One interesting thing about taxes, is that you can tax things in such a way as to encourage and discourage behavior.

The state taxes alcohol to discourage drinking and tobacco to discourage smoking. At the same time, they reduce or annul taxes on profits from scientific research or farming.

But there’s a part of the Irish and UK tax system that seems extremely flawed to me.

The gambler and the investor

Earnings from investing in a company are taxed at 40% (income tax).

If you take into account the corporate tax your company pays, you are taxed at 47.5%, of the initial income the company earns. That’s the case for Ireland, anyway, the UK would have a slightly higher corporate income tax.

These numbers would be ~5% lower if CGT was paid instead of income tax, but the general point stays the same.

There’s a tool that investors use to avoid the income tax (or CGT respectively), called spread betting. Which essentially means that you are treating investments as a bet on the rise or fall in value of your stock, with a broker acting as the house.

The broker will subsequently trade shares or derivatives based on the underlying stock. In countries with more favorable tax laws, in order to hedge these beds.

Why is this masking of stock trading as gambling good ?

Because the tax code in both Ireland and Britain deems 100% of the profits you make gambling as being yours. There’s no income tax, no dividend withholding tax, no CGT; you are free to keep every single penny.

So essentially, when the tax authorities come to rob you, you just say:

No, you got it all wrong, Mr. taxman, I’m not an investor, I’m just a gambler.

And you will be left alone.

Bad incentives

So investors masquerade as gamblers, in order for the government to increase their incentives to invest, via removing all taxes.

This is a twisted model when it comes to investing, but it’s much worse when you think about entrepreneur, VCs and angel investors.

Spread betting is a tool which can be used when trading with currencies or publicly traded stocks. It can’t be used for investing in an early stage company or creating your own, it would be too much of a logistics and legal nightmare.

A gambler needs to pay nothing from what they make, despite doing an act that most would find to be morally gray at best and not in the least helpful to society.

An entrepreneur needs to pay half of what they makes, despite doing an act that is, generally speaking, associate with increasing overall prosperity.

I think that in any healthy society the tax related incentives for those two behaviors should be reversed, or, at least, evened out.