With intangible investments on the rise, governments must rethink tax collection to pay their bills
Roger E.A. Farmer says as those profiting from technological progress are increasingly paid in stock options, and companies invest more in intangible assets like data, branding and software, a change in tax rates may be necessary to pay for public services
Lower productivity growth has meant reduced living standards for many, but not all. For a financial analyst on Wall Street or in the City of London, life isn’t so bad. And for the independently wealthy – especially those with a majority of income derived from a stock portfolio – standards of living have actually increased in recent decades.
But it’s worth asking how much of this increased prosperity was paid in the form of taxes, because the answer – not as much as if income had been in wages and salaries – is one reason why so many economists are so worried.
Consider that capital gains for top earners in the UK are taxed at 28 per cent, and the ceiling in the US is 20 per cent. By comparison, the top rates for income tax are 45 per cent and 39 per cent respectively.
Among Europe’s biggest economies, Germany is the only exception; there, capital gains are treated as ordinary income, so there is no loss to the government when income is received as stock appreciation as opposed to dividends.
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For example, in the past, making an investment meant purchasing a new factory or a new machine; it was the acquisition of a physical asset that appeared immediately in GDP statistics. Today, though, investments often refer to something impossible to touch – like computer software, branding or an archive of data. These “intangible investments” are booked in GDP accounts as intermediate goods, not as output.
But intangible investments influence company profitability. If technology companies’ profits are continually reinvested as intangibles, earnings may never appear as output in GDP statistics, but they will affect the company’s market value. For government leaders concerned with providing goods and services during a period of slow growth, getting a handle on this unmeasured GDP is essential.
Fortunately, there is a solution: rethink how tax revenue is raised. If all income were taxed at the same rate, intangible investments made by companies would still generate revenue in the form of taxes paid by the companies’ wealthy owners. The alternative – to maintain the status quo – will only ensure that, as growth in the intangible economy intensifies, current revenue gaps will eventually become gaping holes.
Roger E.A. Farmer is professor of economics at the University of Warwick, research director at the National Institute of Economic and Social Research, and author of Prosperity for All: How to Prevent Financial Crises. Copyright: Project Syndicate