As Benjamin Franklin once said, “Nothing is certain except death and taxes.”
While this quote was penned in 1789, his words still ring true today. U.S. taxation has changed over time, but it has always existed in some shape or form for over 250 years.
U.S. Taxation: 1765 to Today
In today’s infographic from New York Life Investments, we explore the history of U.S. taxation – from its colonial roots to its recent reform.
The modern American tax code has little resemblance to its early iterations.
Over the last few centuries, Americans have battled against British taxation, faced sky-high tax rates to fund war efforts, and enjoyed tax cuts designed to boost economic growth.
A Timeline of U.S. Taxation
Today, total U.S. tax revenue exceeds $3.4 trillion. Below are some notable events that have shaped modern American taxation.
Colonial Roots: 1765 to 1783
1765 – Stamp Act
In its first direct tax on the colonists, Britain places a tax on all paper – including ship’s papers, court documents, advertisements, and even playing cards.
1767 – Townshend Revenue Act
Importation duties are placed on British products such as glass, paint, and tea. The taxes are expected to raise £40,000 annually, (£6,500,000 in 2018 GBP). As hostilities continue to bubble up, colonists argue for “No taxation without representation”. Although taxes are imposed on the colonists, they aren’t able to elect representatives to British parliament.
1770 – The Boston Massacre
British troops occupy Boston to end the boycott on British goods. The March 5th Boston Massacre sees five colonists killed. By April, all Townshend duties are repealed except for the one on tea.
1773 – The Tea Act (May 10)
Britain grants the struggling British East India Company a monopoly on tea in America. While no new taxes are imposed, this angers colonists as it is seen as a thinly veiled plan to gain colonial support for the Townshend tax while threatening local business.
1773 – The Boston Tea Party (December 16)
Three ships arrive in Boston carrying British East India Company tea. Colonists refuse to allow the unloading of the tea, throwing all 342 chests of tea into Boston Harbour.
1775-1783 – The American Revolutionary War
Growing tensions between Britain and the colonists erupt in a full-scale war. After eight long years, Britain officially recognizes the independence of the United States.
A Free Nation: 1787 to 1943
1787 – The U.S. Constitution
Congress gains the “power to lay and collect taxes, duties, imposts, and excises.” The government primarily earns revenue from excise taxes and tariffs, including an “importation tax” on slaves.
1791-1794 – Whiskey Rebellion
Alexander Hamilton, the nation’s first Secretary of Treasury, leads the implementation of a whiskey excise tax. In 1794, whiskey rebels destroy a tax inspector’s home. President Washington sends in troops and quells the rebellion.
1862 – The Nation’s First Income Tax
To help pay for the Civil War, President Lincoln legislates the nation’s first income tax.
|Income level (1862 dollars)||Income level (2019 dollars)||Tax Rate|
1913 – 16th Amendment
As World War I looms the 16th amendment is ratified, allowing for taxation without allocation according to state populations. An income tax is permanently introduced for both individuals and corporations, and the first Form 1040 is created.
|Income Level (1913 dollars)||Income level (2019 dollars)||Tax Rate|
1918 – The Revenue Act
Tax rates skyrocket to pay for World War I efforts. The top tax rate is 77%.
1935 – Social Security Act
In light of the Great Depression, the Social Security Act introduces:
- An old-age pension program
- Unemployment insurance
- Funding for health and welfare programs
To fund the programs, a 2% tax is shared equally by an employee and their employer.
1942 – The Revenue Act
Described by President Roosevelt as “the greatest tax bill in American history”, the Act increases taxes and the numbers of citizens subject to income tax. Total personal and corporate income tax revenue more than doubles:
|Year||Revenue||2019 dollar equivalent|
|1941||$3.4 billion||$59.2 billion|
|1942||$8.0 billion||$123.8 billion|
1943 – Current Tax Payment Act
It becomes mandatory for employers to withhold taxes from employees’ wages and remit them four times per year.
Modern Times: 1961 to 2018
1961 – Beginning of The Computer Age
The National Computer Center at Martinsburg, West Virginia is formally dedicated to assisting the IRS in its shift to computer data processing.
1986 – Tax Reform Act
The Tax Reform Act:
- Lowers the top individual tax rate from 50% to 28%
- Increases taxes on capital gains from 20% to 28%
- Reduces corporate tax breaks
The revisions are designed to make the tax code simpler and fairer.
1992 – Electronic Filing
Taxpayers who owe money are given the option to file electronically.
2001 – Economic Growth and Tax Relief Reconciliation Act
President George W. Bush implements large tax cuts:
- Creates a new lowest individual tax rate of 10%
- Reduces the top individual tax rate from 39.6% to 35%
- Doubles child tax credit from $500 to $1,000* (*From $700 to $1,400 in 2019 dollars)
2017 – Tax Cuts and Jobs Act
President Trump signs off on reductions in tax rates, while some deductions are made more restrictive.
For example, State and Local Taxes (SALT) deductions are capped at $10,000. Residents in high-tax states such as New York, New Jersey, California and Connecticut could see substantially higher tax bills.
U.S. taxation policy remains a contentious issue and shifts depending on who is in the White House.
Investors need to stay informed on current legislation, so they can engage in proactive financial planning and minimize their tax obligations.
How Carbon Offsetting Works, and What Investors Should Know
Eliminating all harmful GHG emissions is not yet possible, but carbon offsetting offers a route for businesses and funds to become more sustainable.
This infographic is available as a poster.
Carbon Offsetting: What Investors Should Know
In 2016, an international treaty known as the Paris Agreement was negotiated by member nations of the UN Framework Convention on Climate Change.
The long-term goal of this agreement is to limit the increase in global temperature to below 3.6°F (2°C) over the next century. Achieving this target will require the world to develop cleaner solutions across all areas of the economy, from energy to transportation.
In this infographic from New York Life Investments, we introduce carbon offsetting, an activity used by both businesses and investment funds that has the potential to accelerate the development of a more climate-friendly economy.
What are GHG Emissions, and Where do They Come From?
Greenhouse gases (GHGs) are a family of gases known to trap heat in the Earth’s atmosphere. The most prevalent among them is carbon dioxide (CO₂), which accounts for 80% of America’s GHG emissions. Common sources of CO₂ include fossil fuel consumption and deforestation.
Businesses are often significant emitters of CO₂, but due to the complexity of their production chains, emissions can be difficult to track. To combat this, a company’s carbon footprint is measured across three scopes:
- Scope 1: These are direct emissions from a company’s operations. An example would be the CO₂ emitted by company-owned factories.
- Scope 2: These are indirect emissions from a company’s operations, such as the pollution generated from purchased electricity.
- Scope 3: These are indirect emissions from the company’s supply chains. Common sources include the extraction of raw materials and business travel.
Although we understand that GHGs are harmful to the planet, our ability to eliminate them is limited by technology and costs. Fortunately, this is where offsetting can help.
How Does Carbon Offsetting Work?
Carbon offsetting is a method of neutralizing one’s emissions by investing in GHG-reducing projects. The benefits of these projects are measured by the amount of CO₂ equivalent (CO₂e) that they avoid or absorb. Then, the company or fund that is engaging in the carbon offsetting project will then receive one carbon credit for every tonne of CO₂e negated.
Below are the three common types of GHG reduction programs.
1. Energy efficiency projects
These projects reduce energy consumption. One example is the distribution of energy-efficient cookstoves in Rwanda, a country where many people rely on firewood and charcoal. By distributing 10,800 cookstoves throughout the country, nearly 60,000 tonnes of CO₂e can be avoided each year.
2. Forestry projects
These projects nurture and protect our CO₂-absorbing forests. One notable example is the Garcia River forest protection program, which ensures the longevity of California’s redwood forests. The program oversees over 9,600 hectares which has been estimated to store almost 80,000 tonnes of CO₂e annually.
3. Renewable energy projects
These projects reduce our dependency on fossil fuels. They are especially effective in economies such as Taiwan, where 75% of electricity capacity relies on fossil fuels. Thanks to its strong coastal winds, Taiwan is able to remove 328,000 tonnes of CO₂e per year with just 62 wind turbines.
How is Offsetting Regulated?
Carbon offsetting in America is primarily a voluntary activity, but some state governments have made it mandatory for significant polluters. Here’s how both markets are regulated.
The Voluntary Market
The voluntary market is regulated by a variety of third-party organizations such as Verra, Gold Standard, and American Carbon.
They conduct audits on GHG reduction projects to ensure each one meets four broad criteria:
- Measurability: The GHG savings of the project must be measurable
- Verifiability: The results of the project must be verified on an annual basis
- Sustainability: Each project should have a minimum lifespan of seven years
- Additionality: GHG reductions of project must be considered in reference to a baseline scenario
Carbon credits are only issued after a project has passed this verification process.
The Mandatory Market
Some U.S. states have introduced carbon offsetting schemes to meet their climate goals. One of the largest is California’s Cap and Trade program which was introduced in 2013.
The program is targeted at businesses that emit over 25,000 tonnes of CO₂e annually, and works by setting a “cap” on total annual emissions. This cap is reduced each year, and overpolluting businesses must acquire carbon credits to offset their excess pollution. These can be purchased from state-administered auctions or from other firms.
Revenues generated from California’s carbon credit auctions are used to fund various GHG reduction projects, including:
- 690,000 acres of land preserved or restored
- 287,000 rebates issued for zero-emission and plug-in hybrid cars
- 108,000 urban tree plantings
- 150,000 energy efficiency projects installed in homes
By 2030, California’s emissions cap is intended to reach 200.5 million tonnes of CO₂e, marking a near 50% reduction from its 2015 level.
What Role can Investors Play?
A majority of U.S. investors consider themselves to be values-based, meaning they care about the societal and environmental impacts of their investments. This mentality is increasing the demand for ESG investing and placing pressure on corporations to become more sustainable.
For example, the percentage of S&P 500 firms that publish sustainability reports has risen from just 20% in 2011 to 90% in 2019. More importantly, a growing number of U.S. firms are cooperating with the CDP (formerly the Carbon Disclosure Project) to report their emissions and set formal reduction targets.
|Year||Companies with active emissions reduction targets||All other companies reporting to the CDP||Total|
Source: CDP 2020
Some of the world’s largest oil producers are also taking action—a testament to the significance of these shareholder concerns. Royal Dutch Shell announced earlier in 2020 that it intends to fully offset its Scope 1 and 2 emissions.
Does Offsetting Really Help?
Carbon offsetting programs such as the one implemented by California have the potential to generate revenues and encourage innovation. Critics, however, have suggested it has a number of design issues.
One such issue is the fact that California’s carbon credits do not expire. This could allow companies to stockpile credits and ignore future cuts to the emissions cap. Another concern is that the companies covered by California’s cap and trade will simply pass their higher costs to the consumer, although this claim didn’t seem to hold up in a 2016 study conducted by UCLA.
Other inefficiencies within the program may exist, but its benefits are hard to ignore. By the end of 2019, the revenue generated from California’s carbon credit auctions totaled $12.5 billion. Of this amount, over $5 billion has been invested in GHG reduction projects to date.
Tech Investing: Exploring the Sector’s Promising Potential
In the first 9 months of 2020, tech’s return was almost 5x greater than the general market’s return. Here’s what you need to know about tech investing.
This infographic is available as a poster.
Exploring the Potential of Tech Investing
Technology stocks have had impressive momentum. In the first 9 months of 2020, the S&P 500 Information Technology sector had a total return of 28.69%—far exceeding the S&P 500’s total return of 5.57%.
What should investors know about participating in this trending sector? This graphic from New York Life Investments covers tech’s long-term performance, the broad tech universe, and what investors should consider when analyzing tech investments.
Since most tech companies are internet-based, COVID-19 has caused minimal disruptions to their business operations. In a number of cases, tech companies even saw sales growth as they benefited from consumers going online during lockdown.
Over a longer timeframe, however, tech’s performance is quite varied.
|S&P 500 Information Technology||S&P 500|
Data based on total returns.
Tech underperformed the general market in 2010, 2012, and 2013. However, the sector has outperformed every year thereafter.
In total, investors who held tech stocks over the last decade would have been rewarded. The 10-year annualized return for the S&P 500 Information Technology index was 20.50%, compared to 13.74% for the S&P 500.
The Tech Universe
While the information technology sector is commonly used to represent tech stocks, the broader tech universe can be broken down into 4 business types:
- Software – such as application software, fintech, and cybersecurity.
- Hardware – such as electronic equipment, semiconductors, and self-driving cars.
- Internet Information – such as social networks, e-commerce, and digital advertising.
- Telecommunication – such as internet services, telephone operators, and cable companies.
In addition, there are other companies that don’t fit neatly into these categories. This includes businesses involved in biotechnology, blockchain, or even retailers with modern technology such as mobile payment systems.
What Investors Should Consider
There are many factors to consider with tech investing.
To lower potential risk, investors can diversify across industries, geographies, and individual companies. Tech investing should also be part of a broader portfolio strategy.
- Risks and opportunities
Tech stocks have unique risk factors, such as regulatory risk arising from data privacy and antitrust concerns. However, they also present specific opportunities: new applications of technology are always being discovered. For example, GPS was originally used by the U.S. Navy to track submarines, but is now used for things like ridesharing.
- Personal objectives
Investors can consider whether they are seeking growth or income. Growth investors can look for newer companies with high growth potential. Income investors may seek mature companies, some of which offer dividends.
- Company financials
It can be tempting to get swept up in the news hype of a particular company. Instead, investors can pay close attention to company financials and reporting to ground their interest in reality.
With all this in mind, how do the sector’s risks measure up against its returns?
Potential Risk/Reward Payoff
Tech stocks have historically been more volatile than defensive sectors, such as utilities and consumer staples. However, they have also generated higher returns relative to their risk level.
Annualized risk-adjusted returns
|S&P 500 Information Technology||1.37||1.49||1.28|
|S&P 500 Consumer Staples||0.65||0.78||1.06|
|S&P 500 Utilities||0.52||0.76||0.84|
Risk is defined as standard deviation, calculated based on total returns using monthly values.
By understanding the landscape and what to look for, investors will be poised to take advantage of tech’s potential.
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