A Tax By Any Other Name: Equity Stakes, Tariffs, Government Debt
Taking equity stakes in companies, raising tariffs, and even issuing government debt – it's all tax.
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The US government has made headlines over the past year by taking an equity stake in Intel Corporation, along with 4 other companies. At the same, the US government has also levied significant tariffs, and continues to issue new debt (the current total debt to GDP is 125%).
So how are all of these topics connected? They’re all a form of tax.
The Intel Stake
One of the more unique recent government policies was the announcement in October by the US government that it is taking a 10% equity stake in the computer chip company Intel Corporation. It has been framed as a ‘fair’ offset for the subsidies the company receives through government programs.
On first glance, it might sound reasonable – the US taxpayer subsidizes Intel (note: a subsidy is a negative tax) and, in return, the US taxpayer gets 10% equity. But in reality, it’s probably an inefficient way of taxation. Let’s look into how societies fund themselves.
Government Budgets and How We Fund Ourselves
Although governments are often presented as a separate entity from society, it is ultimately “us” that control the government. From a big picture perspective, “we” (via the government) decide that we should provide ourselves with certain goods and services – like education, healthcare, defense.
To fund these goods/services, we collect money from ourselves, done most commonly via taxes (but also via issuing bonds – a promise to pay back the person that gave the government money).
“We” can choose exactly how to do this – we can set tax rates and tax types (income taxes, corporate taxes, congestion taxes, etc). In theory, “we” are completely free to do as “we” choose with regards to what and who “we” tax. Anything that raises money for “us” (the government) can be interpreted as a tax.
Taking the Intel Equity Stake
Thus, taking a 10% stake in Intel by the government is a tax. What type of tax? It’s simply a wealth tax – a tax which is often derided.
How is it a wealth tax? By forcing Intel to give the government 10% of the equity in the firm, Intel has to dilute all current Intel shareholders – the current Intel shareholders give up 10% of the company, making themselves 10% poorer by construction. Thus, taking this equity stake is putting a very specific 10% wealth tax on Intel shareholders.
Should We Care?
The main reason economists care about taxes and tax types is the efficiency implications of taxation. Any form of tax levied on an economic activity potentially distorts the decisions of the people impacted by the tax. An income tax, for example, may discourage work, as a worker gets less money for their work and thus may choose to spend more time not working. A capital tax (a tax on investment earnings) discourages savings and investment. Taxes can also distort decisions positively – a congestion tax discourages usage of cars which generates many benefits (less traffic, less pollution, fewer accidents).
So economists mainly focus on figuring out how much taxes actually distort decisions and how this affects our total output. This is called ‘efficiency’.
Tariff Inefficiencies
Tariffs are a tax – a tax on goods or services being brought in from abroad. This tax, especially on intermediate inputs such as steel or wood, can significantly distort the decisions domestic firms and people make, resulting in a significant efficiency loss. Suppose without tariffs, firms would choose to do A, while with tariffs they choose B. Since firms could choose B before tariffs were imposed, the fact that they didn’t choose B suggests they were better with Option A (i.e. more efficient).
The reason we see nearly all reasonable economists criticize tariffs is because of this fact – tariffs have significant distortions and reduce economic efficiency. Economists will argue that there are better taxes to use to raise revenues for the government.
Taking Equity is Probably Inefficient
Coming back to the Intel equity stake tax, it is probably a very inefficient tax. Picking a firm to impose a wealth tax on its shareholders may have significant impacts on how people save and invest in the future. For example, raising money for firms may become costlier, as investors may be wary of having to pay a wealth tax. This can result in smaller firms with less hiring, shrinking the economy.
If the purpose is to raise revenues from investors, then it would be much simpler for the government to raise the tax on dividends or capital gains – a tax which would be less distortionary compared to equity taking.
Regardless of one’s preferences, the overarching point is that taking an equity stake is a tax.
Government Debt
This brings us to the last topic – government debt. In the beginning of today’s post, I mentioned that any form of revenue raised by the government is a tax. Government-issued bonds are similar – the government, or “we” take money from ourselves.
The only difference is that “we” promise the specific people who gave “us” the money a negative tax in the future in the form of interest payments and a return of the amount of money the person gave “us”.
When governments raise revenues by traditional taxation, we also collect money from specific groups of people and then provide goods/services to these or other people (education, healthcare, infrastructure). Note the sole difference with government debt is the very specific contractual obligation (the lender to the government will get x% and principal back), rather than an implicit society agreement (the taxpayer will receive certain benefits)
Repaying Debt
A big topic of concern is the ability of a country to repay the debt. When we talk about repaying the debt, what we fundamentally mean is whether we give “ourselves” the negative tax (interest payments, principal).
A government can repay the debt by doing three things – raising taxes, cutting spending or defaulting. If it raises taxes, then “we” are contributing money to pay off “ourselves” (or more specially a subset of “us” – the bond holders). If it cuts spending, then “we” are no longer receiving a service/good, i.e. we removed a particular negative tax.
Lastly, if “we” default on our debt, then in effect, we are raising a wealth tax on “ourselves” (more specifically, the bond holders) to pay off our own bond holders.
As you may notice, the main impact of these three approaches is who ends up getting taxed – i.e. a distributive question. If we raise taxes – someone’s paying. If we cut spending -- someone’s negative tax amount decreases (a form of tax raise). If we default, we tax the bond holders.
Thus, whenever you hear people talking about ‘reigning in the deficit’ or ‘cutting debt’, it is essentially a discussion about re-distribution.
It’s All a Question of Tax
I hope the above has shown how everything boils down to who is taxed and whether a particular tax is efficient. When the US announced the receipt of an equity stake, it was a tax on the equity holders. Tomorrow the US could announce a 10% tax on all government bond holders and reduce the outstanding government debt by 10%. It would mechanically be no different from the equity stake (from a financial perspective).
Naturally, instead of either of the above, the US can just raise traditional taxes – income taxes, property taxes, etc. – to pay for the debt. Unfortunately, we often see inefficient taxes, like tariffs, get implemented, because they sound good, but are really very costly.
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Missed the fourth and perhaps most likely way the US will deal with its debt: inflation. A tax on bond holders and savers more broadly.
On a more serious note, could you expand on what is an inefficient tax?