The massive spending bill just signed into law, I will call it the “ACT”, contained several changes to the federal tax code. Though the general definition of a tax is a fee imposed by government on its members to cover expenses, the purpose of taxation goes far beyond the funding of government. Were it not so, the entire Federal tax code could be simplified to a single page.
Tax codes at every level of government are also designed to control behavior. The saying goes, “If you want less of something, tax it – If you want more, subsidize it.” Let’s take the example of cigarettes. The U.S. determined long ago that cigarette smoking is not only bad for individual health, but it also imposes a huge cost on society. In an effort to “encourage” people to smoke less, heavy taxes have been imposed on cigarettes at all levels of government, making them the highest taxed consumer product. I was surprised to learn that in Chicago the combined taxes exceed $7 per pack. So, is the tax working? The CDC estimates that over 40% of American adults smoked in the 1960’s, down to about 13% today. There are numerous reasons for the decline, including education and social changes, but the high tax rate certainly has played a role in changing behavior.
Now turn to the Electric Vehicle (EV) industry. Government has determined it wants more EV’s driving around so tax codes have been shifted to subsidize their purchase. I took the time to read the portion of the new ACT that relates to how these credits are being changed. What a mass of confusion! My short summary of the complicated changes is that the new tax credits are designed to encourage consumers in certain income classes, to buy EV’s in a certain price range, from certain manufacturers. In other words, the governments’ revised EV tax credits will not uniformly benefit the various auto manufacturers. This should attract investors’ attention.
Investors spend significant time and money to determine the potential growth of various companies. They look at a number of factors to help them decide which businesses, products and services are likely to be the most profitable in the years to come. One aspect that high end investors and institutions consider, but average investors often overlook, is the significant part the changing tax code plays in the equation. Taxation is the ultimate system for the re-distribution of wealth but it doesn’t just move money from an individuals’ pocket to the governments’. It very often directs how wealth moves about in the business world.
I have learned that a good tax accountant can be one of the most valuable members on a financial team. It is not just in the tax advice they provide, but their insight into how spending bills (which essentially are wealth re-distribution bills) might affect consumer behavior and shift money among businesses and industries. Any good investor should take notice when government encourages, or orders, the movement of money.
Dan Wyson, CFP® is author of “The Gold Egg,” and “21 Financial Myths” and owner of Wyson Financial/Wealth Management 375 E. Riverside Dr. St. George, UT 84790 – 435-986-9525 – Securities and Advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a registered investment advisor