Governments Need Revenue And More Taxes or Printing Is Not The Answer

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To investors,

The boom in artificial intelligence hype has created a few unlikely winners. One of the least likely is the government of Anguilla, which happens to have the country code top-level domain of “.ai” — in layman’s terms, if you want to buy any .ai domain, you have to buy it from the Anguilla government.

So how much money is this worth for Anguilla?

Amy Thorpe writes for Restofworld.org:

“The rewards from selling web addresses are considerable: Cate estimates the revenue generated by Anguilla’s .ai domain — around $3 million per month — currently accounts for around a third of the government’s monthly budget.”

The islands in the Caribbean are not the only British territory to benefit from this phenomenon. Thorpe writes:

“Following a deal with GoDaddy in 2022, some reports said Tuvalu could make $10 million per year from the .tv domain — one-sixth of its GDP. That revenue has allowed Tuvalu to pave its roads, expand electricity access for its residents, and even pay its first annual United Nations membership in 2000.”

Domain sales are equating to approximately 33% of one government’s budget and about 16% of another government’s GDP output. Wild.

This recent development is going to become more important in the coming years. Remember, many governments around the world are broke.

Some governments will try to rectify the issue by printing money until they fail. Other countries will continue hiking taxes until all the wealthy people leave. Neither of these strategies are long-term sustainable, but they are so simple that the short-term oriented politicians will pursue them with energy and passion.

A bad solution is better than doing nothing in their eyes.

I disagree. Don’t believe me they will do this? The state of California has floated the idea of raising state taxes for the highest tax bracket by up to 5%, which would push the total taxes paid by the wealthiest individuals to almost 60% if ever approved (I highly doubt they can rally support for this extreme measure). That means you don’t start working for yourself until August each year!

But even if California can’t get the egregious tax proposal passed, they are already quite onerous in their tax treatment of citizens. Tanza Loudenback writes for Business Insider:

“California has the highest marginal tax bracket for individuals at 12.3%. It also assesses an additional 1% tax on income exceeding $1 million. California also one of the highest-tax states for corporations, which pay a flat 8.84% tax on net taxable income.”

Add in the fact that a mansion tax that charges an extra 4% - 5.5% for homes sold above certain price points went into effect in Q2 2023 and it becomes obvious that California is looking under every couch cushion for more revenue.

They are not alone as a state though.

New York is also trying new things to drive additional tax revenue. The craziest one is a “congestion tax” in Manhattan, which is the first congestion tax introduced in the United States. How does it work? If you drive into the main business area during work hours on weekdays you are hit with a brand new tax ($15 for passenger cars and up to $36 for trucks). The goal is to raise billions of dollars in revenue with this measure.

California and New York may be on the tip of the spear for new tax revenue opportunities, but they both have also seen a major exodus of wealthy residents in the last three years. Not a good situation. The more people that leave, the more ridiculous the taxes need to become, which drives even more people out in a crazy feedback loop.

If we take a look at governments printing their way out of the problem, we don’t have to look any further than the US government. Our national leaders have helped 10x the Federal Reserve’s balance sheet since the Global Financial Crisis.

Think about that for a second — we have increased the balance sheet ten-fold in about 15 years. That seems unsustainable.

This brings me to what I believe governments should be doing: creating products and services that people are willing to pay for. Does this sound unrealistic? We have examples where it is working.

Florida’s Brightline, which is privately owned but could easily have been built and operated by the government, is growing 50% year-over-year and has reportedly achieved profitability. The MTA in New York was generating over $9 billion in revenue before the pandemic.

Why are these services generating so much revenue? Because they solve a problem for the citizens of that geography.

Singapore and Dubai have both become international economic hubs by embracing the ideals of capitalism, free markets, and low taxes. These governments understand that product that people want and worked diligently to provide it.

This is what governments should be spending more time on. We don’t need them trying to compete with private companies, but rather finding the things that governments are uniquely positioned to do and then doing those things at a world-class level.

The governments who found themselves holding TLDs for “.ai” or “.tv” domains may not have planned their good fortune, but they are definitely taking advantage of it.

Hopefully other governments figure out how to do the same. If not, math will win and governments will end up needing to be bailed out. That is a bad situation for everyone.

Hope you all have a great day. I’ll talk to everyone tomorrow.

-Anthony Pompliano

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