How to Fund Everything without Filling Out Tax Forms


A while back, probably right after I’d finished filling out my income tax forms for 2010, I made a post about a tax idea called the Fair Tax.  The beauty of the Fair Tax is that it would eliminate all of the hassles involved in paying taxes.  Income taxes, Social Security, and other Federal taxes would be replaced by a single sales tax on goods and services when purchased (a national sales tax).  Because taxes would be figured out and charged automatically when you purchased something, you would no longer need to keep track of expenses, have tax-deferred accounts, set up medical savings accounts, 401ks, IRAs, etc… and go through other hassles.

You would simply receive your whole paycheck each month and then spend or save as you choose.  One benefit beyond the simplification of tax compliance is that saving would be rewarded while spending would be penalized.  The current system encourages spending and borrowing, through tax breaks for things like business expenses and the mortgage deduction, and penalizes earning.  This means that under the current system there is a disincentive to grow businesses or work harder because more of your income is taken the more you earn.

The Fair Tax is prevented from being regressive, or level in any case, through the use of a prebate.  In the prebate, a certain amount is refunded to each person each year at the beginning of the year.  For example, if the sales tax is 10%, and $3000 were prefunded to everyone each year, then no one earning less than $30,000 would pay any taxes that year ($30,000*10% = $3000), even if they spent their entire paycheck on taxable goods and services.

One issue with implementing the Fair Tax is the radical change to the tax system.  We have spent so many years having taxes taken from our paychecks and doing things to reduce income taxes that it would be a big shock to the system to see it changed overnight.  Imagine the shock of going to buy a new car and seeing a 20% tax added to the top of it!  Never mind that you have 20% more cash in you pockets – you still see that big tax on the car.  You were paying that big tax before, but it was taken in small increments so you did not see it all at once.  There is a way, however, to implement the tax in a way that will be a smaller shock on the system.

(Never read The Millionaire Next Door?  It is a must for anyone wanting to actually become a millionaire.)

Currently about 50% of people pay no income tax at all.  In fact, many get cash given to them by the tax system since they receive a refund through the Earned Income Tax Credit.  This means that implementing the Fair Tax to replace the tax payments of the lower 50% of earners would not require a large sales tax since the amount of revenue collected from them is mainly Social Security and Medicare, which aren’t large amounts of money.  Also, implementing the Fair Tax would enable taxes to be collected from those who currently don’t pay taxes – those who get paid under the table and/or have illegal sources of income (drug sales, prostitution, illegal labor) – since they would also be charged the sales tax when they spent the ill-gotten money.

If the Fair Tax were implemented only on people making $60,000 per year or less say, it would only be necessary to have a sales tax of about 5% or less.  This means that everyone would see a prefund each year of $2000 (5% x $40,000) and see their sales taxes increase by about 5%, assuming that it is desirable to continue to see 50% of the people pay no income taxes.

After a few years of seeing those at the low-income levels not need to file taxes and also seeing how the system worked, those in the middle and upper-middle classes would probably want to join the system.  The threshold for the Fair tax could be then be ratcheted upwards as political winds allowed.  The prefund would need to be ratcheted upwards as well since the level of the sales tax would need to increase as the income level of the Fair Tax threshold increased.  This is because in order to generate the same level of revenues the sales tax percentage would need to increase since those at the higher income levels are paying a larger portion of the taxes.  If the Fair Tax were ever to fully replace the income tax, including for those in the top 1% of earners, the rate would be about 23%.  It is thought, however, that the drop in the expenses paid by businesses for tax compliance and tax avoidance would allow them to charge less for the goods and services; therefore, the actual price of the goods might stay about the same.

If you like this idea, please tell a friend – let’s get rid of the IRS!

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 Live Like a Millionaire


Many would love to live the millionaire lifestyle.  Spending each day at the beach, on the golf course, or in exotic resorts around the world.  Each night would be parties and galas.  Perhaps a random trip to the office to check on things and grab some cash from the safe.

Sadly, that is not the normal lifestyle of the typical millionaire.  As chronicled in The Millionaire Next Door, the flashy lifestyles seen are those of people who have a large income, but probably would be on the streets within six months of losing that income.  Most millionaires work a lot harder than most other people.  They forego a flashy lifestyle, instead saving religiously and judiciously buying things that will increase in value rather than drop.

(Never read The Millionaire Next Door?  It is a must for anyone wanting to actually become a millionaire.)

Millionaires could afford to buy new cars every few years, but they choose not to because they know they are a wasting asset.  Likewise they could buy big, flashy mansions in new subdivisions, but instead they chose to buy modest houses in older neighborhoods since they cost less to maintain and the rate of appreciation for the neighborhood can be judged from its history.  Whenever they make a big purchase, it is something that will grow in value such as fine furniture, works of art, or properties.  They minimize the amount of money they put into things that go down in value (such as cars).Millionaires also tend to own their own businesses.  It is much easier to become wealthy when doing something that allows each of your hours spent at work to be multiplied.  For example, if you work for someone, you may get paid $30 per hour.  You can earn more by working more hours, but you still only get $30 per hour.   If you work for yourself and use the time to design and market a product, you can get paid each time someone then buys the product.  If you write a novel, you get paid each time someone buys a copy of the novel.  If you own a movie theater, you get paid more if more customers attend the movies and buy popcorn.

Having people working for you also multiplies your time since for each hour you spend supervising, several other people are working to increase the money your business earns.  If you hire effective people and manage well (eventually hiring other effective managers), the more people who work for you the more money you can make for each hour of your time.  Note that even doctors and lawyers don’t make a lot of money because of their salaries.  They make a lot of money because most of them own a practice or are partners in a law firm with people working under them.   They are business owners.

      

So, if you wish to become a millionaire, here are some tips:

1) Spend less than you make, and religiously put money away into assets – things that grow in value and eventually provide an income.  Note that investing in your own business can be an asset.

2) Start your own business, or find something to do that multiplies the value of your time.  This is a tough step for many to take and requires a certain type of personality, but it definitely makes becoming rich a lot easier.

3) Cut down on expenses and payments as much as possible – it is easier to invest and save if you do not have every dollar spoken for before you earn it.

4) Live below your means.  Have a smaller house, older cars, and take less exotic vacations than your level of wealth and income will allow.

5) Make smart purchasing choices.  Bring in drinks from home rather than hitting the vending machine every day.  Bring a lunch in rather than eating out all the time.   When you do eat out, have a water and save $2.50 plus taxes per meal.

(Save money by bringing your own water bottle and skipping the vending machines. Shown: CamelBak Eddy Water Bottle, 0.75-Liter, Cardinal.)

6) Plan your success.  Don’t simply hope your investments will grow.  Make a budget, plan how much you will invest each month, then stick to that plan.  Good luck generally comes to those who have set themselves up for success.

7) Work hard.  Whether you own your own business or work for someone else, you can plan on working harder than most other people if you want to become wealthy.  Additional money earned generally is available for investments since other expenses have been taken care of.

8.) Hire people to perform tasks you are not skilled at doing.  Most millionaires would not work on their own cars, repair their own sinks, or cut their own grass unless it was a leisure activity for them.   Millionaires would rather spend the time doing what they do best or with their families than doing tasks that they can hire someone to do who will do a better, faster job.  If you will take 8 hours to fix a sink and could make $400 in those eight hours at work, it makes sense to hire a plumber at $150 and instead work the extra hours.  Even if it only takes him 1 hour because of his experience and tools, you come out ahead.

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.

What’s Wrong with the Healthcare Market?


I was thinking the other day about the American healthcare system and why it doesn’t seem to function like the other markets.  I mean, there is really no issue with getting food – it is cheap and plentiful.  Sure, people who make a lot of money are able to buy better quality food, or at least food that costs a lot of money in fancy restaurants, but anyone who is willing to work a little can get enough to feed their families, even if it is very little steak and a lot of ground beef and chicken.  Clothing is also not an issue – you can pay $5,000 for a dress, but anyone who works can get can cloth themselves and their family.

The healthcare markets, however, are different.  The cost of things can be very high, such that even someone who makes a good, middle class income can be bankrupted by a hospital stay.  There are some ways to save money, but in general the premium price is almost always charged, particularly when things are urgent.  Why is it the free enterprise works great for food and clothing – necessities of life – but not healthcare?

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Then I started thinking about it a bit and realized that healthcare is not operating under the free enterprise system like food, clothing, shelter, and virtually everything else.  Healthcare is different for these reasons:

  1.  Most people pay for buffet plans, then use as much as they want without concern for costs.
  2. Most services are provided without the consumer or the provider knowing what the price will be.
  3. The final price is decided after the product is consumed, and often the consumer and the person/entity that pays is different.
  4. Many people receive services and pay nothing.

Think about what it would be like if you went into a restaurant that had the same policies.  You can already see what happens when you pay a fixed amount for unlimited food since there are buffet restaurants.  People eat a lot more than they would if they were paying per item, and also tend to concentrate on the more expensive items.  Very quickly the buffet restaurants learn how much they need to charge and earn a profit, and that tends to be a reasonable amount since there is only so much people can eat.  But in the medical system prescriptions, devices, and services can be really pricey, so if people just keep consuming a little bit more it drives up costs, which is why premiums seem to rise every year.

 

                 

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Think now what the effects of the second and third items – having services provided without knowing the cost and not even deciding on the final price until the product was consumed  – would be in the restaurant industry.  What if you walked into a restaurant and sat down and there were no prices on the menu.  You ask the waiter about the price of a steak and he says that he’s not sure since it would depend on your insurance.  You tell him you don’t have restaurant insurance and ask him what you would pay.  He says he’s not sure since everyone pays with insurance.  He might be able to tell you the list price was $500, but says you’d probably pay a lot less.  You then go ahead and order meals for you and your family, sweating the whole time because you’re not sure what the meal was going to cost you.

At the end of the meal, the waiter comes out with the check – $3,455.  You look through the bill and see that rolls were $30 each!  You know you could have bought a whole pack of rolls across the street for $5.  You say that there must be some sort of mistake.  The waiter refers you to a manager who says that they could work out a payment plan.  He also says that he’d be willing to cut $1,500  off of the bill.  You’ve already consumed the food, so you can’t just say “No thanks!” and walk out the door.

Would you go to a restaurant like this?  Maybe you would if you had a meal plan where you paid a fixed amount for food at the restaurant, but what if the price of that meal plan just went up every year until you were paying $5,000 per year for the plan?  Would you be tempted to go to the restaurant more often?  Would you get more food than you really needed, and insist on only the best food while you were there?


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And what if while you were at the restaurant, you saw the family next to you just walk out without paying a bill?  They got the same food and the same service, but paid nothing.   You ask the manager why they didn’t pay and he explains that they didn’t have any money to pay, so they just eat for free as part of the restaurant’s benevolence.  Of course, you realize that the restaurant doesn’t have any source of money except for people like you who eat there and pay their bills, so you’re really paying for the bill of the family that eats free.  Going to the lot you notice that they are stepping into a brand new Cadillac.  You are getting into an old Honda because you want to save up some of your money to pay for things like food and can’t do that with a big car payment.

Obviously this is not the way that restaurants work.  The prices are clearly printed on the menu in almost every restaurant and there is no negotiation.  While you do not pay until after you’ve eaten, you have a good idea of what your bill will be and you choose restaurants based on what is in your wallet since you know that you’ll need to pay the bill after the meal or they’ll call the police.  No one eats without paying, so the price fo your food is only based on what you eat.  You’re not paying for other people.  As a result, prices are reasonable and there is a wide variety in choices of restaurants.  If eating at fancy places is your thing, you can put your money towards that and cut in other areas.  If it is not, you don’t need to pay the same price as others who like fancy places when you do go out since you can pick a cheaper place.  With medical care, especially when it is an emergency, there is little choice.  Plus if you’re on insurance because you’re worried about a big bill, you end up paying premium prices whether you use your medical care often or not.

 


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So how do we fix the healthcare system in the US?  Well, we start having people save up money for medical costs so people can pay for their own care for one.  We make prices transparent for another and have consumers pay the bill and get reimbursed by insurance rather than having fifty different deals cut with insurance companies and having the consumer have no idea what things costs.  We also get medical costs out there where people can see them rather than have everything so hidden.  Maybe there is a tech entrepreneur out there who can take that last idea and run with it.  Think about an app that tells you what the price of procedures are across your city and what that would do to medical care prices.

So what do you think?   Please join the conversation and leave a comment.  Contact me at VTSIoriginal@yahoo.com.

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.

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