As more and more people start to notice that the headline of 440,000 euros being tax free comes with a cost to everyone who invests his savings, or at least does not keep them on his bank account, there are some interesting articles for example this one on Business Insider. The article goes through a couple of examples that show some very interesting points:
- Currently if someone invests 100,000, the effective tax is approximately 0.4%. Based on the new proposal, this turns into 1.63%. For someone who invests 300,000 the jump is relatively smaller, from 1% to 1.71%.
- This hike in tax rate can have massive impact on someone saving regularly small amounts for retirement. Again an example is given where saver who puts aside 400 euros per month is left after 30 years with 314,000 eur under the current system and 266,000 eur under the new system.
Therefore the change will hurt smaller investors much more than till now. Moreover, actively investing on your own for, say, retirement will now be dramatically disadvantaged as regular pension accounts (probably) won’t be taxed.
Who are the winners then?
- Savers, i.e. people who keep all their money on their bank account.
- Banks. As banks worry about having to pass on negative rates to deposit holders, this gives bank accounts 1.75% advantage over most alternatives.
- Pension investment providers (such as Brand New Day) as this becomes considerably more attractive option than before.
- Possibly insurance companies, if there turns out to be a policy structure that avoids the tax.
If the tax changes are implemented as proposed, it will be an interesting experiment in how lowering the risk premium of investments by 1.75% affects the decisions of (potential) investors. As till now the tax was seen as an incentive to invest, we might see many people choosing the safety of bank accounts.
Obviously the big losers will be people buying second homes, investors and potentially whoever provides services to investors. Some types of investing will become pointless, for example given the flat 5.33% return assumed on any investment, corporate bonds don’t seem to have much value left especially if any other fees are involved.