In this episode of Berkonomics, I talk about the most insane policy the Dutch government have ever introduced, and why it's going to kill us all. I mean, seriously, this is like a poison dart with depleted uranium and bloody anthrax in the core, fired straight into the heart of the Dutch people. It's mad.
00:01:20.160So if you have an asset and it goes up in value, before you've even sold it, before you've got the cash, they're going to tax you just because it went up on the last day of the year.
00:01:30.800I mean, okay, have you, the best way that I can describe it is, have you ever watched Game of Thrones?
00:01:38.480You know, that bit where the red viper and he's fighting the mountain.
00:02:58.120And especially in a low interest rate environment, you know, you, you're, it's unhinged from reality and you're violating property rights and people are being taxed on income they never earned.
00:03:19.560Well, I say all driven by a court ruling.
00:03:22.020It's driven by the fact that they insist on spending far more money than they can actually raise in taxes.
00:03:29.480And so they're always looking for stupid additional taxes as well as debt and all the rest of it.
00:03:33.940But anyway, that, that's a setup to the situation.
00:03:36.860So, um, they've had a thing and they've decided, okay, well, if that policy wasn't bonkers enough, what we're going to do is we're going to introduce an even more bonkers policy that is guaranteed to just kill us dead.
00:03:48.600What they're going to do is from 2028, um, they're going to, they're going to tax actual returns on things like, you know, dividends and interest and rent and crucially annual changes in asset value.
00:04:02.580So let me give you an example of this, right?
00:04:06.080Let's say you've got shares in a Dutch company, right?
00:04:08.920Um, and you've got, you, you invest, um, 50,000 euros and in the course of the year, the investment does very well.
00:04:16.320And it doubles to a hundred thousand euros.
00:04:19.180And so what they're going to do is they're going to say, right, well, your investment has gone up by 50,000 euros and that 50,000 euros is going to be treated as income.
00:05:00.200And, you know, to the average, you know, uninformed voter, they might think, oh, that's not too bad because, you know, um, if your portfolio doubled, you got richer.
00:05:09.580And, and why would you wait to sell before paying a tax?
00:05:13.440And look, workers, they pay tax on their income annually.
00:05:16.240So why should, uh, investors be able to defer their, their, um, their tax liability?
00:05:21.740And, and from that point of view, you could say, oh, well, it's closing a, um, it's closing a loophole.
00:05:27.140And it looks modern and it avoids the awkwardness that they had before of, you know, assumed returns.
00:05:33.000And, and politically, it's easier, easier to defend than taxing fictional gains.
00:05:39.080Um, so, you know, you might think, oh, well, that sounds, you know, semi-rational and it's framed as, you know, fair and accurate and all that kind of thing.
00:05:47.080Um, but there is a, there is a big conceptual shift going on.
00:05:50.280And, you know, they're moving from, you know, the state estimating income to a new system where the, where the state taxes, well, essentially balance sheet movements.
00:06:00.540And, and that is a pretty profound procedural shift because the balance between a balance sheet increasing is not the same as realized income.
00:06:10.580And, and, and we're going to get into why it is so wildly stupid.
00:06:15.560And trust me, by the end of this, um, you will be, you will be in no doubt.
00:06:19.520So they're redefining what income is for a start.
00:06:21.900And they're saying, you know, it's, it's, it's the market price of your asset rises.
00:06:28.080Even if you, even if you can't access the cash, even if the price later reverses, even if the valuation is tenuous or, you know, unstable or just, just outright thin.
00:06:43.120So let's walk through that example in a bit more detail.
00:07:21.060You haven't received any cash, not reduced any risk.
00:07:25.820Um, you know, you, you, you've simply experienced, um, you know, a taxation event, um, divorced from anything tangible at this sense.
00:07:35.840Now, what happens if, if the market corrects afterwards, and there'd be good reasons why the market might well correct, um, the day after something like this, especially while we get into that.
00:07:48.680Um, but let's say before you pay the tax bill, um, the portfolio drops to a value of 60,000.
00:07:57.960Right now, bear in mind, if you've been in something in this scenario, if you've been in something that doubles in a year, you're probably in something a bit racy.
00:08:06.720You're in a tech stock, um, you're in crypto, you're in all basically all the sorts of things that I like to invest in.
00:08:12.560There's something, there's something that's a bit dynamic, um, but also very volatile.
00:08:18.320So actually before you sell it, you know, a week or two later, or maybe even the next day, dropping from a hundred thousand to 60,000 is, is not wildly unlikely, but your, um, your taxable event is already crystallized at this point.
00:09:28.800You didn't take out any silly leverage and you didn't speculate beyond owning shares.
00:09:33.400The only change was that the tax was triggered on an arbitrary date when you weren't liquid.
00:09:39.020And I want to come back to, in fact, I'll, I'll, I'll, I'll, I'll, I'll, I'll, I'll, I'll say it now.
00:09:43.900This makes investing in anything with volatility functionally impossible.
00:09:51.300Unless you're investing in, I don't know, if, if you're investing in Amazon or something, then yes, okay, you can, you've got the liquidity.
00:09:59.160If you're investing in one of the, one of the world's major stocks, you've got the liquidity to get in and out of positions very quickly.
00:10:05.700So you could do that, but what if you're investing in something newer, something earlier stage, a new business, a small family business, a business turnaround, or even a crypto.
00:10:20.440It makes all of those things, anything that is not both highly liquid and also very low volatility is now basically impossible to invest in.
00:10:31.280And they haven't considered any of this because they're just thinking about, um, their idea of stock market investing is, you know, BP or whatever the, whatever the Dutch version of BP is or whatever the biggest Dutch companies are.
00:10:46.260They're thinking about a handful, very large, very liquid traded companies, and they're applying it to everything, including family businesses, including a business that your brother set up and you put some money into that is just fundamentally illiquid.
00:11:05.540Or something that is, or something that is in any way volatile, essentially what they're, what they're pushing you to do, I mean, we go through, what they're essentially pushing you to do is invest, the only thing you can invest in something which is highly liquid and highly unvolatile, which is government debt.
00:11:20.640That's effectively what they're forcing you to do.
00:11:23.140So, I mean, lesson one on this, liquidity is, is not wealth.
00:11:27.940Okay, so, so the, the, the, the, the, the market value, it's not cash and the state assumes because your portfolio has risen, you have greater capacity to pay.
00:11:37.900Okay, in theory, fine, but, but the capacity requires the liquidity.
00:11:44.860So in this example, the, the investor was worth a hundred thousand on paper on the particular day that the tax event crystallized.
00:11:51.580But when the, when the bill had arrived, the market's already moved.
00:11:55.900Uh, and the, and the tax liabilities, their cash obligations and market gain, the market gains, their balance sheet moves, and they're not the same thing.
00:12:06.920The system assumes frictionless liquidity, but, but, but real markets, they're, they're, they're path dependent.
00:12:15.200And, and what it's going to do is it's going to create forced selling around the taxation event.
00:12:21.500And, and it is so easy, I mean, if I had a Dutch hedge fund, I'd be loving this because this is obviously going to create a wave of selling on the first, well, the 31st of December of the year, the 1st of January of the year.
00:13:12.460Losses can be carried forward, but there's no refund of, of prior tax, right?
00:13:16.820So it's not like you can, I've got unrealized loss.
00:13:20.600Is the government going to give you some money?
00:13:22.020No, you know, the best they do is they will, they will, they will let you carry forward that as long as you don't reset the cost basis, which you would always have to do under the system anyway.
00:13:32.540So there's no, there's no refund of prior tax if it goes against you.
00:13:35.700There's no restoration of sold shares and there's no rewinds on this.
00:13:38.780So the state is participating in upside only and it's giving you a, a most, a notional carve out for, for downside at best.
00:13:49.440But, but this is, this is a bit like, you know, I've often known people who have their own businesses and sometimes their staff will come to me and say, oh, can we have a profit share?
00:13:59.440And the guy will invariably say, okay, but are you going to participate in a loss share?
00:14:03.280We have, if we have a down year and they're like, no, no, we only want upside.
00:14:06.920And that's the level that government is operating on this.