The taxman cometh

Governments around the world are on the prowl to hunt down extra cash, says John Stepek. Investors should beware.

The US government has shut down. Leaders across Europe are locked in terminal bickering. And as Matthew Lynn notes, our politicians are vying to offer the most ridiculous bribes to voters before the 2015 election (they never remind us that they are bribing us with our own cash, of course).

Much of this turmoil is a direct result of politicians handing responsibility for economic management to the world's central bankers.

In America, market reaction to the shutdown has been fairly muted, because the government stalemate makes it more likely the Federal Reserve will keep printing money.

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Over here, Ed Miliband and David Cameron may disagree on whether we should be taking energy prices back to the 1970s, or merely freezing taxes on petrol. But ask either man for his view on where interest rates should be, and they'll each gratefully pass the buck to the Bank of England. (Chancellor George Osborne has now even handed responsibility for his flagship housing bubble reflation scheme Help to Buy to the Bank.)

As for Europe, well, eurozone politicians gave up economic sovereignty to the European Central Bank when they joined the euro.

The trouble is, the central bankers' solutions only make things harder politically. Quantitative easing (QE) has driven up asset prices. This is deliberate as regular contributor James Ferguson says, the point of QE is to bail out banks by the back door.

Pushing up asset prices does just that. But it also means that ever more of the world's wealth is becoming concentrated in the hands of fewer and fewer people because those with the most money also tend to own the most assets.

In turn, the wealthier you are, the easier it is to pick and choose a tax jurisdiction. This comes at a time when most developed-world nations have promised their citizens far more than they can ever realistically afford to deliver.

That can only mean one thing higher taxes and fewer benefits for the merely well-off' rather than the super-rich, regardless of what politicians say this side of an election.

What does this mean for investors? For one, even if you don't see yourself as especially well-off, you are likely to be a target for paying more tax. As we've said in the past, pensions are favoured places for governments to go snuffling for treasure, because most people don't pay them much attention.

So, make sure you have some investments sheltered in an individual savings account (Isa) too they're likely to be further down the hit-list. Be wary of easy corporate targets: utilities may be attractive income-payers, but they are also less mobile than other firms.

Finally, avoid government debt (still). When politicians start floating wacky policies such as fixing prices, there has to be a growing chance that markets will lose their desire to keep funding that country regardless of how much money the central bank prints.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.