Direction or Misdirection?

Recently, economist and policy analyst Stephen Moore did an interview with a well-circulated newsletter that I occasionally read. He's is the author of the new book "The End of Prosperity" (linky-linky) and an editorial writer for the Wall Street Journal. He is very well educated and was the senior economist for the the U.S. Congress Joint Economic Committee, so he definitely knows what he's talking about. I found this segment of the interview particularly interesting and certainly timely as we start a new era with a president and congress bound and determined to try to regulate, socialize, and tax this country into prosperity:

“The 1990’s was a great decade. Our book (The End of Prosperity) describes when Reagan came in with a new kind of supply-side pro-free-market philosophy- turning around, by the way, the worst decade of the century other than the Great Depression, which was the 1970’s.

Amazingly , the left is rewriting the history of the 70’s: “If only we hadn’t had Reaganomics, we could go back to those wonderful years of the 1970’s”- when we had gas lines and 25% mortgage interest rates and 14% inflation.”

In any case, Reagan did two things. He cut tax rates very significantly from 70% all the way down to 28%. And he slayed inflation. The inflation rate went from 14.5% down to 3%. We had the greatest boom for 25 years in the history of civilization. No country had ever seen anything like what happened in American from the early 1980’s through 2007. We created $40 trillion dollars of net new wealth over that period. It was an awesome experiment in prosperity.

Now, Bill Clinton’s tax increase did hurt the economy, The evidence is that in the first two years in the Clinton Administration, the economy actually slowed down. But once you had the Republican Revolution in 1994, once you had the combination of Newt Gingrich and Dick Armey running the Congress, then Clinton moved back to the right. That’s when he gave his speech, “the era of big government is over.”

We had welfare reform, we had the capital gains tax cut, we balanced the budget. Those were all pro-growth Reagan ideas.

But a lot of the economists that I talk to in the Obama camp look at that period and say, “Look, we can raise taxes through the roof and its not going to hurt the economy.”

That’s a very dangerous idea at a time when the rest of the world is going the other way. China, Sweden, India, my goodness, Russia has a 13% flat tax. How are we going to compete with them with a 40% income tax? It’s a really dangerous idea to be talking about raising taxes right now in the face of the worst economy we’ve had in 25 years.”

Ah, the 70's. I'm so glad I was just a baby during the vast majority of them, especially the Carter years. I think my head would have exploded. I just hope the new prez doesn't take us the same direction.

YFNN

Thought for 10/27/08

The following post is a YFNN rant. You may find it offensive, crude or just plain wrong. Get over it.

If there is a moral to the story of the ongoing financial bailout and the current state (and apparently future state) of politics and the country in general, it's this: it truly pays to be a loser. Irresponsibility and self-proclaimed helplessness can be very profitable.

All my life, I thought I was smart: saving my money, making prudent choices, living within my means, working hard while I got a good degree at a good school. Had I known the government would do their best to punish me for hard work and success, and reward my neighbors who sit home collecting welfare (in all of its forms) and watching Judge Judy, I'd have asked the unproductive and fraudulent to make room on their rent-to-own couch for me.

I shoulda bought a bigger house I couldn't afford with an adjustable-rate mortgage. I shoulda backpacked through Europe on credit cards to "find myself" after college rather than pay student loans. I shoulda tried to flip condos in 2004. I shoulda had kids at age 19. Man, did I ever blow those opportunities.

It clearly pays (and will continue to pay after 01/20/09, apparently) to make poor decisions and declare yourself helpless and hopelessly inept. Hard work and good decision-making is for suckers. It's time for me to stop paying our mortgage so I can get in on this free money gravy train.

YFNN

Tax Refunds as Forced Savings

Yesterday, I wrote post about the inherent evils of tax refunds. To summarize it in a sentence: You're being temporarily cheated out of your own money. I also mentioned the MLB and I intentionally receive a tax refund at the end of the year, even though from a number-only point of view, it's a terrible decision. Today, I'll outline why we still do it.

I'd imagine that everyone who chooses to receive a big tax refund at the end of the year does it for the same reason: trickery. It's a big psychological trick on ourselves.

I've stated before that I'm a fan of forced savings (self-forced, NOT governmental) because it creates a state of artificial scarcity. It's pretty simple: if I put $500 a month into savings automatically, that's $500 less a month I have to spend. This creates a situation where I'm forcing myself to make more prudent decisions about the money I do have available to spend. Since there are things that I must pay for each month (like the mortgage, food, electricity, etc.), the artificial scarcity situation forces me to cut back on unnecessary spending, like a new set of speakers for the living room, or several meals at restaurants, or new pair of motorcycle boots. By cutting back spending on these unnecessary items, we continue to live below our means and put back more and more money towards debt (mortgage, etc.) and towards savings (IRAs, etc.). This is a VERY good thing.

So, by having more money withheld throughout the year from our paychecks, we're implementing another forcing savings, payable in April. Now, this extra bit of money only amounts to about $75 a week, which when paid to us on a weekly basis, is very easy to waste on frivolous, useless things. It's too easy to say "It's only $10...", or "I'll save some money next week..." when you're paid in small amounts. But, when taken away every week, and paid to us at the end of the year, this amounts to a sizable sum of money. And, when MLB receive a big windfall all at once, it's easier for us to say "Wow, we better do something smart with this extra cash!"

Having said all this, it's probably not entirely necessary for MLB and I to do this. We're both rather prudent with our money, and certainly not wasteful. We've developed enough self-discipline to use our money wisely, even when it comes in small chunks.

Even though I'm a big numbers person, I'm not going to argue that you shouldn't get a refund. Do what works for you. If you're disciplined enough to make good use of those smaller amount of money throughout the year, then forgo the refund. But, if it helps you to save or spend more wisely, like it does for MLB and I, get the refund. You just need to realize that you're paying a slight financial penalty for doing it.

I, for one, am okay with that.

YFNN

Evil Tax Refunds and Human Resources

With tax season here, millions of Americans are filing their tax returns and receiving sizable tax refunds shortly thereafter. To a lot of people, that extra money in March or April is like winning the lottery. But, in reality, it's just a sign that you're getting ripped off with your own money.

To understand why tax refunds are evil and what you can do about it, you really need to understand how the whole withholding and refund tax thing works. As I'm sure you're well aware, an amount of money is withheld from each paycheck to pay your federal taxes (and state, local, FICA, etc., but I'll only deal with federal for simplicity). The amount withheld for your taxes is dependent on how much money you earn, how many exemptions you claim, and how much additional withholding you allow.

"Exemptions? I think I remember seeing that on a form when I first started my job. Isn't that the thing where the HR lady just told me to put a zero or a one?"

Pretty much. Basically, that form you filled out is a W4. It helps to tell your employer how much money they should withhold from your paycheck to pre-pay your taxes for the year. That way, when tax day rolls around on April 15th, or April 16th this year, your taxes are already pre-paid (deducted from each paycheck) and the government doesn't have to worry about trying to squeeze you for the entire bill at once. When you receive a refund, you've essentially pre-paid too much money, and they're giving you the amount you overpaid back. The reason the smiling HR lady suggested that you only claim zero or one exemption is that it helps to ensure that the ignorant masses don't underpay their taxes for the year and aren't stuck with a tax bill in April.

“I’m still confused. I thought a refund was the government paying me?"

Think of it this way: Assume your electric bill only comes once a year. But, in order to make sure they get their money, the electric company makes you pay each month. Since they don't know exactly how much your bill will be for the year, they make a guess: say $110 a month. So, at the end of the year you've paid a total of $1320. But, what if your yearly bill only comes out to $1200? Well, you'd be refunded the $120 you've over-paid for the year. They're just giving the extra money back that you've paid them unnecessarily all year long.

So what can you do to keep from overpaying throughout the year? You adjust your exemptions. Basically, the more exemptions you claim, the less they'll withhold each paycheck, and the more money will end up in your pocket each month. But, if you claim too many exemptions, or withhold too much additional money, and they don't withhold enough, you'll end up owing money at the end of the year.

"Okay, so how come getting a nice big check for a refund is so evil?"

A couple reasons:

1) You're giving the government an interest-free loan. Basically, you're saying "Here's some extra money. I won't need it until April, so go ahead a use it until then."

2) You're cheating yourself out of additional interest money. When you don't pre-pay extra money, you have more money available to invest or pay off debts. That's pretty valuable time money-wise, since when it comes to interest, either on your mortgage, credit cards, or a savings account, time is money.

3) You're depriving yourself out of additional monthly cash-flow. Every extra dime you pre-pay the government is one less dime in your pocket each month. Those dimes could be used for groceries, the electric bill, or insurance.

Basically, loaning someone (the government in this case) money interest-free, while you could use the money is a very poor financial decision. From a purely financial, numbers-only standpoint, it's a no-brainer to try to eliminate your refund.

All that said, MLB and I are will be receiving a rather large tax refund in the next week or so, and we did it completely on purpose.

"What? After that long dissertation on why refunds are evil, you STILL get one?"

Yep, we sure do. More on why we intentionally make such a poor financial decision tomorrow.

YFNN