Sources of Tax Revenue in the US vs. OECD Countries

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While researching on capital taxes around the world recently, I came across the below interesting graph that shows the sources of tax revenue in the US compared to the OECD countries. Tax revenues come in various categories such as Individual Taxes, Corporate Taxes, Property Taxes, etc. But they differ significantly in terms of reliance on each of these taxes by the US and other OECD countries.

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Source: Taxes in the United States, Tax Foundation

I wrote an article about this fact many years ago. The US collects more taxes from individuals than from corporations as shown in the chart above. This is policy is highly beneficial to investors of corporations. By paying less taxes, corporations are able to keep more of their profits or pass it on to their owners in the form of dividends and share buybacks. OCED countries on an average raise nearly double the US rate in the form of Corporate Taxes.

Property Taxes are nearly double in the country relative to the OECD average. Property Taxes vary widely even within a state or a city. These taxes are used as a form of catch-all revenue sources by local governments. Any need for funds such as adding a new library to building a stadium to establishing a park and everything in between is easily achieved by adding them to property taxes owed by a owner of a property within the jurisdiction. Of course such levies are first put through a ballot for approval from voters. In addition, since annual property taxes are in the thousands of dollars just adding a dollar here and dollar there for some requirement can easily generate millions in additional revenue.

The American economy is a consumption-driven economy. Hence taxes on consumption are kept low when compared to OECD countries. High taxes on consumption such as consumer goods for example can slash demand. So lower consumption taxes indirectly encourages consumers to consume more of goods and services.

Which US Stocks Performed Better During the 1970s ?

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In the 1970s, the US economy was suffering from Stagflation. This was period of high inflation and unemployment. Many experts are predicting the current economic condition could lead to a similar scenario. If the US economy enters into a period of stagflation, which stocks will perform better?

According to a report by Marko Gränitz, “During the 1970s, when inflation rates were very high, the 20 percent of stocks with the lowest valuation – as measured by price-to-earnings ratios – performed significantly better than the highest-valued stocks.”

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Source: “Stagflation, then and now“, by Marko Gränitz, guest author at LGT, May 18, 2022 via Investment Office

Here is an excerpt on Stagflation from an article at AP:

Saudi Arabia and other oil-producing countries imposed an oil embargo on the United States and other countries that supported Israel in the 1973 Yom Kippur War. Oil prices jumped and stayed high. The cost of living grew more unaffordable for many. The economy reeled.

Enter stagflation. Each year from 1974 through 1982, inflation and unemployment in the United States both topped 5%. The combination of the two figures, which came to be called the “misery index,” peaked at a most miserable 20.6 in 1980.

Stagflation, and especially chronically high inflation, became a defining feature of the 1970s. Political figures struggled in vain to attack the problem. President Richard Nixon resorted, futilely, to wage and price controls. The Ford administration issued “Whip Inflation Now” buttons. The reaction was mainly scorn.

Source: Worry about stagflation, a flashback to ’70s, begins to grow, AP

Related ETF:

  • SPDR S&P 500 ETF (SPY)

Disclosure: No Positions

An Important Note on Singapore Stock Dividends

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The Dividend Withholding Tax Rate for Singapore is 0% (excluding REITs) for US investors. The tax rate on REITs is 10% for 2022. Singapore has always had no withholding taxes on dividends paid out domestic firms to US investors. This makes the Singapore market attractive. However one important point to remember is that the dividends are NOT considered as “Qualified” dividends by the IRS for tax purposes. So instead of the reduced rate of qualified dividends American investors will pay their individual marginal tax rate on those dividends since they will be considered as “Ordinary” dividends. This rate will most likely be higher than the qualified rate.

Unlike many other countries, Singapore dividends are treated as ordinary dividends because the US does not have a tax treaty with Singapore. Tax treaties between countries allow for reduced rates or to avoid double taxation. Though Singapore is a developed country and is a global financial hub, it is said that the US has no tax treaty with Singapore.

Another point is many Singapore stocks are known are their high dividend yields. For example, the dividend yield of the benchmark Straits Times Index (STI) was 3.6% as of November, 2021 (in Singapore Dollars). This is much higher than the 2.35% on the S&P 500 (in SGD). In US dollar terms, the S&P 500’s dividend yield rarely crosses 2%.

Currently just two Singapore companies trade on the US exchanges. However about 44 firms trade on the OTC markets. The country’s banks traditionally tend to have high dividend yields. For example, the DBS Group Holdings Ltd (DBSDY) currently pays $4.04 in dividends per year for a yield of 4.40%. But this rate will be effectively reduced since they are ordinary dividends and not qualified dividends which can be as low as 10% or 15%.

So investors need to be aware of this important rule and make their investment decisions accordingly.

Related:

Related ETFs:

  1. iShares MSCI Singapore Index Fund (EWS)
  2. iShares MSCI Singapore Small-Cap Fund(EWSS)

Disclosure: No positions

Singapore Downtown Skyline

Why Holding Stocks for The Long-Term is Important

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One of the key traits of successful investors is the ability to think from a long-term perspective. Unlike short-term traders and speculators, long-term investors avoid all the daily noise and volatility in the markets and hold equities for the long-term as measured in years or even decades. Being patient and having the courage to not to sell out during huge declines in markets is especially critical. Markets go through bull and bear markets. Just because markets have performed extremely well over the past few years it does not mean that will continue forever.

With that said, a recent article at Capital Group included the below showing average annual return over all the 10-year periods from 1937 to 2021 was a decent 10.57%:

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Source: How to handle market declines, Capital Group

The average annual return for the 10-year period ending 12/31/21 was even better at 16.55%. But it would be foolish to expect such great returns for the next 10-year period.

Related ETF:

  • SPDR S&P 500 ETF (SPY)

Disclosure: No positions