Does Our Government Keep Us Broke?
In many ways our economic system is designed to keep us broke. Take our federal reserve for example. Here is a very simple explanation of our federal reserve. The federal reserve determines the interest rate at which banks borrow money and therefore sets the rate at which we, the general public, borrows money. If the government would like to spur our economy, they lower rates and encourage us to go into debt. I am not going to explore the differences between good debt and bad debt here. Hopefully if you don't already know, I have inspired you to go find out. So we have borrowed money and now we are spending it and the economy has picked up pace. But what is the long term outcome? Now instead of saving our money, we are out spending it and accruing new debt, to ensure that for many years to come, we will not save anything, and instead pay loads of interest to the banks. Congratulations, we have now secured the financial future of the bank. Now that we know the bank is safe, what happens to people who have saved nothing in their golden years? They end up trying to retire on social security. If you want to spur the economy, give us a tax break. Atleast then the money we are spending to spur the economy is ours, and we will not be paying it back for up to thirty years. I want to make clear,this is by no means an attack on the federal reserve. The Fed does an excellent job with the resources they are given. Besides they are the least of our problems.
Let's take a look at our tax structure. What is the biggest tax break most people will receive? For most people, it will be the interest you pay on your home. Sounds like a good deal right? You pay a lot of money for your home and would like to get some of it back. Now I want you to look at the long term effects. You spend many years paying off your home, but as you get closer to owning it, your tax break goes down. Not only that, but as your tax break goes down, your income is going up (in most cases). So what advice does your accountant give you? You need a bigger house, so you won't get hit so hard in taxes. If you had simply kept that house, all the money you saved from not having a house payment could have been directed towards your retirement, and your golden years would not be spent under the golden arches. Instead, you traded up, bought the bigger house, got the bigger tax break, and began living paycheck to paycheck, again. By giving people an immediate tax break, the government is ensuring these people will need government assistance in the future. Once again, a short term solution to a long term problem. Shouldn't we give the tax break to the person who paid their house off? Atleast then we have taken some positive action to encourage the population to be financially independent in retirement.
While we are on the subject of retirement, let's take a look at the retirement vehicles available to us here in America. The most popular of which is the 401k. Hey, this is a great idea. I get to invest money and I get a tax break. Sounds good to me. But is Uncle Sam going to let us slide on these taxes? I think not. When you go to access that money, all of the taxes are due. So let me get this straight. I get a tax break now, when I have a job and an income, but once I am retired, and I need the money the most, now I have to pay taxes? This is in now way meant to be investment advice. I am in no way trying to discourage you from putting money into a 401k. My point is, if you gave me a tax break now, and a tax break later, I wouldn't need to collect social security, and the government wouldn't need my tax money.
This is a wake up call to America. Stop encouraging me to go into debt now, you will just be supporting me later. Stop encouraging me to get a tax break now, you will just be supporting me later.
posted by Todd Zuccato @ 7:44 PM
8 comments
8 Comments:
Um, Todd. Most people don't have accountants, let alone accountants that tell people to buy a bigger home.
People buy bigger homes because they want to, not because of the tax break. Spending $10,000 a year in interest, instead of $0 by keeping your paid-off home, so you can save $1,500-$3,500 in taxes is hardly a sound or promoted investment strategy.
Likewise, just because interest rates are low doesn't mean one has to charge up the latest Circuit City card that arrived in the mail.
Your 401(k) argument is equally off the mark. Your complaint is that one has a tax break now, in today's dollars no less, and continues to grow annually without any taxes being paid out, but, by gum, you have to pay taxes when you do withdraw it. Yes Todd, that's how things work. That's why there are Roth IRAs. Or, perhaps you prefer the Social Security program where you pay in more every year, earn a pittance and then receive less than you paid in!
You are correct in one aspect. It is a wakeup call for America. That someone who claims to be a conservative would close his ramblings by whining how corporate America and big government is forcing him to go into debt because he can't say no to easy credit and that one shouldn't bother planning there own retirement because they'll be taxed on it later, apparently shows how bad off the Right has become.
Your woe's-me nagging would be more at home on a Green blog. If you're the future of conservatism in Nevada, god help the Silver State.
First, I want to say I appreciate your comments. I will tackle your points one at a time.
You are right that many people don't have an account. There in lies the first problem. A good accountant is worth their weight in gold. Our IRS tax code is far to complex for the average person to negotiate on their own. If you don't think there are accountants giving advise to buy more expensive houses to get larger tax breaks, you, my friend, need to get out more.
You and I are in agreement that spending more in interest to get a tax break is not an investment strategy. It is, however, a tax savings strategy. And what is an accountant's field of expertise? If you said tax savings you would be correct.
You and I are once again in agreement that just because rates are low does not mean we must go out and accrue consumer debt. Regardless or whether we have to or not, the general population does. They get a good interest rate on their home so they refinance, pay off of all their consumer debt with equity they pulled out of their home, and a few months later, start building new consumer debt. The biggest challenge here is education. We have a serious lack of fincancial education in America, and I intend to tackle that topic here shortly. Like it or not, this is the cycle the Fed expects to happen when they lower interest rates. In heinsight, I should not have taken on this issue with the Fed for one reason. I keep a policy of not pointing out a problem without offering a solution, and I do not have a better solution. If you think I am off the mark as to the cycle that occurs when interest rates are lowered, please explain.
Now, attacked me on the 401k, but at no point do I recommend social security as the alternative. My goal is to eliminate social security, except in the cases where it is absolutly necessary (disability, etc.)My main point (if you take the time to read it again)is that if the government gave us incentive to save instead of spend, we would create more people independent of the government. That is the goal of conservatism, right? To create people who are independent of government? I am not sure how you got out of what I wrote that the government and big business keeps me in debt, but you missed the mark there. I have taken the time to educate myself in the field of finance and therefore understand the traps that have been set and how to avoid them.
It seems to me that you managed to miss the entire point of my writing. Put more simply, point is if you put more money in my pocket (ie tax savings) and encourage me to save it(ie a tax break for savings)I would not need social securtiy.
One more point, since you brought up the future of conservatism. I hope the future of conservatism is not determined by the type of negative condesending rhetoric you would find on the "green blog". I hope it is full of intellegent debate amoung conservatives, like I am attempting to have here with you. And how you came up with your theory of don't invest, because the government will take care of me is so far off the mark it is scary. In fact, I am speaking to a group of high schoolers later today on the importance of finacial planning. It is a subject that is very near and dear to my heart. I think the number of peole that require social security to retire in the our country is appalling. I have a person mission to create financially independent families. The fact of the matter is that far to many peole rely on the government to tell them how to think. What I would like from our government is some encouragement towards savings for those who do rely on the government to be told how they should think. Then those who rely on the government to be told how to think will not have to rely on my income for their retirement.
-Todd
No accountant in their right mind is going to tell someone that happily owns their own home outright, to buy a new one just so they can spend thousands on interest all for a savings of 10-35% of that on taxes. That's a ludicrous argument.
The real thrust should have been on personal responsibility, which used to be a conservative hallmark, not so much about the poor individual unable to resist cheap loans.
As for the social security comment, you just complained about the 401(k)and failed to mention any option to SSI.
Likewise, if you truly knew a lot about finance, you would know that there has been a savers credit available to those who participate in 401(k) plans and the various IRAs that are out there. This provides an actual tax credit, up to $1000 I believe, along with the deduction in current income that occurs when one utilizes a retirement savings plan. Plus there is always the Roth IRA, which grows tax-free and is not taxed on withdrawal. A personal favorite of mine.
As for more thinking you were just throwing your hands up at 401(k)s, I took it that your comment of "Stop encouraging me to go into debt now, you will just be supporting me later," was related to your housing argument and the separate sentence "Stop encouraging me to get a tax break now, you will just be supporting me later," was regarding your second argument concerning retirement savings.
While you may have thought your text was a solid conservative argument, it came off as something more Green or Dem than Right. That's a perception one needs to erase, if one is to be effective.
Okay, first thing. I don't know where you got this extra 1000 dollar credit on retirement plans, but prove it. I have searched through the IRS tax code and to my knowledge, no extra credit for a retirement plan exists. I agree that the trust should be put on personal responsibility, but your stance is to educate people to navigate around and inadequate system. I disagree. People should be taught how to navigate around a system designed for their success, not their failure. As far as accountants go, we could argue what they would or wouldn't say all day long. I am sharing my personal experience here. If you disagree, that is your opinion, but I stand my ground. I am not launching an attack on all accountants. I know of some very good ones. I also know of many people (first hand) that were told by their accountants, as their income went up, that it was time to buy a bigger house to reduce their tax liability. You can argue from inside your little world all day long, but you will not change my personal experience.
-Todd
Obviously Todd, you need yourself a new accountant. I've been using the Savers Credit for years. There's even a line for it on the 1040 form for all to see. Here are some easily found links that explain it:
http://www.irs.gov/publications/p590/ch05.html
http://www.investopedia.com/articles/retirement/04/031704.asp
And yes, I would encourage someone to intelligently navigate around an inadequate system. Why? Because that is the current system we are stuck with.
Waiting to teach people to "navigate around a system designed for success, not failure" does nothing for people in the here and now. Sitting around waiting for the perfect system to arrive only guarantees people being unprepared for retirement. Why? Because it's doubtful a perfect system will ever arrive and, if it does, what if it is 20 years down the road.
Perhaps it is you who needs to expand from your little world. And when you do, you might want to file a 1040X or two and claim your savers credit. That is, of course, if you did use the current inadequate system.
Thanks for the links and the information. I have to say, I didn't know that. Due to the income requirements, I can't imagine too much of the population would qualify for that tax break.
As for "the current system we are stuck with", I firmly disagree. I am glad to see that the extent of your activism reaches as far a anonymous complaining on the internet. Mine, however extends farther. I don't for one second believe that we are stuck with anything in this country. That is the beauty of democracy in America. If enough people desire a change, the change will happen. My attack at the finacial challenges that we face America is two fold. I do my best to educate poeple how to handle their finances today, and try to offer solutions to some of the pitfalls I see with today's system. If I can offer viable solutions, and enough people will listen, we can make a change.
Obviously, Todd, your studies of finance didn't go very far.
Your first argument about tax-deductibility of home mortgage interest payments is based upon hearing of people's accountants telling them to buy a bigger home. We both agree that is bad advice. So why go on with your argument about not having a tax deduction after one's home is paid off?
Plus, you apparently have forgotten the home sale exclusion of $250K per that homeowners enjoy. A tax break of tens of thousands of dollars that goes back into the homeowners pocket, something renters don't have when they move, or flippers who are constantly upgrading for that interest deduction.
And your apparently claim to fame, your financial expertise is also exposed when not only did you not know of the retirement savings credit but, when told, couldn't even find it despite thousands of articles about it and numerous citations on the IRS site.
And,when you are told where to find it, you dismiss it it as something most wouldn't use. Did you actual research that Todd or was that just another "I think I heard it somewhere." If you actually researched it you would know that 5.3 million returns used that credit in 2003 and, with the median AGI of those tax returns being $29k, a whole lot more could have used it either through awareness of it or by contributing to an 401(k)or IRA.
Despite saying in your last post that you "educate people", and I shutter to use that word given your lack of basic financial knowledge, people how to invest now as well as for a better system, that's not what you said before.
Myself, I always tell people to max their 401(k) and, if they can't afford it, to at least contribute the amount equal to any employer-match. I also push Roth IRAs for their tax-free growth and distribution; tell people leaving a job to either keep it there if allowed, roll it over to the new employers' plan or place it in a Rollover IRA and not just withdraw it and face penalties and taxes (something more than a third do); to look at Vanguard funds as their industry-low management fees make a positive difference over the long haul; and to try and do your own taxes to see how it works as it isn't that difficult and, with online and computer programs and the Tax Freedom Alliance, it is just as accurate as going to Block, Hewitt, etc. without the cost. That's what I do to make a difference.
It's great you are trying to make a better system. More power to you in that endeavor, and I'm not being facetious. But given your track record with correctly explaining the current system, I, unfortunately, don't hold out much hope.
Blogging is great in that anyone with computer access can state their case. But you know what, to be taken seriously one needs to put in a little legwork and check facts or formulate logical arguments. Put a little research time and effort into your articles before posting and they can be much more effective in persuading an audience.
I meant to say the median AGI for all 2003 tax returns was $29k, not just those that used the credit.
With a phaseout of $50K, there is a lot of room for people to use it.
Post a Comment
<< Home