short-term fix. For me, I would need to see some detailed data points prior to making a final decision. While this is not necessarily an issue for most of us, if this does not pass and we move to a different form of taxing, borrowing or creating money, that ‘alternate solution’ will most certainly impact our financial health.
I encourage you to watch the show Explained on Netflix to augment your understanding. There are two episodes of interest, Billionaires and The Racial Wealth Gap. Each episode is less than 20 minutes and is crammed with valuable data points including the variation in tax percentages. They do a wonderful job of providing digestible and entertaining facts and are very accurate in their research. Michelle and I are big fans.
A couple quick hits
In other super rich news, Jeff Bezos’ value of his personal ownership in Amazon has increased by $34.6 billion during this crisis. To put this amount of money in perspective, that is nearly ½ of the entire Canadian stimulus package our government is spending during this crisis. The incredible increase in Amazon’s stock value is interesting. While their e-commerce is up 20%, Amazon’s major profit center is actually their cloud storage business. Cloud storage relies heavily on small business accounts who, in the US, are reporting record rates of default…
The US economy has now lost every job that they had gained since the last economic meltdown in 2008 except this time it is primarily made of service jobs vs finance jobs. It hasn’t even been 8 weeks…
The head of the International Monetary Fund, an organization of 187 countries, similar to the WHO but for financial health, recently said the global financial outlook is actually worse now than it was a month ago.
Shopify just started work at home as a default. This is something to keep an eye on as we see life evolve in the new norm. Not sure about you guys but working from home when the weather gets nice is not so easy…
The Last Dance has ended which makes any sports fan sad. On demand viewership of close to 15M people an episode was almost the same as the 2019 NBA finals making it the most popular ESPN documentary of all time.
The jets just signed Joe Flacco and if you are a jets fan, this might be the worst thing you’ve read so far…