“In this world,” wrote American statesman Benjamin Franklin to French physicist Jean Baptiste Leroy as the French Revolution kicked off in 1789, “nothing can be certain, except death and taxes.”
It’s as true today as it was 234 years ago. You are subjected to tax from the moment you are born till after you are dead with plenty in between.
There is one tax, however, you can and must avoid. The best part is that it is perfectly legitimate and possible to do so. It just requires some focus.
Governments have two sources of income, the first comes from charging a fee on all economic activity in their respective country; the second is to borrow on capital markets and those interest payments are funded by…well yes…taxes or as is becoming more usual…borrowing more money. Decent governments in competitive political environments tend to spend more judiciously than others, and provide services commensurate with their citizens financial commitment, which reduces the pain of separation from their hard-earned cash. Far too many however treat you, their primary source of income, with contempt, and demand you fulfil you contract with them but fail to reciprocate.
There is archaeological evidence in Egypt providing evidence of states levying taxes on citizens 5000 years ago – Pharoahs helped themselves to about 20% of all grain harvests. States have become more rapacious since then.
We are taxed on our income, we are taxed on our consumption in the form of VAT, we pay taxes on our fuel and our imports, taxes to buy our homes and if we dare make a profit on the sale of an asset, there is capital gains tax and don’t you dare earn more than government thinks is reasonable in interest on a cash deposit because it will have a chunk of that as well. Once in our homes, we are taxed by our local authority based on their perceived value of that residence and are then subjected to whatever level of service they deem appropriate or can be bothered to deliver.
There is income tax, corporate tax, company tax, capital gains tax, value added tax, property tax, tariffs on your imports and exports, excise duties on your bad habits like booze and tobacco, levies on the tyres you buy, and the plastic bags you use when shopping, a tax for landing and taking off at the airport, dividends tax, donations tax if you give away too much, death duties if you have not given away enough by the time you die.
There is also the lesser-known tax and one we must all avoid.
The tax on stupid.
The advantage of this one is that it is avoidable. Here are some examples. Feel free to add yours in the comments.
Buying new stuff.
My family recently downsized and we got rid of accumulated household items which would not fit into our new accommodation. Only when you move house do you realize how much you have acquired over a long period of time and just how poor its resale value is. We sold high-quality items for a fraction of their retail price to eager buyers who trawl digital marketplaces and second-hand outlets looking for good items without a fixation on trends. They pay less for the items, and zero VAT.
The most annoying is a collection of artworks for which we do not have wall space. That painting you bought by the fabulous local artist while on holiday in a seaside town 20 years ago is practically worthless. Unless eminently collectable, most original artwork, no matter how much you love it, will not achieve anywhere near what you paid for it. Like a puppy, when you buy mainstream art, it’s for life.
If you have ever tried to sell a watch or a piece of jewelry, you quickly learn about depreciation. I have a friend with an extraordinary collection of jewels and high-end vintage watches – none of it new. He buys it for a fraction of what the same stuff would cost new and when he does sell it, his rate of depreciation is far lower than the person who first bought it.
If you like the new car smell, there is a can of spray that can give you that. Never buy a brand-new car, rather get a vehicle that’s had a careful owner before you.
Like Persian rugs? Never buy from a dealer, go to auctions. Be patient. Kids nowadays don’t appreciate them and when deceased estates are wound up, plenty turn up at auction for a fraction of what you pay in a shop.
You can have nice things – but buy smarter, not on impulse, and be prepared to wait for deals to come your way. Products are cheaper and the taxes you pay are lower.
The industry, which bills itself as “entertainment” won’t thank me, but the reason casinos and other forms of betting exist is because for millennia, those with greater actuarial capabilities than us have figured out how to swing the odds in their favour. They understood behavioral economics long before it had a name and appeal basest instinct, greed.
Fines are the ultimate tax on stupid. At least with gambling, buying second rate art and drinking wine at a price point where the infinitesimal upgrade in quality cannot be justified in the price you pay, there may be some enjoyment. There is no upside to paying a fine. It’s simply a reflection of your failure to pay attention to society’s rules.
A friend has recently run up a huge number of fines after they relocated to the UK. Unfamiliar with the compliance culture which is enforced by the use of high-quality technology and efficiency of the postal system, they received a host of notices demanding payment for a range of transgressions in their first month in the country.
Among the fines they have received: a couple of £100 fines for overstaying the time limit in otherwise free parking near a train station. The penalty makes sense, but unless you read the boards as you enter the garages as you whizz by distracted by your new environment, you will also be unaware that once you have left, you may not return for three hours. Speeds vary considerably in urban areas and the country has notoriously small speed limit signs; they have several notices demanding payment for that. The City of London recently expanded its Ultra Low Emission Zone to nearby their home and a bit like homeland borders in the old South Africa it’s hard to tell when you are in or out of an area where a hefty fee is levied if your vehicle is non-compliant with new regulations. There was also a charge for parking in a station car park and despite their best efforts to master the app required to make payment while running for a train, they got nailed for messing it up. The best however was a notice for crossing an old bridge with a weight limit exceeded by an admittedly substantial family car. And, because they are new to the area – have no idea where it is and are likely to transgress again before they figure it out.
“Those who understand compound interest earn it, those who don’t, pay it,” is a quote attributed to Albert Einstein.
Probably the most insidious tax on stupid is to borrow money for consumption and not pay it back immediately. I am a big fan of credit cards as it allows me use of the bank’s money interest free for a period of time. But I make certain that I stick within a tight budget and pay it off in full on the due date. In Covid, global interest rates plummeted to their lowest levels in living memory and rather than use that opportunity to pay down debt, lots of people overextended themselves and when the most rapid rise in inflation since the 1970’s took hold, central banks raised interest rates more quickly than most of us remember. It has destroyed many household balance sheets around the world especially because high interest charges come on top of what has become an extended cost-of-living crisis which shows no signs of abating.
No doubt you will think of others. Share those below. Avoid spending money you do not need to spend. Understand the difference between your needs and wants, delay gratification and avoid making silly mistakes which cause you to part with money with zero satisfaction.
Don’t pay the stupid tax.