Molto Bene

Taxing Millionaires, the Cuban Economy, and XRP!

For years I’ve said that I don’t want to be in business with the government. They’re the only partner who can change the rules on your investments AFTER you’ve relied on their assurances and committed your funds. I hold only the bare minimum in terms of IRAs, etc. because when it comes time for me to get my money out, I know Uncle Sam well enough to know he’ll change the rules to his benefit and not mine.

It seems that Italy’s government has caught the same bug. Several years ago, it passed a new flat tax on the wealth of millionaires and billionaires, €100,000 per year. This spread like wildfire throughout the tax planning world and 2,700+ millionaires relocated to Italy for tax purposes. So many professionals soccer players did so that the tax plan became known as the “footballer’s scheme,” especially when Cristiano Ronaldo bought a place in Turin and made Italy his tax home.

A software millionaire I know structured his company’s sale to pay him 5% upfront, and then 4 additional payments once his relo to Italy was complete. On $44m, he paid taxes of €400,000 + $476,000 US (about $916,000), or 2% and that’s it. He could be heard shouting “Bella! Bella!” all the way to the bank. He now lives in an 11th century monastery in Milano that’s been redeveloped into chic condos with UK hedge fund managers as his neighbors.

As with any government scheme, though, the rules change, and now the Italian government has decided that the new tax is €200,000 flat, still a great deal, sure, but illustrative of the fact that you simply can’t trust them, not matter what language they speak or flag they fly.

Not to be outdone, Switzerland is also contemplating turning the screws on its ultra-wealthy. There’s talk of a 50% tax on inheritances over 50 million francs ($59 million). This could affect the rich Norwegians who fled to the Swiss Alps after Oslo upped its wealth tax to 1.1% in 2022.

The Bottom Line is that governments will woo you with one hand and rob you blind with the other. They might start with a sweet deal, but rest assured, the taxman always comes for his unearned share.

"The only difference between a tax man and a taxidermist is that the taxidermist leaves the skin."

—Mark Twain

Speaking of rapacious governments, things are so bad in Cuba right now that the Communists are telling the truth!

The head of the country’s national statistics bureau reported to the National Assembly that over 1 million Cubans —a stunning 10% of Cuba’s population fled the island between 2022 and 2023, the largest migration wave in Cuban history. Following the Pandemic lockdowns, Cuba entered an economic crisis that it hasn’t been able pull itself out of. Whereas other governments were able to deluge their economies with cheap money that inflated assets, Cuba had been doing that for so long that it couldn’t keep pace with the new scheme, and so it did what it could which was very little.

This has caused unemployment to skyrocket in an already depressed job market which has had an impact on production, created widespread shortages compounding decades of widespread shortages, let inflation run wild again, and leave infrastructure to crumble and fail. Specifically, food production has collapsed and reach all time lows per capita.

A senior official at the Ministry of Agriculture, said the country produced 15,200 tons of beef in the first six months of this year. As a comparison, Cuba produced 172,300 tons of beef in 2022, already down 40% from 289,100 in 1989. Pork production fared even worse. The country produced barely 3,800 tons in the first six months of this year, compared to 149,000 tons in all of 2018. Almost every other sector reported losses and failed production goals.

In response, the Cuban Prime Minister, DuWayne Castro (not his real name, but funnier than Manuel Marrero) announced that the private sector food producers were to be blame for charging too much for food that the proletariat needs to keep up the fight for global Marxism and announced price controls on those companies.

When in doubt, screw it up!

"The government solution to a problem is usually as bad as the problem."

—Milton Friedman

More than a year after a Federal judge held that XRP (a utility token, or cryptocurrency used to transfer money) is not a security and, therefore, not subject to the regulation of the SEC, Ripple Labs, its developer, has settled a lawsuit with the SEC for $125m. The CEO of Ripple (where I am an angel investor), Brad Garlinghouse, said:

The SEC asked for $2B, and the Court reduced their demand by ~94% recognizing that they had overplayed their hand. We respect the Court’s decision and have clarity to continue growing our company. This is a victory for Ripple, the industry and the rule of law. The SEC’s headwinds against the whole of the XRP community are gone.

The SEC’s Chairman, Gary Gensler, decided unilaterally that cryptocurrencies were securities and, as such, were subject to the regulatory authority of the SEC. When Byron Donalds (R-FL) asked him where that authority came from he answered effectively that it felt like a security so he pounced on it. Donalds correctly reminded the Chairman that a regulatory agency didn’t get to change what it regulated based on its own analysis (or feelings), but was only granted that authority by Congress, which hasn’t’ happened with regard to crypto. The Federal Court agreed last year, but did think that Ripple had acted inappropriately in selling to institutions and so agreed to a fine. The SEC asked for $2B, the court awarded 6% of that. The entire case has been one stinging rebuke against the Chairman after another.

XRP is one of the most amazing technologies that have come out of blockchain technologies. With it, an individual or institution can transfer money and prove provenance over real or digital assets forever. Instead of a wire from bank-to-bank costing ~$40, taking 24 hours and being subject to fraud risk, an XRP is attached to a transaction, costs $.64 as of today, and is executed in 4 seconds. Instant, perfect, secure transfers of capital and assets.

The world has not yet begun to understand how powerful this will prove to be for the financial system in the future. When friction around moving capital is reduced capital moves and creates value in the moving. Bank of America loves XRP so much that it is rumored to have continually tried to buy Ripple despite the pending lawsuit. My sincere hope is that the token becomes institutionally adopted, that Ripple goes public immediately and that I become very, very rich.