Recently in Money Category

A Case For Building Wealth

By
Rob Safuto
on October 26, 2008 12:40 PM | | Comments (0)
The United States has a progressive Federal tax system. The more money you make, the more taxes you pay as the image below illustrates.

Tax Rates
You can see that the bottom rate is 10% and the top rate is currently 35%. The long and short of this system is that people are punished for their success. In my post titled fairness and taxes I give a simple example of the difference in tax liabilities between a couple earning $50,000 and a couple earning $250,000. That comparison speaks for itself.

Some people believe that with every additional dollar that a person earns that there is an incremental responsibility to support the rest of society. There are people who have little and those who have more should sacrifice what they don't need to help others. That's one argument for a progressive tax structure and the same argument for ever higher taxes on people earning $xxx,xxx (fill in the number that feels good to you) per year. I've got a few arguments against that approach.

Freedom

There's a thing we call freedom in the United States. And financial wealth building is supposed to be one of the benefits of a free society. If someone earns an honest living, plays fair, and doesn't break the law, they are entitled to build wealth. Most people aren't misers racking up cash for me, me, me! Most people have families in multiple generations that they may need to care for. Most people have other needs (and dare I say wants) that the tax policies don't account for. So when money is lifted directly from a person's paycheck there's a certain tyranny in having to wonder if you may or may not get a small pittance of it back from the government someday.

Efficiency 

The government does nothing in an efficient manner. Most people assume that $1 taxed that is earmarked with a social program will end up in $1 going to a social program. Ha! If you believe that then you need to grow up a bit. Our money gets filtered through a massive bureaucracy that probably burns at least 70% before something comes out on the other side. So if you're of a redistribute wealth (aka socialist) mindset when it comes to taxes then just know that you're encouragingwaste and helping a lot fewer people than you think you are.

Continue reading A Case For Building Wealth.

Fairness and Taxes

By
Rob Safuto
on October 15, 2008 8:35 AM | | Comments (2)

There's a lot of talk during this election cycle about fairness and taxes. John McCain says that everyone should pay a little less. Barack Obama says that people who make $250,000 per year and up should pay more.

The interesting thing that rarely gets spoken about is the fact that the United States has a progressive tax system. Taxes aren't based on a fixed percentage of income but on a scale that gets progressively higher as income increases.

There are currently five Federal income tax brackets in the system: 10%, 15%, 25%, 28%, 33% and 35%. A married couple earning $50,000 per year are in the 15% bracket and a married couple earning $250,000 per year falls into the 33% bracket. At first glance you might think that this is unfair because it appears that a family earning five times the income only pays a little more than double the taxes. Let's do the math and see if that is true.

Married Couple Earning $50,000

Earnings   Rate  Taxes
$16050       0.10   $1605
$33950       0.15   $5092.5
$50000                $6697.5

Married Couple Earning $250,000

Earnings   Rate  Taxes
$16050       0.10   $1605
$49050       0.15   $7357.5
$66350       0.25   $16587.5
$68850       0.28   $19278
$49700       0.33   $16401
$250000              $61229

* Based on the brackets detailed here.

The numbers here don't lie. The couple earning $250,000 has a Federal tax liability that is nine times the Federal tax liability of the couple earning $50,000 per year, not the two to three times that many people assume.

Actual tax paid will vary based on deductions. But it is an undeniable fact the taxpayers who Barack Obama says should pay more, in the interest of fairness and spreading the wealth, already incur a very large percentage of the tax liability in the United States. If we still think thay they should pay more then the following question needs to be asked. How much is enough?

It's The Debt Stupid

By
Rob Safuto
on September 22, 2008 5:42 PM | | Comments (0)
"In the sudden rush to blame the crooks in DC and on Wall Street, we should first take a long look in the mirror."
- Victor Davis Hanson

While Congress ponders a $700 billion bailout of financial firms I can't help but think that things could have been different today. I have long believed that America is too much in love with the concept of debt as a tool to build wealth. Today the chickens created by those beliefs are coming home to roost.

About 18 months ago I lamented America's lust for debt on another blog with a post titled, Where There Are Long Term Loans There Are Problems. I completed that post with the following statement.

"Here's the bottom line. Everyone makes choices. Sometimes we make bad choices. You can't always blame the companies that make the risky loans available. And you can't always curse the system. But somewhere there needs to be the intersection of personal responsibility and corporate consciousness that makes sense. Given the financial situation that many people are in today I have to say that we're not there yet."

The situation we're in today is a result of many aforementioned bad choices at all levels. Many citizens have accumulated too much debt, relying on risky and expensive financial products to pay for things that they can't afford. Small business owners have long been in the habit of racking up debt as a way to artificially grow their businesses. Ironically the thing that most small business owners think helped them grow, also helped them to fail as well.

Corporations have faltered as well. The financial companies that we see failing today are where they are because they bought debt with debt. Only the corporations either didn't know what they were buying or knew but simply bought more than they could afford. This turns into a vicious cycle because as the debt they bought goes bad, the people who lent the corporations money to buy the debt in turn want their money. It's a real house of cards.

Let's not leave the government out of the fools party either. The government sponsored enablers of this mess are called Freddie Mac and Fannie Mae. Bloomberg columnist Kevin Hassett weighs in with a very simple opinion that gets right to the point.

"Fannie and Freddie did this by becoming a key enabler of the mortgage crisis. They fueled Wall Street's efforts to securitize subprime loans by becoming the primary customer of all AAA-rated subprime-mortgage pools. In addition, they held an enormous portfolio of mortgages themselves."

"The problem was that the trillions of dollars in play were only low-risk investments if real estate prices continued to rise. Once they began to fall, the entire house of cards came down with them."

Consider the house of cards officially down. Fannie and Freddie, whose unlawful accounting wizardry is the stuff of legends, did their part to wreck the system. Aunt Fannie and Uncle Freddie bought junk debt from financial institutions so that financial institutions could buy more junk debt. We might as well call the Fan/Fred monster and the financial institutions dumb and dumber.

So how do we turn the ship around? I think step one involves taking steps to reduce the thirst for debt at all levels. Individuals should not look to credit cards, home equity loans, student loans and risky mortgages as a solution to remedy getting things they want. Businesses need to learn to build slowly and grow organically on revenue rather than loans. Financial institutions need to lend and invest in a way that considers all the risks involved. And the government needs to shut down Fannie and Freddie. The government should not be enabling private industry to take on more debt, period.

Can we turn the ship around? I really don't know. Real positive change requires discipline and a desire to learn. Real positive change also requires good teachers who can show everyone how to survive, and ultimately thrive, without using debt as a tool. The best teacher I know on this subject is a guy named Dave Ramsey. Dave sells books and seminars but you can also download the first hour of his radio show as a free podcast every day. 

I do know one thing. The proposed government bailout of lenders treats a symptom but doesn't eradicate the illness. Most people who get bailed out when their debts go bad turn right around and get back into debt. We hope that people would learn lessons. But how can people, businesses or governments learn lessons when there's always someone there to rescue them before the consequences of those mistakes are felt? 

Maybe there's a greater irony in play here. America's thirst for debt has lead to the government requiring that Americans support the people that sold and guaranteed the debt in the first place buy purchasing the bad loans. 

The situation reminds me of a quote from the movie Boiler Room where a young stock salesman says to a client something like this, "I liked this stock at $10 and I love it at $5." Well, I didn't like the debt they were selling at $10 and I hate it at $5. I say don't buy it at all.
« Mia | Main Index | Archives | Music »

Search

About this Archive

This page is a archive of recent entries in the Money category.

Mia is the previous category.

Music is the next category.

Find recent content on the main index or look in the archives to find all content.