Mailbag: incl. Are bank shares just a Ponzi? December 22, 2024

26:49We all hate when the shares go down. We buy shares today because we think they're cheap. Yeah. And then tomorrow we're surprised when the market doesn't agree with us all of a sudden. Yes. And so, hang on. Today, I'm saying the market is wrong about this company, Woolies, right? I'm buying Woolies shares and I think it's there too cheap. The market's wrong. And tomorrow the shares go down. It's like, what's wrong? Why are the shares going down? Why did you think? let's say you're right that it is too cheap. The market's all of a sudden going to go, oh, yeah, Scott bought some shares yesterday.

27:16And it turns out he's right. These are worth more up against the price. They're going to keep believing what they believed yesterday. When I took advantage of that and bought the shares cheaply, over 12 months, 24 months, you're lucky if the market changes its mind that quickly and says, oh, yeah, a couple of earnings, a couple of announcements from the company. Oh, yeah, they are worth more. And that's great if it happens. But sometimes you've got to wait for a very, very long time. And that's, again, to your point, I'm assuming you're right in the first place. Literally every good investment, let me have to think about this.

27:45If it's not literally everyone, it's 98%, I made, I bought, it either went down or sideways for a long time before it went good. And there's plenty that just never came good. So I'm not trying to say that everything I buy is right and the market just doesn't yet realize the genius of my decisions. I'm not saying that. I'm saying for the ones that did turn out really well, they didn't turn out really well immediately. You cannot have a bargain and have the consensus view be it's a bargain. That's right. Yeah, by definition. Yes. It's a contradiction. Yes. And here's the other thing. You and I might agree, Scott, that the banks are overvalued.

28:25And then someone asks a follow-up question and goes, well, what is it worth? Yeah. And we go away and we come back and I guarantee you we'll come up with different numbers. Yes, 100%. Like maybe 1 % different, maybe 20 % different. I don't know, but they're going to be different, right? Like the odds of us arriving at the exact same value, it's very, very, very difficult. So it's all subjective. So the only thing you can do is you can observe folly, but you don't have to participate in it. But you also have to have the fortitude to not participate. Not only do you not have to, you have to stop yourself from all of a sudden.

29:00Because we do, we say, that looks cheap. And then tomorrow we say, what does the market think it's worth? Yes. What about today? What about today? What about today? It's like, how do we, you know, mentally, it's a real, it'll mess with your head because that is true. True of all. And it gets natural, right? It's not just Sam. It's not just who you're listening. It's me. It's Andrew. You know, I look at my portfolio and go, oh, bloody corporate travel. Shares are down again. You know, oh, man, that sucks, you know. And I think, well, hang on, I bought them because I thought the market was wrong.

29:25And now it's who I own them. I'm like, please tell me I'm right, market. It's not going to happen. It's not going to happen. It's not going to happen. And the other thing as part of that as well is to check yourself before you wreck yourself, I think, is the economic term, which is - That must be a Bitcoin phrase, is it? No, it's a Beastie Boys or someone, isn't it? I don't know. I'll take your word for it. I was going to sing it, but I'm not going to. Okay.

29:55In that - Ice Cube. Ice Cube. There you go. Check Yo Self is the name of the song, apparently. Check Yo Self. it might be that the market is right. The market is often right. The market, look, again, back to my definition of what you mean by right or wrong, but in my definition, that the market can be wrong and sometimes is wrong is true. But too many people take that, so some of these buffettisms too far and too literally and just like, oh, Mr. Market, he's crazy. He never knows what he's talking about. That was absolutely, like he will absolutely lose his mind and pay ridiculous prices on the upside or downside at various points in time.

30:37To be fair though, usually he's pretty good. Yeah. He's pretty good. My shares are roughly right most of the time. Roughly right most of the time. Which is why it's hard to find great investments. Which is why it's hard to find great investments, right? And so that's why I say check yourself before you wreck yourself because you need to have that view that the market is wrong, but don't assume that the market is wrong. Question is like, what am I missing? If the market, and you can do this like things like reverse DCFs and it's too much to get into here, but I do often like the analysis of saying, actually I did it with ProMedicus just yesterday.

31:19Not to talk about ProMedicus, but I thought rather than saying, I think it's overvalued. I asked, what needs to happen for this to be fair value? It's a slightly different thing. And you can tweak the dials how you want. And the way I came at it was like, well, if they 15X their revenue line in the next eight years, maintain a 50 % margin and the market trades at a PE of 50 in eight years time, and I want a 10 % return. Now, I'm not going to do the maths verbally. But it means that shares are actually perfectly fairly valued. So, the question I need to ask is, are those assumptions reasonable?

32:01And the bulls, most brokers have got buy recommendations on this thing. I think they're wrong, humbly. But if and if, i.e. if very substantial significant revenue growth, maintain of margins and a maintain of a high multiple, then absolutely it's cheap. They're right. But rather than just going, oh, it's wrong, or is it right? Well, it is right if, if, and if. And then that's another really useful way to think about it. That's a great way to think about it, man. I like that. It's a really nice tip as well. Just for our listeners, I'm going to read the chorus. So, chickity check yourself before you wreck yourself.

32:41Come on and check yourself before you rickety wreck yourself. So, chickity check yourself before you wreck yourself. and the rest of it I can't say on radio. That'll do. Let's go to a question from Adrian. Now, Sam, I hope you'll just pay attention, Sam, to Adrian's opening here. He says, hi, Andrew and Scott. I just called you Ram. Close enough. I want to take a moment to say how much I enjoy listening to you both on the pod machine. See what he did there? Good man, Adrian. During my commute to and from work, your content truly resonates with me. As a 34-year-old, I still hate you, and I have learned a great deal from your discussions.

33:15At some point, I've just become a meme donor, I really say the same things every single time. Is that true? I was thinking about what you said the other day, and it's actually I am not envious of younger people. You know what? I mean, I want the health. I want the health and youth and strength and all the stuff that comes with it. What are you not envious of then? What do we have that they don't? They'll never buy a house, and they're inheriting a much worse environment. There's a lot of things that kind of sort of say. I should have to outlive them. You know, but well, you know, and I've also been alive for a lot longer.

33:49So before when they didn't exist, I did. Right. So it's all relative. That sounds like something my young book would say. I got there first. You'll get it. Yeah. Anyway. He says, I have learned a great deal from your discussions. As a result, I've signed up for ShareAdvisor. Thank you, mate. And hope to one day afford to join Strawman, which I understand is Australia's premier online investment club. Turns out it is. Well done, Adrian. Great. See, Sam? See what he's done there? He's mentioned the Motley Fool. He's mentioned the Strawman. has mentioned the pod machine. He said we're excellent. I'm just saying it helps.

34:18Over the past six months, says Adrian, I've listened to your podcast. I've started investing a fixed amount into individual shares each month. Well done. However, here's the question, I'm still a bit unclear about the tax implications of investing in US shares and how this should be considered when comparing returns on an Australian company. Could you please shed some light on this topic? Thanks again for all the valuable insights you provide and I look forward to hearing your thoughts on the matter. Best regards, Adrian. This is one for you, mate. All I'll say is very quickly is that there is various tax treaties and withholding tax where there is some allowance made for tax paid to the US government is recognized as some of the tax that you would otherwise pay here.

34:59Correct. As to the mechanics and the specifics, that's about as good as I get. Not something I think about very often. All right. There's two types of tax. Well, there's lots. But for investors, there is capital gains tax and there is income tax. Capital gains tax is levied on the investor in their country of residence for tax purposes. That sounds like a word salad, but you can actually live somewhere and not be considered a resident for tax purposes, which is as weird as it sounds, but that's what tax departments do around the world. So if you are an Australian resident for tax purposes, and almost everyone is, if you wouldn't, you'd know it.

35:33If you're not, you'd know it, sorry. Then you pay capital gains tax on US shares, just as you would pay capital gains tax on Australian shares. You buy shares in Apple for$100, they go to$200, you've got a$100 gain, you pay capital gains tax in Australia on that gain when you lodge your tax return, exactly as if it was an Australian company. So no difference there, no issues with US withholding. The Yanks don't care about it, they don't need to know about it, it is what it is. The income tax is a little bit different, but not much. The US government will withhold, your broker will withhold 15 % tax on that dividend on behalf of the US government.

36:08So you get a dollar dividend, you'll get your dollar put in your brokerage account, and they'll take out 15 cents for US tax, which is fine. At the end of the year, when you'd lodge your tax return, you say to the government, hey, I got a$1 US dividend. I'll ignore the currency for now, but you have to adjust for currency. I got a dollar dividend. I've already paid 15 % tax on that. And the AT goes, cool, I'll put that as a credit against the tax you otherwise would owe on this dividend. So let's say you're in a 30 % tax bracket because it makes my life easy. If you earned a dollar from Woolies as a dividend, you would get the full dollar and you pay the ATO 30 cents at tax time.

36:43If you was an Apple share and they paid a dollar dividend, you would get 85 cents and you would say, I got a dollar dividend, I've already paid 15 cents and the government says, cool, give us the extra 15. So again, no difference. By the end of the tax year, in terms of cash flows, the difference is simply US government garnishes the 15 % when the dividend is paid. The Australian government doesn't do that. They do PAYG, pay as you go for income tax, but not for dividends. So you declare that at the end of the year. So those are the only tax differences, and they're basically no different at all.

37:15You have to fill out a form called W8BEN form. Bureaucrats love their codes, don't they? It just basically says, I'm Scott. I live in Australia. I'm Australian for tax purposes. Please apply the treaty. And that's easy. So that's what they do. So those are the only differences. I've got two wrinkles to share with you. The first is, just so you're aware of it, it's not a big deal, US companies don't pay franking credits. You can't get a franking credit, which is a dividend imputation credit, for the tax paid by the company on your behalf. So Woolies would give you your dollar dividend, and then they would give you a tax credit, which you can offset against your tax, for the dividend that's paid.

37:52Apple won't and can't do that. Some Australian companies also, though, don't pay frank dividends. So don't invest or not invest in the US based on the lack of franking. But consider the after-tax implications just as you would if you're looking at two Australian companies. So if one paid a frank dividend and one didn't, again, or paid a dividend that wasn't franked, there'll be different tax implications. That shouldn't be the only reason you invest, but that's something to look at. Again, it's not about the US in particular. It's just about whether or not you allow for the franking credit with your calculation of your desired returns.

38:23The last one is there is officially an inheritance tax in the US. If you die with an account worth a certain amount of money, I don't know what the numbers are right now, they will take a small amount out of that estate on the way out. I will say, if they know about it, I'm not for a second suggesting anyone not pay their taxes or do the right thing. Whether they know about it, whether they find out about it, how it gets settled, that's up to the individual taxpayer. There is a small, very small, I believe, inheritance tax on large US accounts. Have a look at that. If you're going to have an account which is large enough to qualify for that, you may want to think about it.

38:56Again, do I think you should worry about it? No. You only pay the estate tax, hopefully, if you made a lot of money. The estate tax is unlikely to be the difference between investing in Apple and investing in Woolworths, right? If your investment thesis is so close that the only difference is the amount of inheritance tax you might pay in the US, then sure, buy the willy shares. The reality is it shouldn't, in my view, dissuade anybody from investing in the US just on those bases. What have I missed? What have I left out? No, I was taking notes there. It was like, good to know. So the North Star here is what's going to be the best performing asset.

39:33Yep. And then the secondary tertiary. After tax. Yes. Sorry. Thank you. Then you think about that. It's amazing how many people do this, though. They will intentionally invest in poor performing assets for tax reasons. Negative gearing. Negative gearing. Sorry. Clearing something out of my throat. which is just as dumb as it sounds. And I've offended half the audience, but, you know, check yourself before you wreck yourself, I would say. Yeah. Like, do you not want to invest in some of the best performing companies on earth? I mean, would you not rather something that is going to compound at 20 % per annum, but you might have to pay a slightly higher tax on than something that's going to go at 8 % per annum, but you don't pay much tax on.

40:17Like it's just, as you said, it's not something to ignore. It's just on the list of priorities for an investor, it's very, very low down the list. And then once you make a fortune, you pay tax, do what I do, and everyone else does, which is then shake your fist and go, ah, it sucks. But, you know, good problem. I've always said this, like there is no better problem than a tax problem. Best problem in the world. Do you know? Yes. I mean, it's a problem. Don't get me wrong. I'm not happy about it. Yeah, right, right. But you're telling me that I have, I've had so many, you know, in other four other roles, people complain to me about the tax they're paying.

40:58Yeah, I know. I know. Are you saying you want worse recommendations? I'm not, because I can fix that. If tax is your problem here, then we can help you out, right? Exactly. In fact, do you know that if you lose money, you can carry that loss forward? So if you like, I can make it that you never pay tax again. Do you like that? You do? Great. Here's a bunch of stuff that's going to zero. We laugh, mate, but the whole property bubble has its genesis, in my view, in the answer to the question, how can I pay less tax? Yep. Literally, that is the genesis of most of the... I think it's a big part of it.

41:35Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

41:45I've got a question from someone who says they are called non-property-only listener, or at least that's the way they've signed off the email. They haven't given us their name, so I will assume they want to be anonymous. Okay. It starts this way. For the greatest of all time podcasts. This should have been bummed to the top of the list. He does say brackets or she. Let's ignore the fact that podcasts are only as existent for but a brief moment in time. We will, thank you. Property, again. Affordability and the question of negative gearing. And then a statement. Negative gearing provides a tax break on one business, your time-based salary, for an activity that is not related to that business, buying investment properties.

42:28The normal taxation principle is that expenses, i.e. interest and maintenance, can only be claimed against sales, i.e. rent, for the same activity. The original aim was to bring more property to the rental market at lower prices. The outcome is now unaffordable housing and insufficient rental properties versus demand. Shock, horror. I'm just so surprised by that. Who could have possibly foreseen that as an inevitable consequence? But please, please continue. As does our listener who says, Would you support removing the ability to claim expenses against an individual's salary income for investment properties, but allow individuals being able to claim interest payments against their primary residence only.

43:12This may be capped at a certain level and indexed over time. The logic is that an individual needs a house to live in to be able to earn an income, so it is a real related expense, whereas an investment property is a separate business activity that should be treated on its own merits. Extending that principle might include a certain amount of rent being claimable against the salary, which could distort the market, but I would think less than the current negative gearing impact on prices and the concentration of wealth in a small number of multiple property-owning propagarks. I like that. Oligarks, propagarks.

43:44Regards non-property-owning investor. Well, listener, sorry. Non-property-owning listener. So it seems like the idea is that the proposal is we change negative gearing so you can only claim the expenses against the revenues from that property, but also we let people claim their mortgage as a tax deduction. What do you reckon?

44:09I mean, I'm tempted to go with a knee-jerk reaction. What I've learned, though, in thinking about taxis, it's all the unintended consequences that are super, super, super hard. So I'm a little bit reluctant. When I have thought of my... We had that great question a little while ago. Someone said, if you're emperor for a day, what would you do? Yeah. And it stuck with me, actually. you've got delusions of grandeur all of a sudden have you yeah yeah what idea if i was to how could i be emperor i've got a manifesto right i've got a long red tie i can i can i can make this work you know what i mean i've got i've put together some some thoughts here and and i i've i've really come to the view that part of the problem that we have at the moment is that we have a system that has been designed in increment and and in myopically on oh there's a problem here so let's change something there oh there's another problem over here let's change something here yep and and no one's looking at the whole thing holistically yeah and so you have this very very complex system that again unintended consequences and one change over here might make that thing that you want to be better better but makes that other thing over there worse that you didn't even think about so it's so it's super hard um i am increasingly you know what i do here's what i do Go on.

45:31What would you do? I'd scrap income tax. Oh, God. Okay. Don't you have to put tariffs in place? No, no tariffs. Good. Thank God. I'd have a land tax, a resources rent tax, and I'd have a consumption tax. Okay. Because what it does - Land, resource, and consumption, all right. Yeah. So what it does is it - And interestingly enough, you do some maths here, and it's something - If you had like a 3 % land tax and a 12 % consumption tax and a resources rent tax that was above a certain rate of return, you basically replace, you could actually match the current tax revenue base. So why on land tax? Because what it does is it shifts the burden of tax towards wealth and away from effort.

46:16So the overarching, again, North Star here with any tax system, to my mind, is like, I mean, we have to pay for stuff, like as we have to raise money. let's incentivize the things that we want more of and and and and recognize those that have benefited most from our society and system uh uh pay for that so it so it's it's it's it sounds a bit unfair it feels like tax the rich yeah and this is why i'll never get through because the rich just have the best lobbyists right like it's been it's been it's been it's been raised a number of times but it but it but it means that the aren't the wealthier you are the more tax you pay and it gives everyone a chance to sort of level up and if ever you find that you're in a situation where it's kind of like i don't like paying all of this tax well it's like you're only in that situation because you're amongst the most wealthy and even after the tax burden has been in um put onto you, you still remain wealthy.

47:19So you're still very much relatively at the top of the pile. You absolutely do not want to punish people for being rich. I'm not saying that at all, but you want to recognize those that are most able to pay and those that aren't, they have the equal opportunity, not equal outcome, but equal opportunity to get to that stage. So we have a situation at the moment where people who own a gazillion properties because of various things they're doing pay hardly any tax. But the fiery out there on a pretty modest income, slogging their guts out and risking their life pays a huge amount of tax relative to their income.

47:55I think it's a fairer system and a lot of economists have come to that conclusion. It's just that it's politically very, very difficult to get through. Exactly. But that's tangential to the question. I don't want to get into land tax per se, Other than to sort of say, I really do sympathize with what the proposition is, but I feel as though we risk just doing more of the same and we really need to set back and go, right, let's redesign this thing from the ground up, which is never going to happen. But there you go. I'm going to ask you about land tax and I'm going to answer the question for our listener.

48:31I have two issues with land tax, mate. And this is, I've mentioned your thoughts. And it's ideological or philosophical. Yep. And of course, it always depends on how you levy it and at what levels and is there an exemption under a certain dollar value of the land or that kind of stuff, right? But as a matter of course, I don't love taxing something that doesn't produce an income or may not produce an income, which would require liquidation or something else to pay that tax. So, for example, take the example of the pensioner in a house of whatever size who has a land tax bill that is simply too sizable to maintain the property.

49:12I have no problem with capital grand tax on sale, and I'll get to that in a second, or something else. But my starting point is you levy the transaction, not the static value, particularly if it's not creating any value. A land tax on investment properties, maybe, because it, by definition, is there to create an income. But tax income that doesn't provide a cash flow or may not provide a cash flow as if it did or as if they could meet that burden, I don't know from a societal perspective. Financially, they could sell a house. You can make them sell and pay their tax and stuff. But I just think societally, whether it's a pensioner or whether it's a low-income earner, whether it's a decent income earner, having to liquidate the asset to pay a tax because no other way to manage the cash flow strikes me as not ideal.

49:57And if we say, well, let's defer the tax, then we're saying, okay, we're talking about capital gains tax, which is where I get back to, you know, it's at the point of transaction. Because the reality is that the land tax really is – land tax and the capital gains tax are the same thing. It's just a question of timing, right? Because you either pay it slowly during the period or you pay it at the end at some point. Every asset gets sold or inherited or passed down or something, so there's always going to be a taxable event. That's what I would prefer. You don't have that concern or it's just one of those?

50:25Well, so you don't want to put frictions in place for people who want to move around. So there are people at the moment, it's just sort of like, gosh, I'd love to move in this, you know, because there's more employment opportunities, I can create more economic value over here. It's just like, oh, God, I have to pay a mountain in stamp duty or something like that. I was saying just specifically the required to tax someone annually on an asset that doesn't produce any income. Yeah, so a couple of things have been proposed there. One approach I'm sympathetic to is for those that don't have the income to do it, you can just let the tax burden accrue.

50:59And then when they slip off this mortal coil, you take it then. Isn't that just a couple of grand tax? I mean, do we need a land tax if we're going to just make a couple of grand tax? Well, it is in that narrow context. But more broadly, if you add up all of the people who own all of the land at this point in time, and you say 5 % or 10 % can't meet that on a regular income basis, Yeah. Well, what about the 90%, 95 % that can? And those that can't we make allowances for? But all of them die eventually anyway, so you get the money. That's what I'm saying. The only difference between capital gains tax and land tax is the timing.

51:32Yeah, but one provides a more regular source of income, which is what you need to run the country. But if everyone's dying, 1 % of the population dies every year, I think at an aggregate level, the individual properties don't get taxed each year, but on aggregate, one of the 100 people in my suburb dies every year. They pass on the asset that gets taxed at that point. But then you tax mobility and you don't want to disincentivize mobility. It's like, gosh, it turns out that I could have better income and economic opportunities if I moved to Perth. It's like, oh, I've got to pay all this tax. It disincentivizes the mobility of human capital, which is a negative, right?

52:13And again, it sounds – here's the thing. before anyone gets very upset i know i've got land right i've got what you have to do is it sounds like whoa you're putting all the burden on me no um yes but i'm also saying that you don't have any income tax now so so what matters is how much tax are you paying right now and under this system how much tax you paying now however you want to carve it up for for the majority of people you will actually find your tax is lower. Yes. Even middle class, upper middle class people. Income tax. Now, the very rich will pay more tax. Yeah. They will pay more tax, but not at a burdensome level of tax that they can't afford and not at a level of tax that disincentivizes them in any other way.

53:01And not in a way that anyone not at that level will go, you know what, I've got this opportunity to make a gazillion dollars, but I won't because I might have to pay a bit of extra tax. Exactly. No one in the world has ever made it. Like the incentive mechanism is still there. So it's sort of like, that's where I think when it's been raised before it's been shut down politically, because people go, it's exactly how the resource rent tax got shut down. Yes, exactly. Because the Minerals Council and various other groups just sort of said, oh, it's going to cost you. Is it? Yeah. Oh, I don't want it then.

53:31And in fact saying, no, you'll pay less tax. You as an individual, 98 % of you will pay less tax. And that's why it seems, it blows my mind that the people advocating for it couldn't just put forward a very straightforward message to say. That's the message. That's the message. Hey, we'll charge you less tax. What? How? By doing this. I'm all in for it. Not, oh, here's some complicated thing, don't really understand, and it's an extra tax. And it just allows the others to sort of muddy the waters. It's like carbon tax. If it came with a carbon dividend, your price you got, but I'll send you$1 ,500 a year.

54:11Yep. Okay. And if you buy less carbon-imiting stuff, you'll save money. Okay. So you're on$300 ,000 a year as an individual, and your partner's on$300 ,000 a year. You're both brain surgeons. Yep. Right? And you've got a really lovely house on the harbour somewhere. I bet you under a land tax of 3%, as a household, you pay less tax. Yeah, right. Right? So just to let that simmer there for a second. And then other people going, whoa, wait a second. So if they're paying less tax, does that mean I pay more tax? No, no, no, no, no, no. It's redistributing where the money comes from. And it's sort of saying, hey, look, the person with 12 different properties is going to pay a little bit more.

55:01but the those the reason that they've got a high income presumably in a fair free market system is because they're creating immense amounts of value i.e they're chopping tumors out of people's brain pretty valuable pretty valuable service i i would argue why would we why would we disincentivize that now the muppet over there that's got 18 different investment properties would would still that's a bit harsh little you would you would still be happy with this scenario yes yes If you are making productive use of it, and here's the other benefit of a land tax, it incentivizes more value creation. If you're land banking or you're hoarding or you're buying things at prices that are uneconomic and not allowing for any cash flow, that's on you.

55:47A land tax will incentivize you. Oh, gosh, I can't meet this payment. Why can't you meet? And I'm not talking about Granny Smith in her own house here. I'm talking about the person with 1 ,000 properties. It's like, well, if the 3 % land tax burden makes all of these holdings uneconomic, it means that you're getting a rate of return on your assets of less than 3%. In other words, it's not maximizing the utility value of that land. and someone else will come in and go, well, you give me the land and I'm going to set up a business on it, or I'm going to do this on it, or I'm going to improve the property.

56:22It's got to think beyond just residentially, but if you want to think residential, it's like, well, I'm going to improve the property and be able to charge more rent. It incentivizes value creation. And that's what we want to incentivize. I'm going to try and say to someone, hey, the more you work, the more tax you pay, what? Why are you disincentivizing? Why would you do that? Now, if I make a squillion dollars, right? I'm a million dollars a year. I'm just making it rain. At some point, I'm probably going to own some land as a consequence of that, and I'll pay my fair share. So, it's less friction, incentivizes the right thing, and for the vast majority of people, reduces the tax burden.

57:01And as an added kicker, it makes the whole system so much easier. We talked about productivity the other day, right? Now, rather than spending like two agonizing weeks of tearing out my hair and paying the accountant a gazillion dollars to do my taxes, it becomes a much more straightforward process. Improved productivity, improved fairness, better economic incentives. It's just a better system. And the other part of it, of course, is the consumption tax as well. So again, you've got absolute monster of income. What good is that if you never spend it? And if you don't ever spend it, then okay, fine.

57:33You're not paying much GST. you're not paying much consumption but if you go out there and buy 10 ferraris and a racehorse and all that kind well then you pay your tax then as you know that like that it's a much harder tax to dodge as well so anyone who gets angry about tax avoidance schemes it's like and this applies to business as well i get rid of corporate tax get rid of it but businesses have to pay for things and they'll pay the consumption tax and they will own land for their factories and shops and all the rest of it or they'll rent it off someone else who's getting an economic rent off it so it just the more i've thought about it the more elegant it is i absolutely acknowledge your point and that's the one that people put forward but again perfect is the enemy of the good the fact that a 90 year old sitting in a four million dollar house might have trouble doing it's like well let's carve out an allowance for them we'll just let it accrue and then you can pay it later on and that but we still get all the other benefits with that yeah fair enough that's my pitch my my So here's the other challenge I've got with land tax is we are – if we're taxing the asset, we're not taxing paintings or shares or something else.

58:36And so we're distorting the – if we're taxing wealth, which is what you're proposing – I'm not, by the way, miles away from what you're saying, by the way. But just to be devil's advocate, why not include shares in that? Why is one form of wealth taxable and the other form of wealth not taxable? I want to encourage people to invest in productive businesses. But if you buy on the secondary market, you're not real. If I buy BHP shares from you, BHP doesn't see the money. Well, why am I taxing it, therefore, then? Nothing's changed. Well, you're taxing the gain. But why am I being punished for taking a risk with – so I've paid tax.

59:13This is the system at the moment. But the same with land tax. If I buy land with taxed income, I'm in the same situation. So,

59:25if I... The company itself is still paying tax. Yes, absolutely. Right? We're extracting it in a different way. So, I can buy and sell. You and I can swap ownership a thousand times, right? It doesn't really change anything. No, but that's my point. But why put an impediment towards the free and open transfer of an asset between two parties? You're not. Why would I disincentivise that and say, well, if you do that and you make a profit, we're going to take some of that profit. No, I'm not saying – I'm not arguing for capital gains tax necessarily. You're arguing for a wealth tax effectively on land only.

1:00:07What I'm saying is that 3 % tax, for example, on land, there's no reason it shouldn't apply to shares in the same way or to paintings or something else. applying a wealth tax the value of your personal portfolio you're saying right I want 3 % of that on land but shares you can have and I'm not going to tax that at all that's the bit that strikes me as the land tax argument I don't I don't know that if you're taxing wealth it should be only certain forms of wealth and not other forms of wealth for example. I do grant you that it becomes more difficult in an increasingly intangible wealth. Yes, and where most of the wealth will grow.

1:00:46I mean, the Australian property market may seem otherwise, but you and I both believe, for example, that shares will grow faster than land over the foreseeable future. At some point, there is that question of, if I move my wealth from point A to point B, I avoid the tax. That doesn't strike me as an ideal way to... If you don't tax wealth, tax wealth is, I guess, my argument, rather taxing land. And look, I don't... I have no dog in the fight. I mean, I own land too, so I pay more, but I probably pay less than income tax. So it's not a... I have no dog in the fight. It's just a composition question.

1:01:16I don't know that if I had wealth tax, we should exclude gold bars or horses or paintings or wine collections or shares, for example. And again, I'm a shares guy, right? I'd happily take no tax on my shares because it'd be lovely. But if I'm designing a system, I understand the wealth tax idea. I just don't know that I'd do it just on land. Yeah, it's just, again, I guess I'd make the point that it's not that the company's avoiding tax. They're just the way that the tax is extracted, as it is with individuals. It is extracted differently. And at the end of the day, wealth does come down to land in a very big and significant way, right?

1:01:54And it might be removed a step or two via my ownership in a share. Yeah. But that part ownership in the company, that company owns, presumably a lot of them, most of them own some kind of land or rented off someone who owns the land and is buying stuff and consuming stuff as well as producing stuff. So, it feels like, wait a sec, corporations aren't being taxed and traders aren't being taxed. It's like, well, people allocating capital and helping to direct, that's another whole other conversation. I do think there is some value created. Some sort of value, yes. I agree. I'm not going to agree with you.

1:02:32I mean, the way to play it through is to sort of say, okay, I'm going to take it to the exercise, Scott. Click my finger. You're a billionaire. You've got$1 billion in the bank, right? What are you going to do? I suspect you probably want to live somewhere pretty nice. Like, no one has a billion dollars and go, yeah, I'm going to go live in the caravan park, you know, somewhere in Dubai. Like, you're not going to, right? So, and you're probably going to buy a bunch of nice toys. Yeah. And on both of those things, you will pay tax. Not to punish you. Absolutely not to punish you. Now, if people over here, again, we're trying to remove frictions, right?

1:03:12So, it's just like, again, you and I on the secondary market are swapping our assets back and forward. I just don't know. That is something that I want. I'm not saying that should be taxed necessarily. I'm saying the value of it that I own at the end of the day. Because you're a billionaire and I'm a billionaire. I buy a billion dollars of property. You buy$990 million worth of shares and a$10 million house. Yes. And so I pay a squillion dollars more tax than you pay because of my asset choice. But now what can I do with now? So you bought this land, right? Yeah. And now the land yourself actually gives you a source of income because you can put a factory on it or you can rent it or you can do all kinds of things.

1:03:51My portfolio, I put my$10 billion in shares, you put your$10 billion in land. I can't live in my portfolio. I can't spend my portfolio. If I transfer it and then have somewhere nice to live and then consume a Ferrari and whatever, then the tax comes out. I don't want to be punished just because I've owned something. They are both forms of wealth. It's just that one form of wealth is far more abstract and one form of wealth is if ever wants to be... I mean, what's the point of having a$10 billion portfolio if you can't spend it? But there's no point in having$10 billion worth of property either.

1:04:29Whatever proportion of... Take Twiggy and Gina and Clive. Twiggy and Gina for fun and Rupert and, I don't know, James Backer. Yep. They would pay under your regime very different amounts of tax. If James rented an apartment at the toaster, he paid no tax at all. Yep. And if Gina bought$10 billion worth of property, she'd pay all the tax. Well, they're also not consuming anything. That's right. Okay, sure. Because none of them are going to consume their wealth during their lifetime, right? They're going to pass it on because you can't consume it all. Yeah, yeah. So now it comes down to the assets they own is the basis of the taxation rather than the value of the assets they own.

1:05:05Yeah, but James is renting that property off someone, right? Yeah, but of the$10 billion. So he's indirectly paying land tax by subsidizing the landowner's land tax because the landowner charges them a rent to do so. Yeah, sorry. But my point is the proportion of his wealth that's tied up in land is very different. Yeah. So Jane's portfolio was all land. Yep. James owns no land. Yes, he rents a million-dollar apartment or a$10 million apartment, but out of his billion dollars. Yeah. So he pays almost no tax. Until the point comes he wants to – But he doesn't spend it all. So neither am I going to spend all their wealth before they die.

1:05:41Right. And Gina is going to have paid – it doesn't matter who the people are for what it's worth. If people have their issues with Gina, but, you know. Turn it down around if it makes you happier. Not you personally, our listeners. You know, the person who puts all of their portfolio in property, never going to spend it because they've got so much money. Gina's never going to spend her money. James is never going to spend his. Right? So over their lifetimes, Gina pays a tri-colated tax for the land, and James pays a little bit of indirect tax because he rents the place. Yep. So you're taxing what they own, not how much they own.

1:06:12Yeah. It's the value of their wealth. Yes. So Gina looks around and goes, wait a second. I own all of this property. Now, don't forget the property is earning money, right? And if it's not earning money, she is wasting a resource. And therefore, she should probably sell it to someone who can make productive use of it. So if you've got a problem with that, Gina, sell the damn property and put it into shares, right? You can do that and someone else will buy it and then derive an income. Now, or even if she decides, I'm just going to keep it. And let's say she's got really, really good quality properties or really good quality land.

1:06:49And technically, it's the unimproved value of the land that land taxes is sort of based on. But she's got very, very good quality land here. Definitionally, if it is good quality, it is because it is able to generate a good amount of income. So I've got some land here. Let's say for the sake of argument, I'm earning 10 % per annum on that through rent and the businesses and everything that I've got on top of that. And I pay 3 % tax. I've still got 7 % compounding on all of that. I'm still advantaged. I'm still ahead. And if I decide I don't want to, and then don't forget, this is one part of it.

1:07:26Land tax is part. Consumption tax is the other. So as she goes, or James goes out and buys the power yacht and does all, every time he spends the money, he's paying tax, right? And part of spending the money is paying rent, right? So it's all, it is actually contributing. Now, the only way, the only way for the uber wealthy to avoid all this tax is to never, ever spend a cent and to never, ever, ever own any land. And it's like, point to me a billionaire who's going to fit that description. And if they do, it's like, well, okay, your choice, right? They will, yeah. I think the aggregate, I'm not worried about Jenna paying too much tax, by the way.

1:08:06My issue is James not paying any in this environment. If he then gives the shares to his kids and they give his kids, they end up with a trillion dollar portfolio. But they're all living in tents and they're living on two-minute noodles. But think about the proportion of their portfolio that goes to living expenses. James can never spend, he will die with more money than he inherited. But that's true today under the current system. Yeah, but they've got to – no, because it's capital gains tax once you pass on the inheritance. Yeah, but he's still not going to spend it all. No, but the capital gains tax is where it comes out.

1:08:34The inheritance triggers a capital gains tax event. If you only tax land and you don't have capital gains tax, that portfolio is never, ever, ever, ever, ever taxed. Yes, but – It'll compound from here to forever because the family will never spend the wealth. There's so much wealth generated. Kerry had more wealth than Frank. James got more wealth than Kerry. James' kids love more wealth than him. They'll never spend it because there's too much to spend. And in a world where there's no capital gains tax, that portfolio grows infinitely and it's never taxed. The very small portion they spend because you can only spend so much.

1:09:06You buy one power yacht. Okay, buy an apartment block. You got that. Okay, I've still got$9 billion over here. Well, I'm not going to do anything with that. Okay, we won't tax you on it then because it's not land. It's a share portfolio. If that's what they want to do, then that's what they want to do. I've got no problem with that. But if they're going to actively – but again, let's forget about my assertions and just say we've just got this system. We've got the current system. Every year that dude gets richer. Every year he's never going to spend – I get the argument. The taxable event is the inheritance.

1:09:38There wouldn't be a taxable event in – You're talking about inheritance tax. You're not talking about income tax. No, capital gains tax. No, capital gains tax. No, I am. Because when the asset is disposed, there's a capital gains tax event. Right. The inheritor carries the capital, the cost base. So this is what the rich do, right? So this is what Bezos, Bezos have talked about it before, right? So he's like, don't sell your shares, borrow against your shares. Yeah. So they don't do it. And my point is, I hear what you're saying, but they - But try to have a wealth tax. I'm not saying this current version is perfect.

1:10:10I'm saying tax the wealth, not just the land. I'm trying to say incentivize wealth creation.

1:10:22don't incentivize wealth creation, right? And if someone wants to consume a lot, when you consume, you extract stuff from the economy, which is fine. I mean, it's got to be consumed at some point. It's kind of why we make this stuff is to consume it. You're adding as well as extracting, right? Because you're creating jobs, you're creating demand as well. Absolutely, yeah. So again, it's a bit hard to think of. I mean, it's of all of the things that are the pro, and look, there are pros and cons. I acknowledge that. But if the con is that the uber, uber wealthy are going to have a slight advantage if they choose to consume very minimally.

1:11:01Yeah. But we have all of these other benefits. I kind of think, you know what, on net, this is still good. So most people end up paying less. tax. I suggest most of these billionaires will continue to fly around on private jets and do the things and have lovely waterfront properties because you would. I would. I would. And that'd be fine. Even with the 3 % tax, I'm still okay. But if, okay, whatever, I'm only ever going to rent, well, then I'm kind of still subsidizing the landholders' rent tax, right? Otherwise, they wouldn't be renting. You know what I mean? It's still worthwhile. And if it wasn't worthwhile for them.

1:11:35They would sell it to someone else who can make more productive use of it. So it's pushing, it's Charlie Munger, incentives, incentives, incentives, incentives. Do I want to disencourage, disencourage, discourage people from working? No, I don't. I mean, I still have to pay for all of these hospitals and roads and that kind of stuff. And for the people who have accrued great, well, good on them. You deserve all of your success and absolutely not going to just like eat the rich. It's not that. But it just means that, and don't forget that wealth was created by the society and the institutions that we have has allowed you to.

1:12:11The reason Gina is so rich is because we have property rights, is because we have given her mining rights, or her dad. You know, we have done this. And good on you. Good on you. You sold a ton of it. Well done to you. And if you have to pay a bit of tax as a consequence of that, then fine. Here's the thing. at the moment they get away with murder and i'm not saying tax them into oblivion and punish them for being successful i'm just saying pay pay your fair share that's all and this is a much better much harder to wriggle out of things and if you want to be super super super clever and not pay tax under this system and the way to do that is you're gonna live in a cardboard box and eat two minute news like okay good on you can i have the billion dollars and i'll have the power yacht and I'll do that and I'll pay more tax, but I'm still the richest.

1:13:00I'm still the richest. And that's... I have no issue with the basis. I would extend it to all wealth rather than just land. I think it's a more appropriate way to tax wealth, if that's what we're going to do, is say pay a small proportion of the good fortune you've worked hard for. I wouldn't exclude other assets and just do one asset class as a way of making that, grow that funding. I'm not arguing for the current system. I've got some sympathy. Again, only in the world that we are increasingly trending towards, which is a digitized online, intangible world. Yeah. Netflix, right? Or Apple, or you kind of think, you know, or bloody, you know, you talked off air about Fortnite.

1:13:37I mean, the money's arrow there with, you know, how much land is being used for that? Like, digital land might be the question, right? It's such a good question. I could talk about this all day. We're running out of time. We are. But the servers have to be located somewhere. Yes. The energy that feeds those servers has to come from a power plant that is located somewhere. So even in an abstracted world, there is a base layer of reality, I suppose, which being the physical real world in which the infrastructure that supports these intangible things must still exist at some point. It's a funny – I mean, it creates some really fascinating kind of second, third order impacts, right?

1:14:14It does, yeah. So it's a bit like a revenue tax. It's like, oh, I should just tax on revenue. It's like, well, Woolies margins are 5 % and Apple's margins are 70%. So we don't tax revenue, we tax profit. Anything about land, it's like, so the farmer or the toll road or the, I'm trying to think a big land use kind of, versus the, yeah, there's some service somewhere, but they're really, really, really concentrated. The dollar per square meter kind of generated from these things. It's a really, I mean, think about Woolies, the two markets literally work on dollar per linear meter in terms of their shelf space, right?

1:14:47It's like, okay, we've got this much space. How do we maximize the value from it? You kind of go to that. It's like the servers take up less room than the farm. The industrial manufacturing, the steelworks take up more space than the whatever. The solar farm takes up more space than the nuclear plant. I mean, the whole thing is like fascinating to follow that through. It's so interesting, isn't it? Because I would imagine that there's a part of that there which says, well, wait a second. Are you telling me that what we're talking about there is increased productivity of the available land that we have?

1:15:15Yeah, yeah, yeah. which means that there's more land available. If I can do on one acre what I had to previously use 40 acres for, I've just freed up 39 acres. Yeah. And human demand is infinite and unlimited. Yeah. So there will always be someone who will go, I'll take that land and I'll build a house on that. Yeah. And I'll put a farm on it. Well, I'll do that. You know what? Whoever's going to create the most value gets to take it. And if you're at a point where it's just like, it's so uneconomic, I can't even support a 3 % levy on this. It's just like you should sell that and give it to someone – or sell it and not give it.

1:15:49Sell it to someone who can do it. And that's why it drives the incentive towards productivity. It's deep, right? It makes digital goods much cheaper and it probably makes food much more expensive, I suspect. As one side of the thing about the cost of the land, you've got to pay that back. You could say, well, sell it to someone who's going to use it for something else. We still need that as X amount of food. So the amount of food required doesn't change. The levies, as long as it's applied fairly across the country or the world or whatever level you choose. It's almost like a revenue tax. It's like the lower...

1:16:18Yeah, fast... Anyway, so we'll... Hey, so I do want to answer Adrian's question, though. Sorry, Adrian. Sorry, man. And I'll do it quickly because it's a good one. So, Adrian, I think if you're going to give people a tax deduction on their mortgage, you probably need to charge capital gain tax on the sale. Again, because that's the way we do it. We don't have to, but... Sure. And Ram's point about... Back to the real world, which is likely to happen. You could blow the whole thing up for sure. But yeah, in that circumstance, I mean, you don't have to, but it would be weird to give people a tax deduction.

1:16:47The other thing, by the way, is what do we know about tax deductions on property? It pushes the price up. So if we gave people a tax deduction on their mortgage, then we could all afford to pay more for housing. I suspect it's a zero-sum game, quite honestly. It may even be playing for the little bit between owner-occupiers and investors on that basis. And your suggestion to kind of only apply negative gearing or property losses to property income or expenses to income rather than general income would also help balance that a little bit. So I can't get where you're coming from. It would – overall, there's more property owned than rented, so it's probably a net increase in price, but it probably does make things a little more evenly managed.

1:17:26You've heard me say this before. I'd just take a negative gear on resident property altogether. That's how I'd finish the problem. Sorry for going off the reservation. No, it's good. It's good. No, I would just take off negative gear and say that's even the playing field, right? There's not an owner-occupied property. Take it off investment property and then let the two sips side by side. It doesn't add anything to demand. Probably depresses demand slightly. It probably brings the price down. Any more on that, mate? I said to Scott, man, we've got to finish by 11 because I've got to go somewhere.

1:17:53I just thought, it's 11.22. It really is. And whose fault is it? Well, I was trying to come up. This guy. This guy's fault because he had to go. Anyway, I've got to go. So the record Ram's pointing to himself, not to me, in case anyone's wondering. I did try a couple of times to come up. So, finish it off. Yeah, but. I was like, okay. I was on a roll. It was a very, very good roll, but I'm going to let you go, mate. Thank you, everyone, for listening. Thanks for sharing some time with us. Hit us up on the socials. I'll save Andrew a bit of time and say you know what they are. Until next week, until next Friday, Fool on.

1:18:21Cheers. The Motley Fool and people appearing in this program may have positions in the companies mentioned. General advice only. Please speak to your financial professional to understand how it may pertain to your situation. Subscribe to the free newsletter at fool.com.au forward slash listener. The Motley Fool operates under Financial Services Licence 400691.