Category Archives: taxes

The Evil of Income Taxes

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When America was founded, there were no income taxes – just taxes on goods and on trade.  It wasn’t until about 150 years after the country’s founding, there was no income tax.  And there is a good reason for it.

Have you ever really thought about income taxes, and what a country is doing by imposing an income tax?  Most other taxes involve doing something.  You want to buy something, so you pay a tax when you make the purchase.  The tax helps fund the protections that allowed that marketplace to function.  You want to travel somewhere, so you pay a tax when you make the trip.  The taxes help cover the cost of the roads and protections along the route.  In both cases you want something that involves help from the government and use of government services.

With an income tax, you really aren’t doing anything or asking anything from anyone.  All you are doing is producing things.  And you have not even necessarily gotten anything for the items you produced yet – you just have a bunch of IOU’s that will allow you to purchase things later.  People just come to your home (symbolically, unless you don’t pay your taxes), see that you have produced something, and demand that you give up a share of what you have made.

Imagine if you had spent all summer growing corn.  In the Spring you dig up the ground and get everything ready.  You plant the seeds and spread fertilizer out.  All summer long you water, pull weeds, and chase off crows.  Finally, in the fall, you spend hot afternoons and evenings picking the corn and storing it away, until your barn or silo is full.

Then someone comes along and says, “You owe me 15% of that corn.”

Now I’ll agree that part of your money goes towards things that government provides that enable you to make an income.  The government provides the protections that are needed to allow you to focus on running a business or working in a factory.  The government provides roads and infrastructure that allow you to ship goods and travel to and from work.

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And actually, my example isn’t quite right.  If you just grew the corn and then stored it away, I don’t believe you would owe income taxes.  Things you produce for yourself are generally not taxed.  And that’s the really strange thing.  When you do things selfishly for yourself – build a home for yourself, grow food for yourself (and you family), or make clothes for yourself, you pay no taxes.  You could even make yourself a yacht or a private plane, and you would owe no taxes (if you produced all of the materials yourself).

If you do things for other people, however, like grow food for them, build houses for them, or make clothes for them, you are taxed.  And the more you do for other people, the more you are taxed!  If you make a few clothes per week and maybe provide clothes for 100 families during the year, you’ll be taxed at 10%  If you manage a group of people, making clothing for 10,000 families a year,  you are taxed at 25%.  If you run a company that provides clothes for hundreds of thousands of people, you’re taxed at 40%!

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So think about that – the more you do for others, the more you produce, the more you make the lives of others better, the more you are taxed.  Does that sound like a good system?

Please contact me via vtsioriginal@yahoo.com or leave a comment.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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A Missed Chance to Change American Healthcare History

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Regular readers to the blog will remember the “Parable of the Pipeline,” which was created by Burke Hedges.  This is an excellent analogy to show how the rich become wealthy and why the “normal” person doesn’t.  (You can buy your own copy by clicking on the book cover below.)

To paraphrase:

Once in a town in Spain there were two brothers who were paid for each bucket of water they carried from the spring to the village.  They each worked hard and made a reasonable living.

One brother went out at night and had big meals and wine with friends, spending any money he had left after paying for his basic needs.  He saw a lot of money go through his hands with little to show for it, but he was not concerned because he was young and healthy.  Whenever he needed more money he simply worked harder, carrying more buckets.

The other brother also worked hard, but he spent his nights building a pipeline from the spring.  He spent any surplus money he had on materials for the pipeline.  While his brother was spending his money on fancy meals and good wine, he was eating a simple dinner he brought from home in the field.  While this brother was buying fancy clothes, he was content to buy durable, functional clothes that would last a long time.

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The first brother ridiculed the second brother, saying that he was wasting his time and not enjoying life.  He and the other men and women in town laughed at his simple clothes and pipe dream.  “We have always carried buckets from that well,” they would say.  “Our parents were bucket carriers, and their parents before them.  Quit wasting your time on this fancy.”

But the second brother continued to work on his pipeline each chance that he got.  Finally, he completed the pipeline all the way to town.  The second brother was now able to bring as much water to the village as he ever could in his youngest days simply by turning a valve.  If he also carried buckets, how could easily sell twice as many buckets as his brother could. 

When he was sick, his income did not decline.  He would travel and still have the same steady income.  He could now buy nicer clothes, using the income from his pipeline, and still have his whole salary to pay for his needs and materials.

Because he did not need to work as hard to provide for his needs, the second brother could now spend more time working on his pipelines.  Because he had even more surplus money, he could also hire others to help.  As time passed he used his wealth to build more pipelines, eventually becoming very wealthy.

As they grew older, the number of buckets each brother could carry each day decreased.  The first brother, no longer able to work, saw his income decline, making it tough to pay for necessities.    The second brother, however, was able to live comfortably on his income from the pipelines.

Note in this parable no one was cheated.  The second brother did not build his fortune by taking advantage of his workers – he paid them what they considered a fair wage for their efforts.  It is true that he worked harder for his income when carrying buckets than when he was using the pipeline he built, but he certainly worked very hard when building the pipelines and he delayed using the fruits of his labor in order to build them.  He was using his income in a smarter way than the first brother was using his – something the first brother could have done had he chosen to do so.

There is currently an assault on those who have built their pipelines and are now receiving the fruits of their efforts.  Jealousy and envy are being used as tools to divide.  So that people will not notice the political promises that have not been kept (because the economics made it impossible to do so), the blame is being placed on those who saved and invested.

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This nation is great because of those who have built the pipelines.  Henry Ford created a way that would allow average people to own an automobile and in doing so created the factory, employing thousands.  Sam Walton filled the need for a greater selection of products at prices the average person in rural communities could afford and in doing so raised the standard of living for thousands.

Even those who did not found multibillion dollar corporations, but who did save and invest so that they had a few million dollars by their 50’s benefit society.  They ensure that they will not be a burden on others as they age.  They also have the means to help individuals and organizations in their communities (as many do).

If we are all bucket carriers who spend every dime we will not be able to take care of ourselves in old age.  If we tear down all of the pipelines out of envy there will be less for everyone.  Less money, less taxes, fewer jobs, and fewer goods.

We will be like a lake full of frogs who find that the pond is dry.  As an old Texan once told me, when the pond runs dry, frogs eat frogs.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Picture Credits:  Kevin Abbott , downloaded from stock.xchng.

A Missed Chance to Change American Healthcare History

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I’m extremely disappointed that one of our Senators, Lamar Alexander (R-TN), went along with nine other Republicans and all of the Democrats and voted against the straight Affordable Care Act  repeal bill put forth in the Senate the other day.  The repeal would have been phased in over two years, giving plenty of time for people to shift to new health plans (that would become available once the markets were freed to sell insurance plans that people wanted, rather than those mandated by the government) and for Congress to pass free-market measures that would reduce the cost of healthcare such as mandated Health Savings Accounts, transparent pricing,  and portable health insurance, sold to individuals instead of through work.

When I wrote to Senator Alexander about the repeal of the ACA, he said that he would not vote for any bill that caused people to lose access to health insurance.  Yet Obamacare is imploding as we speak, and it is likely that many insurance markets will have no providers, so people will lose coverage.  Others will have only one or two providers, and those ones will charge so much that those who can’t afford standard health insurance won’t be able to afford the Obamacare plans anyway, so people are losing their health insurance even if Congress does nothing.  And even if people have insurance, that doesn’t mean they have access to healthcare through their insurance.  Many people right now need to pay thousands in premiums and thousands for their deductible even with the Obamacare plans, so they end up needing to spend $10,000 or more per year before their insurance covers anything.  How is this helping them?

And what about Senator Alexander’s other constituents?  How can he vote to protect a small subset of the people in Tennessee while forcing the majority to pay for their protection.  I strongly believe that individuals should voluntarily provide for those who they find in need due to circumstances.  Certainly we need to care for the 21-year old who gets brain cancer and needs expensive treatments.  We need to help the young single mother who has a child who need round-the-clock care.

But think about what we’re doing by enacting forced welfare.  We’re telling productive members of society that they must surrender a portion of their income to us to give to someone else, either through taxes or by forcing them to purchase subsidized health insurance on a sliding payment scale, or we will go to their homes and seize their property and/or throw them in jail.  We are taking people’s money by force and giving it to other people, some who truly have no other way, some who simply choose not to produce, and some  who are unable to take care of themselves because they always have made bad choices and continue to do so.

In many ways, forcing everyone to contribute to what is effectively a public healthcare system, which is poorly run, has an inferior product, and is way over-priced as all public systems are (see public schools for another example) is worse than simply having taxes and providing overpriced, poor quality benefits (see Medicaid) to those who qualify for them.  At least with just taxes people can take whatever money is left over and maybe get better healthcare than what is available in the public system.  By forcing people to buy into the public system (which is what you’re doing when the government fully controls the insurance offered and the prices that can be charged, even if private companies are providing the insurance), you take away that ability for all but the very wealthy to find better healthcare since they have no resources left with which to do so.  Note the similarity with public education, where because people are already paying for the public system through property taxes, only the very wealthy are able to afford private schools, even in places where the private schools are far superior.

But what about the people being helped by public welfare programs?  At least it is a good thing for them, right?  Maybe not.  Think about people in your family who could get a full-time job and take care of themselves, but choose not to.  This is different from a family member who loses a job and needs to move in for a couple of months or needs some help with the rent until they get back on their feet.  This is someone who always has an excuse about why they can’t work here or work there.  Often there is someone in your family who is an enabler – a very sweet person who pays for the food, apartment, and lifestyle of the non-working family member.  In doing so, the needy family member never gets a job or makes anything out of their life.

When we give through private charities, the charity is normally able to do a better job of figuring out who truly needs help and who would be better served with a kick in the pants.  Public programs often give money out blindly, and often even encourage individuals to not work or do anything or the hand-outs would decline.  Get a job, you see your housing allowance cut.  Have another child, see your food stamps payments increase.  If you’re religious, imagine needing to stand before God, having had two good arms, two good legs, and a good brain and having done nothing with the gifts He had given you.  If you’re not, just imagine spending your whole life and doing nothing of value.  How kind is it to encourage others to face that fate?

Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Fixing the US Health Payment System: Repeal and Remove

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Many say the US healthcare system is broken, but they are wrong.  To see a broken healthcare system, go places like Vietnam and see people dying on gurneys in hospital corridors, or even Great Britain  to see people waiting months for critical procedures.  See also cases like Charlie Gard, where the government of Great Britain is basically telling the parents that they must just watch their child die, forbidding them from going and get care elsewhere.  Because the waits are so long, “good” Canadian insurance includes a clause that allows for treatment in the US if the lines are too long in Canada.  In the US you can almost always get into see a doctor the same day or at least within a couple of days, which is not true in many countries.  Even if you don’t have the money required to pay for care, you can still get the care needed to preserve and even better your life through the emergency room.  You may get a bill, but the hospital will just write the cost off and pass it on to other patients who have insurance.  No one is dying in the streets for lack of care.
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The issue in the US is not healthcare, but the effects of health insurance and government programs on the healthcare markets.  Because most people get insurance through work, and because each insurance company has their own deals cut with providers, it is virtually impossible to figure out how much you will pay for a procedure ahead of time.  You might get the list price:  “Popping that pimple will cost $20,000 plus doctor’s fees, billed separately,” but the actual price you and the insurance will pay will be maybe 10-20% of the list price.  The trouble is that the person who goes in without insurance will need to fight to get a better rate, and that rate usually depends on how much the hospital thinks they can get out of them.  If you can pay $20,000, you’ll pay $20,000.  If you can only pay $200, you’ll pay $200.

Health insurance also distorts the cost of routine care at your doctor’s office.  They charge $120 for the visit and $500 for x-rays and screenings, but they know they’ll actually get $60 for the visit and $150 for the screenings from the insurance company.  If you knew you would be paying $60 for a visit and $150 for x-rays, you wouldn’t be willing to pay $1200 per month for health insurance – you would just pocket the $1200 and write the doctor’s office a check during the half dozen times your family went in during the year.  Put the rest of that $1200 away each month and you’d have the money needed for the times you did end up with a hospital stay or more serious issues.

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The issue is that you don’t know what things will cost and what you will pay because insurance has distorted the prices so much.  As a personal example, after a family member spent a couple of weeks in the hospital recently, we received a bill for $60,000.  Insurance reduced the amount down to $15,000, then we paid $3,000.    A $60,000 bill is scary.  A $15,000 bill is significant, but manageable with some savings and perhaps a payment plan, particularly if we weren’t paying $12,000 per year or so in health insurance.  Without insurance, however, we would have needed to fight the hospital to reduce the bill, and perhaps seen it cut to $20,000 to $30,000 after a significant back-and-forth since we don’t have the negotiating power the insurance company does.  If insurance did not exist at all, however, the hospital bill would have been $15,000 to start with since no one would go to a hospital charging $60,000 when another one across town was charging $15,000.  There would probably be a phone app that you could use from the waiting room to compare prices at local hospitals and you would transfer for a $45,000 savings.

The Affordable Care Act (Obamacare) has not brought healthcare to millions of people as some advertise.  Instead it has just amplified the issues caused by the insurance market by making all plans cover the same thing (everything) and forcing everyone to pay with insurance instead of paying out-of-pocket.  It has also added government subsidies, which have the effect of making health insurance cost “whatever you are able to pay” rather than being based on the value of what you receive in return.

In addition, while you may have insurance through Obamacare, it doesn’t mean you’ll actually get healthcare.  Customers are stuck with insurance policies that they cannot use since the deductibles are so high.  It doesn’t do anyone any good to have a policy with a $9,000 deductible since very few people would ever reach that level in a given year.  Even if they did, how many would have the $9,000 to pay?  They would be better off just saving the $4,000 to $8,000 they spent on the insurance policy and just paying for healthcare out-of-pocket.

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Even those who are now on Medicaid, which covers all of the costs, are having trouble getting care since the government is not reimbursing providers enough to make them want to treat Medicaid patients.  In California the free and reduced price clinics have gone away due to the ACA, but doctors are not accepting Medicaid patients.  One individual was quoted in a recent Wall Street Journal article who went to mexico for a critical gull bladder operation after waiting for months in the US for the surgery needed to save her life.

The actions needed to fix the US health payment system are actually quite simple and could be summarized as follows:

  1.  Repeal the ACA in its entirety.
  2.  Eliminate the tax deduction for companies that provide health insurance to their employees.  This would incentivize them to stop providing employer healthcare and just pay higher salaries instead.
  3.  Create a tax deduction for individuals who buy insurance.  This would further create the incentive for insurance to be something individuals buy instead of the norm to be to get health insurance through work.
  4.  Outlaw insurance with deductibles of less than $3000 per year for a family of four.  This would cause most people to pay for routine care out-of-pocket, which means they would be more sensitive to prices and shop around.
  5. Require that all doctors and hospitals publish their rates for procedures online and outlaw charging different people different rates.  Pricing transparency is critical to an effective, efficient market.  Prices would fall as people sought out the best deals for healthcare just as they do for everything else.
  6. Require that everyone put 10% of pay into an HSA.  This would ensure people had the money to pay for healthcare as needed instead of buying a bunch of other things and then not having money for the doctor.
  7.  Provide a direct tax credit for donations made to organizations like free clinics and hospitals.  This would provide a safety net for those between jobs or who were unable to work.  Individuals would be funding these causes directly instead of the money filtering through the government first.

Take these actions and the issue would virtually disappear.

Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Don’t Conserve – Use the Water You Need

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If you live in a desert with a very limited water source and there are a lot of people around, ignore what I am about to say.  If you live in a place where water falls from the sky regularly, let me be a Green heretic and go against the common wisdom by saying:

Use all of the water you need.

Doing so makes the most sense financially, and really sets us up to be able to provide for future needs.  Here’s why:
A utility needs to maintain a certain amount of equipment.  They also need to do functions like billing and customer service.  All of these things require a certain number of people.  Once you get past a certain threshold of water production, the number of people needed does not change that much if you increase the amount of water needed.  You still need a certain number of people to maintain the equipment, and usually you’ll just buy the same numbers of larger equipment if you need more production, rather than buy more pumps, motors, etc….  The larger equipment in fact will usually be more efficient, meaning the cost to produce each gallon will decline as the utility produces more water.

 

              

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The other factor is that most of the cost is people, not electricity or other resources.  Sure, you will use more electricity cleaning and pumping more water, but again the cost per gallon produced will probably decline as you use bigger, more efficient equipment.  Unless the number of customers changes dramatically, you’ll also still need to be paying the same number of people to send out bills, maintain equipment, and do other administrative tasks.   In fact with modern computer tools, things like billing cost about the same whether you have a million customers or two million.  Customer interaction things like the service desk are the only areas where more employees may be needed.  If you cut the use per customer, you’ll save a little on electricity, but you’ll still have all of the other costs.  Since the utility will be producing fewer gallons, yet their costs will stay about the same, you’ll end up paying more for less water.

So lets say that you decide to turn off the water while you soap up in the shower, then just turn the water on briefly to quickly wash off, cutting your shower water usage from 20 gallons per shower to three gallons.  You might be able to cut your water bill by doing this.  But let’s now say that everyone in the town does so, such that the utility now sells 5 million gallons of water each year instead of 10 million.  They still have the same equipment, which they’re probably paying off on a 30-year bond or something.  They also still have the same number of customers, meaning they will still need to send out the same number of phone calls and send out the same number of bills.  They also have the same number of homes to supply, meaning they’ll need to do the same number of repairs and upgrades.  They might even discover that sewer line repairs will become more frequent since there will be less water mixed in with the sludge, causing pipes to clog.  The result will be that you’ll end up paying the same amount each month for your water bill as you were when you took a regular shower, yet you’ll have a miserable shower in the morning instead of a pleasant one.

 

 


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Utilities are also loath to cut employees, so they probably won’t slash staff even if they didn’t need as many people.  They’ll also still need to pay off the equipment they bought when there was more demand, so they’ll still need the same amount of money to operate.  They have no competitors so it isn’t like customers will transfer somewhere else if prices are raised, and the regulators aren’t likely to demand that they cut staff or swallow the costs of equipment they purchased when there was more demand, so the utilities can just say they need to raise prices due to cuts in usage and they’ll be able to do so.  You use half of the water, but your bill stays the same since the price per gallon doubles.

So instead of conserving and saving, use what you need.  This doesn’t mean that you should be wasteful with water.  Don’t leave a hose on, running water down the street all day for no reason.  Don’t leave the shower running through the night while you sleep.  It just means to use what you need to live a comfortable life so that the utility will set themselves up to produce that much water.

 


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But what about the power usage?  Shouldn’t we save the energy needed to make water?  The free markets have a great way of figuring out ways to meet needs.  If everyone cuts back to nothing, such that the amount of power we produce is easily made using existing technologies and infrastructure, we’ll never see improvements.  We want people to be building the infrastructure and developing the technologies we need to supply the power needed int he future.  If we use the amount we need (again, not being wasteful), we’ll see people come forward to build the needed infrastructure and make power more efficiently and with resources we don’t currently use extensively like biomass, solar, and wind.  So we can either conserve and be miserable, never providing entrepreneurs and industrialists with the incentive to improve things, eventually needing to cut back even further as populations expand, or we can use what we need and provide the funding and incentive to make cold fusion or cars that run on water.  I say use what you need.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

A Bad Idea from Amazon

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Amazon’s Socialist bent is showing with their announcement this week that those on EBT cards will be able to get Amazon Prime at half of the cost per month that they charge regular customers.   Their thinking is probably that they can get some people who don’t subscribe now to sign up and maybe help those in need get access to television shows and movies, as well as free shipping for head phones and iPhone accessories.  But you need to wonder what effect this will have on their regular customers who now will be charged twice as much as others who are already receiving money for food, housing, cell phones, and other things, especially when that money is coming from taxes those paying regular price for Amazon Prime are paying.  If I had an Amazon Prime account, I’d cancel immediately, or at least demand the discount.
If Amazon is unsuccessful in luring many EBT customers, which would be a good thing since if you can’t even manage to feed your family, you probably don’t need to be buying things on Amazon, this hopefully would just go down as another bad marketing idea.  If they are successful, however, and don’t see a big backlash from their regular customers, that would be a really bad thing for Capitalism and the standard of living in America in general.  Imagine if others then followed suit, charging customers based upon their income instead of the  value of the goods and services they were receiving.  One person would pay a dollar a gallon for gas, where the next person would need to pay ten.  The same would go for milk, and food in restaurants, and cars, and so on.

              

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As always happens when you start a Socialist program, the first thing that will happen as Amazon starts this program and it attracts a lot of people is that prices for regular users will go up.  Imagine if a lot of people start paying less than the cost of shipping and providing the TV shows – Amazon would need to raise the price of the standard service to make up the difference.  As prices rise, there will be fewer people paying full price as they dropped out of the program, which will make the price go up even more.  This will cause even more people to drop the service.

For an example of this, look at the cost of college.  As more and more students get a break from tuition, the cost for everyone else goes up faster than inflation.  This results in fewer people paying the full rate, until now it might cost $40,000 in tuition alone to send your child to a four-year instate college if you don’t get some sort of discount.  This then provides an incentive for people to not do well economically since doing to leads to you paying more for the same goods and services.

 


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And this is where programs such as the one by Amazon will hurt the standard of living in America.  If you incentivize people to not work and not produce, there is less to go around.  This leads to scarcities and high prices.  You want everyone at least doing something to contribute to society. Right now we have it pretty good with lots of choices and easy access to low-cost goods through places like Amazon.  That may not be the case if Amazon changes the way prices are set in America through their actions.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

A Tax System for a Productive Society

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As President Trump rolled out his tax plan, one area that corresponds with his campaign promises is a cut in the corporate tax rate.  During the campaigns he said he would cut it to 15%, maybe 20%.  Now it appears that he is eyeing a cut to 15% from the existing rate of 35%.  This has caused some to declare that the rich corporations are getting richer at the expense of the poor.  Yet really, since businesses just pass through costs to consumers, and a tax is just a cost, who is really paying the corporate income tax?

The cuts on the individual side in the Trump plan are a bit less exciting.  Many rates would stay about the same, except there would be a virtual exemption for the first $24,000 of income.  The top rate would only fall from 39.5% down to 35%.  Still, we’re hearing the usual calls from progressives of how the rich are getting a big tax break while the poor and middle class get nothing.

Really, though, what is the purpose of taxes?

The purpose of taxes is to raise the money needed for government functions.  But oddly, some people seem to feel that taxes are to be a punishment for those who make “too much money.”  Originally it was probably just the idea that those who make more would be able to pay a greater portion of costs, kind of like when your parents pay when you go out to eat while you’re in college or just starting a first job.  Or maybe it’s more the thought that those who don’t make much won’t be able to pay much if anything in taxes.  That idea morphed into the idea that those who had more burdens, like children to raise, health expenses to cover, and a bigger mortgage payment, should be given a break since they have less money available to pay taxes.  Somehow along the way it became virtuous to have obligations and make little money and evil to have few obligations and make more money.

              

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Now the thinking goes:

1.  If you make little money or no money, you should not pay taxes and maybe even get money from the tax system.  You should also get a lot of services even though you have paid nothing for them.

2.  If you make more money, you should pay more in taxes and pay at a higher rate.

3.  If you make a whole lot of money, you should pay really high rates.  Maybe above a certain amount you should just have it all confiscated.  (After all, who needs that much money?)  Not only that, but you should also not get to deduct your obligations, and you should not get to partake in many of the services provided by your tax dollars, at least without paying again.

As an example of denying those who make above a certain amount access to services, both Bernie Sanders and Hillary Clinton favored providing free college, but only to those making less than $125,000 per year.  The wealthy would be paying most of the taxes, providing the money to pay for those colleges, yet their children would not even get to go to those colleges without paying again.  After all, why should some son of a billionaire get to go to college for “free” just because his parents paid for it?

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Note that nowhere in the calculus is the amount of effort an individual puts out included.  If someone does nothing all day and therefore makes no money, he is still rewarded.  If someone works 100 hour weeks to make $150,000 per year, he is punished.

Effort is punished.   Resting is rewarded.

But what do we want people to do in a society if we want a wealthy society with lots of wealth to go around?

We want people to do things.

We want them to grow crops so that there is food to eat.  We want them to build houses so that there are places to live.  We want jobs, so we want people to start companies and grow them to the point that there are lots of jobs.  We want lots of managers and supervisors, since those are higher paying jobs, so we want big companies.  In general we want almost everyone working, using their time to make things, so that there are more things to go around.

But think about the tax system described that rewards you for doing little or nothing, but penalizes you for doing a lot.  If you lay around on the couch, you get free stuff and money.  You pay no taxes.  You are considered noble.

If you spend a lot of time working and creating things, you are considered less noble.  You are made to pay more.  You get less free stuff.

If you start a big company and employ a lot of people, you are evil.  You are made to pay a lot as punishment for your sin of making a big company that employs a lot of people.  You get no free stuff, even though you are providing the money that is providing that free stuff.

The current system encourages people to do little or nothing.

You would not want to do too much, or you would be punished.  You get to keep all of the dollars you make between $0 and $20,000, but only 85 cents on the dollar between $20,000 and maybe $80,000.  You also don’t get as much free stuff as you make more money.  Over a certain level, you only get to keep 60 cents for each dollar you make.  If we go back to where we were in the 1950’s before President Kennedy started reducing the top tax rates, at a certain point you would only get to keep ten cents for every dollar you make.   This system does not encourage people to produce and do the things.


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This system does not encourage people to be productive, which is what you want to have a wealthy society with lots to go around.

So what would a system that encourages people to produce, and make jobs, and build big businesses with lots of high paying jobs look like?  Well, it would not penalize people for being productive.  You would not get to keep a smaller portion of each dollar you make as you cross certain income thresholds.  This sounds like something like the flat tax or the Fair Tax,  In fact, maybe there would be an incentive to make at least some minimal amount – to produce at least something – so that everyone would at least spend some of their time working to produce something.  Maybe a flat tax where receiving any sort of aid required that you have some minimum income level (based on your physical and mental capability to make an income), or a Fair Tax where you get the prebate if you earn a certain amount of income each year.  (Go to Fairtax.org for information on the Fair Tax.

So, while progressives may push back against lowering corporate income taxes and lowering the upper tax rates, realize that doing so brings you closer to a tax system that provides what you want in a society:

  1. Lots being produced.
  2. Lots to go around,
  3. Lots of jobs.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

How to Never Need to Keep Tax Records Again

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So today is tax day in America yet again.  Sometime in the last few months you probably had to gather your receipts, W-2 forms, and 1099’s.  You had to buy some tax software or set up a meeting with an accountant.  Either way, you were out at least $100 because the forms are too complicated to someone to just fill out.  You then spent several hours away from your family filling in information.  You probably also had to call various places for receipts, send money or letters of authorization to transfer money into IRAs and HSAs before the deadline.  You then needed to go to the post office and stand in line to send in your forms, or sent them in electronically despite warnings from the IRS that many tax returns are being stolen each year when filed electronically and the information used for identity theft.  You do all this because the law says you need to in order to pay your taxes.

If you’re like most people, you probably also got a big refund check back.  You may look forward to receiving that check, and maybe you use it to pay down a credit card bill or just blow it on something, but realize that is your money that the government had all year-long without paying you a dime of interest.  Maybe you paid credit card interest all year because Uncle Sam was holding onto that money.  At 15% per year, that’s $600 per year you are losing if your refund is $4,000.  Even at $2000 per year, that’s $300 you are losing.


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There is a better way and it’s called the Fair Tax.    With the Fair Tax you would receive your entire paycheck each month with no deductions taken out so your paycheck would be at least 20% bigger.  You wouldn’t pay a dime in taxes until you bought a new item, at which point you would pay a sales tax.  That would be the end of your obligation as far as taxes went.  You wouldn’t need to save any receipts.  You wouldn’t need to file anything.  You would pay at the cash register and then go on with your life.

One argument against a sales tax is that it is regressive since people who make less spend a higher percentage of their income.  This is also addressed in the Fair Tax with a prefund.  Each year (or each month) everyone who works would get a deposit in their accounts from the government to cover a portion of the sales tax they pay.  For example, if the Fair Tax is 20% and you wanted to make sure no one who made less that $30,000 paid anything in taxes, you would issue a prefund of $600 per year to everyone.  Then the prefund would cover the taxes on the first $30,000 you spent.  Only those spending more than $30,000 per year would then be paying taxes.  You could set the prefund as high or as low as you wished depending on how much you needed to collect in taxes and at what income threshold you wished people to start paying taxes.


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Another argument is that people don’t want to be paying a 20% sales tax (an estimate for the sales tax that would be needed to raise the same amount of money as is currently raised through the payroll taxes and income tax).  Realize first of all that you are already paying 12% or more of your income out before you get your check.  Including the employer match for Social Security and Medicare, you are paying around 20%.  This is not just on the money you spend, but also on the money you save.  It is also expected that because retailers will no longer need to spend as much money on tax planning, and because they would no longer pay income tax on their earnings, that prices would fall, perhaps by enough to cover most, if not all, of the sales tax.  It is very likely that the government will be raising the same amount in taxes while you are paying a lower percentage of your (increased) income in taxes.

If this sounds great to you, go to www.fairtax.org. learn more, and learn how you can help get the Fair Tax passed.  Let’s have 2016 be the last year you need to spend time away from your family filling out forms.

What do you think?  Don’t like the Fair Tax?  Why not?  What do you think is the best way to collect taxes? Please leave a comment.


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To ask a question, email vtsioriginal@yahoo.com or leave the question in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Why Don’t We Have the Fair Tax Yet? A Late Night Rant.

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IMG_0123About three years ago I published Ten Reasons that you should like the Fair Tax.   I gave ten great reasons that we should enact the Fair Tax – yesterday.  Things like not needing to keep records in case the IRS calls and asks.  Not needing to deal with the IRS at all.  Not needing to spend any time filling out forms.  Not needing to have special tax-sheltered accounts for anything.

How simple is this:  You walk into a store, buy something, and pay your Fair Tax when you pay your bill.  About 20% is added on to your purchase (assuming we stay with the same amount of government revenue).  This is compared with having 15% of your full income taken before you get it, plus another 12.4% for Social Security and 6% or whatever it is for Medicare.  If you spend all of your income, you pay 20% for the Fair Tax or about 30% with the income tax and payroll taxes.  If you spend less than your income and actually save, you pay even less with the Fair Tax.

The income tax punishes earning money.  The Fair Tax punishes spending money.

And it even gets better.  Because the company you’re buying stuff from doesn’t need to do fancy maneuvers to avoid taxes, like have a corporate headquarters in Barbatos, the price you pay for the things you’re buying are 10% less.  So you end up paying less than you pay now with the income tax.

So why don’t we have it yet?  Do you like keeping receipts?  Do you like funneling your child care money through a flexible spending account, and then risk losing it at the end of the year if you don’t spend it all?  Perhaps you like a check that is 25-50% smaller than it would be with the Fair Tax.

Maybe you’re worried that it doesn’t zap the evil rich guy enough and punish him for employing all of those people and making all of those products you use every day.  But then you forget about the prebate – money that comes to you to cover taxes up to a certain income level.  If you’re making $30,000 per year, you would still not be paying any taxes.  That evil high earning guy would be paying it all.  Ha ha haaaa….

So come on, what gives?  Why haven’t you called, emailed, and shown up on your Congressman’s door, demanding the Fair Tax?

Do you just like your accountant too much?  Do you like buying TurboTax every year?  ( Their ads talking about  your taxes being the story of your life do make it sound kind of exciting to spend an afternoon with your W2 forms and receipts.)

Tell me, please.  I’d like to know.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

The Cost of Obamacare

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OLYMPUS DIGITAL CAMERAI was talking to a gentleman today who works part-time as a professor at a local community college.  He also spends part-time running a local non-profit.  His experience shows why the recovery from the 2008 recession has been so slow.

When the Affordable Care Act, a.k.a. Obamacare, was forced through Congress by the thinnest of margins, one issue pointed out was that it discouraged employment.  This is because the law requires a company provide healthcare to employees who work for more than 30 hours per week.  It also requires employers with greater than 50 employees to offer health insurance.  This creates a digital change in the cost per employee.  If you give someone a few extra hours per week, your cost for that employee may jump by $8,000 per year or more.  Even worse, if you add another employee to the payrolls and pass the 50 person threshold, your cost may just by $8,000 per employee per year, or $400,000 for a 50 person company.  This is a recipe to reduce hours and keep companies from creating jobs.

While the intentions of the law were good – get everybody health insurance – the way it penalizes businesses who go above a certain threshold is a bad idea.  It has caused businesses to cut people’s hours to stay below the threshold.  Likewise, it has caused businesses to not expand and hire more people because they can’t pay for the huge cost of adding healthcare for all of their employees.

The gentleman I was speaking to saw his hours cut at the college because they could not afford to pay for health insurance for him and others like him who were not full-time professors.  For the individual, this means that not only do they not have health insurance, but they also have less money in general to pay for things like healthcare, food, and housing.  This makes people drop out of the workforce entirely so that they can get Medicaid.  Otherwise, they may need to work a few part-time jobs because they cannot get a single full-time job.

So is there an answer to healthcare?  I think that there is a solution that will work for most people, and for the number remaining it would be easy to take care of them.  It involves going back to the way healthcare was paid for before health insurance was offered through work, but adding a measure of personal responsibility.  It involves the following:

  1.  Everyone who is working is required to put 10% of their salary away into a health savings account for their immediate family.  This account is disconnected from their job – it is money sitting there waiting for them when they need it whether they are working at the time or not.  Lower income workers would receive a subsidy to boost their contributions.
  2. Parents are required to put away $500 per child per year into a health savings account for their children from the time their children are born until they turn 18.  That means the child will have a starter HSA of $9,000 when they leave the house.  Parents can contribute more if needed.  Poorer parents would get a subsidy.
  3. Individuals would be required to purchase major medical insurance.  They could choose policies that pay for bills that exceed certain thresholds, such as $5,000, $10,000, or $20,000.  Choosing a higher threshold would require enough money be saved in the HSA to cover the deductible.  Higher thresholds would charge lower premiums, encouraging individuals to keep the balance in their HSAs high to reduce their major medical insurance bills.  These policies would cover all medical costs after the individual met the threshold and would continue to pay for that condition.
  4. Doctors would be required to post their rates for procedures so that individuals could determine the price of services and compare among providers.  Doctors could also have flat rates per year and sell healthcare plans.

The reason that this plan would work is that most individuals would have the money needed to pay for care when needed, meaning that people wouldn’t be hit with outrageous bills that are the result of many people not paying their bills.  Because the bills would be more reasonable, more people would be able to just pay their bills.  The major medical insurance means that most people would also be able to pay for the rare, high cost events like major surgeries and accidents.

This would also disconnect health insurance from employment, resulting in increased employment, increasing the amount of goods and services produces, leaving people better able to take care of themselves. and improving the economy.  This in turn would further lower healthcare costs since it would increase the percentage of people who could pay their medical bills.  Soon, the ability to pay for healthcare costs would be as common as the ability to pay for food and most people would be paying their costs out-of-pocket, saving their HSAs for the rare major expense..

Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.