The Virtuous & Vicious Cycle

Posted by Vincent Tie on 01 Oct 2021


My adopted country, Singapore, is a pragmatic country. The government ensures that all citizens have access to fantastic education opportunities and that it creates the right conditions for businesses and entrepreneurship to flourish.

Unemployment is extremely low, partially because businesses can easily hire and fire staff as needed and taxes are minimal. There is no government unemployment pay, but people can easily obtain a job, and the low taxes and simple structure of the taxation system made Singapore one of the wealthiest countries in the world.

This success is based on the common-sense principle to encourage people to do productive things and that their excess savings lead to investments that raises productivity, benefiting everybody in the form of returns, higher wages and overall wealth. Lee Kuan Yew, the architect of modern Singapore, called this cycle of investments leading to higher growth in turn leading to higher investment the “virtuous circle”.

Because people keep the vast majority of the currency they earn but do not receive free currency, everybody is incentivised to work. In practice, this means that Singapore has no wealth tax, no capital gains tax, no tax on dividends and very low-income tax rates, yet it has a fully paid pension system and the government normally records budget surpluses on a yearly basis.

The virtuous cycle and other pragmatic policies transformed backwater Singapore into one of the most prosperous countries in the world in just 40 years, and it demonstrates the power of sound governmental policies.

The Vicious Circle – The Road to Ruin

Unfortunately, European policies, Italian in particular, are increasingly designed to maximize unemployment, eradicate entrepreneurship, eliminate work incentives and tax residents to such a degree, coupled with negative interest rates and creeping inflation, that personal wealth will either leave the country or will be taxed away.

I recently experienced the oppressiveness of these tax laws as I helped a non-Italian acquaintance in Italy to deal with an insidious wealth tax that is often levied on longer term visitors to Italy. For example, should you spend more than 183 calendar days in Italy and cannot prove that you did not, then you might be deemed a tax resident by Italian tax authorities.

Should you be deemed a tax resident, you would have to provide a complete accounting of your income, bank account and other worldwide assets and be subject to Italian income taxes, value added taxes, corporate taxes, productivity taxes (yes, they tax productivity) and a set of little-known wealth taxes with the acronym “IVIE” and “IVAFE”.

IVIE requires payment of 0.76% of the value of any real estate owned outside of Italy (e.g. your home elsewhere) while IVAFE requires payment of 0.2% of the value on any financial investments owned outside of Italy, and includes a 34.20 Euro fixed tax for every bank account, credit card or similar account the victim owns.

For any real estate located outside the European Union member states, the Italian authorities reserve the right to arbitrarily determine the value of these properties and therefore tax 0.76% on their valuation. Given that most real estate has appreciated over the past years, this can become very expensive, especially for retirees who do not have an income.

Furthermore, transporting cash or gold over a certain limit without an approved receipt or clear wealth provenance documentation can result in confiscation by authorities. Such policies by the authorities put in question the very concept of private property, creating much anxiety.

Lastly, if a tax resident were inclined to leave Italy, he would need to prove to Italian authorities that he is not leaving to avoid taxation, otherwise the authorities will not recognize his departure from Italy and continue to charge taxes as if he is still a tax resident.

Faced with such laws, it, therefore, is very expensive for people who own foreign properties or have appreciable wealth to reside or retire in Italy. Italian entrepreneurs face even bigger regulatory and taxation challenges, causing many businesses to close or for would-be entrepreneurs to never launch their business.

Not only are wealthy individuals and entrepreneurs strongly discouraged to create jobs as the various taxes, paid by employer and employee, tend to add up to 80% of income, but the government further discourages employment via unemployment subsidies and the “Citizens' income” program which provides a permanent income (up to 1300 Euro per month, tax-free) to people with low income, greatly discouraging employment as they would lose all this free money.

Government Follies

Thus, a highly indebted and economically increasingly dysfunctional country like Italy is accelerating its economic demise at the long term expense of all its citizens, but particularly the younger generation which is burdened by debts, and who have few prospects for personal success and whose official unemployment level is at 30%.

The true situation is much worse as many young Italians simply stay at home and no longer try to find a job as they would lose their Citizens Income allotment and employers, given the dire economic situation and high taxes, can hardly offer incentives to compete with welfare.

Another recent governmental program consists of providing 110% subsidies on personal house renovations. The government will essentially pay citizens for all the costs of renovating their house plus an additional 10% bonus for doing so. This undoubtedly popular program is financed via the 235 billion Euro grant Italy received from Europe’s 1,824.3 billion (~2.1 trillion USD) “Next Generation EU” Recovery fund.

This free money further distorts the natural allocation of resources as the 110% subsidy encourages transacting at the highest renovation costs possible and makes construction for non-subsidized productive activity extremely expensive as construction material costs escalate.

Worst of all, these drastic policies destroy the trust entrepreneurs and businesses have in the government as the government is guided by short term political vote-buying at the expense of anything else.

How it Will Affect Us All

Wealth ultimately can only be generated through productive activities and in the absence of productivity, long term money printing will just cheapen the currency and eventually result in a loss of confidence that will be disastrous for people holding these currencies, bonds and other financial derivatives.

Real estate in these countries, particularly beyond your primary residence, will scarcely be a safe haven because failing states will super tax or nationalize such “excessive” properties. Germany, for example, already started to nationalize houses in Berlin.

Strangely, unlike real estate and stocks, the most rational safe haven asset class, physical precious metals, is still inexpensive. Silver, in particular, has fallen over 25% recently, with the silver to gold ratio reaching 80:1 again (a sure sign that silver is cheap relative both to fiat currencies and to gold).

In this environment, storing fully insured physical precious metals as your private property in a safe jurisdiction – outside your own – is not only a rational choice given the state of the world but wealth insurance that will protect you from the financial storms that are sure to come this decade.

A decade ago, when I discussed with a board member of Commerzbank (Germany’s second-largest bank) these disincentives to work in Europe and where this will lead to, he told me that “nothing will change until five minutes to midnight”. The meaning, to which I concur, is that neither politicians nor the majority of the voters is likely to desire to implement the type of policies necessary to make work and productivity attractive again or to tackle these unsustainable debts until the system itself is close to collapse.

It is therefore up to those who can see the bigger picture to protect themselves because most people are blinded by the assumption on continuity, they believe that nothing will change, and fail to recognize how this vicious cycle must eventually end.

Even if I am wrong, buying precious metals and storing them in a good jurisdiction is hardly a mistake as these metals will always appreciate over the very long term.

As we are preparing our new mega vault, capable of holding 15,500 tons of precious metals – about 500 million troy ounces – and further upgrading our processes and systems our efforts might become more than a refuge for the coming financial storms, we might be planting a seed for a new, better, less centralized financial system.