Despite several recent posts on broad issues like the economy, Get Rich Slowly is a blog about personal finance. I have little interest or expertise regarding politics and economics. I’ve received e-mail about the Presidential campaign and about various tax schemes, but I don’t intend to post much (if anything) about these subjects because, frankly, I’m not interested in dogma. I’m interested in helping you save money day-to-day.
I will, however, occasionally point to articles at other sites. For example, Nickel recently wondered, “Would the Fair Tax gut the economy?” If you’re itching to discuss this, head over and join the conversation. Here are some other personal finance stories I’ve enjoyed lately:
- Jacob at SuccessMinders has some tricks to avoid spending so much, all of which are variations on track every penny you spend. (I’ll confess that I love the concept of creating a “stupid” category in Quicken. This is like my “sin” category for tobacco, alcohol, gambling, etc.)
- Ever wonder about all those deductions from your paycheck? BxCapricorn at The Fine Art of Money has an excellent paycheck breakdown article in which he describes each item and its history.
- Madame X at My Open Wallet has some thoughts about making choices between time and money. “Would you choose time over money, if your employer offered that option?” she asks. “How much money would you have to be making to consider trading some of it away for a less hectic work schedule? Which is worth more to you, money or time?”
Tonight I’m heading out roller-skating with friends. This is great, cheap fun — and it’s exercise, too! (I’m actually shocked by how many people are at the skating rink on a Saturday night. What is this? 1955?)
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I hate to break it to you but whenever you present a value, principle, or, truth then its correctly defined as dogma.
Dictionary.com defines dogma as a settled or established opinion, belief, or principle.
I understand what you are trying to convey: this is not a political blog. However, if you didn’t believe in the principles of getting rich slowly then you wouldn’t blog about it. Thankfully for us, you do!
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Just wanted to add that I have been following the Fair Tax since 2004 and I love the idea.
I must confess that I have not recently studied the ideas that the Founding Father’s conveyed concerning taxes but I definitely do not like the multiple taxes that are hidden within the system.
Also, a little prediction: as the nation continues to shift toward savings in a Roth IRA account then Congress will figure out a way to tax the account.
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I’ve never tagged my spending with descriptive words, but I have had to create an Unknown category for when I’ve procrastinated weeks on entering purchases and I realize I have less cash than receipts to remember what I bought. When the Unknown gets too big, I know it’s time to buckle down and update the spreadsheet in a more timely manner.
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On money vs time: 2 years ago I got a job offer. Compared to the job I had at the time, the new job was:
Less money: $1K less in annual salary and $4K more I have to pay in medical premiums
More time: Twice the vacation (4 wks instead of 2wks), 1/2-1/3 the commute time by car, and a 7.5-hr “standard day” instead of an 8-hr day.
I chose the job with less money and more time. Since then I’ve gotten a few raises that make up for the money – but it’s the time that makes the biggest difference in my happiness.
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Man, I love skating. I’m not good at it, and my feet feel like they’re on fire, but I love it. I wish I did it more than once a year.
@Steven
You’re right — dogma is probably the wrong word. I’m not sure what the correct word is…
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The big worry of mine is that the fair tax will end up like VAT in Europe. Income taxes will come back too…First as a Millionaire tax (which, by then I would Hope to qualify for!
) then it would go lower and lower and then…we would have both!
Rember the first real income tax was levied during the Civil War to help pay for it…it didn’t leave, and came back in full scale during WWI.
“Slippery Slopes are buttered with the best intentions”
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While I wasn’t able to join my friends roller skating last week, I did have a great time bowling last night.
Glad you had fun.
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As an economist, I understand the frustration with the current tax code, but I’m completely against a national sales tax for economic reasons. The national sales tax pitched by Boortz and Huckabee is a horrible idea that most economists are quite against. Under their plan the actual tax rate is 30% (they claim 23% due to math manipulation). New purchases (cars, homes) would be subject to the tax but not existing units. Sales taxes are by nature regressive because folks with little income must consume a larger share of their income for basic necessities.
If the NST passed, those who already owned their own homes and who could be considered rich would have a sizeable advantage in that new economy.
Oh, and HR25 doesn’t repeal the income tax. That’s a problem!
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A useful take on the time/money question of Madame X is http://www.timeday.org/ – the Take Back Your Time movement advocates a six hour day. There is historical precedent for it – Kelloggs in Battle Creek, MI, offered it as an option for many years. The quality of life was very, very high and people didn’t miss the extra luxuries that more income might have afforded because they were busy raising vegetables, helping out at school, hanging out with their neighbors, and building enough social capital to more than offset the opportunity loss on income. Sounds good to me….
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I work 4 10 hour days right now. It’s great having the extra day off, but a bit of a burnout on those 4 days I am working. Still, I think rearranging the hours you work, can help you feel like you have more time, if that makes any sense.
Also, I sometimes have the option of working at home. That is quite nice!
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Jericho,
I wonder if you have read the book or have subscribed to the website?
I am not even going to debate with you on economic matters (you would win) but I do want to present one example that may work against your conclusion.
Tennessee! We have no income tax and an 8.25 sales tax ON EVERYTHING. The state has had little economic trouble as of recent as opposed to the state I just left: Michigan. Michigan has a 6% sales tax (necessities are not included) and a 3.9% income tax. Tennessee is enjoying prosperity with ideas such as “tax free” days while Michigan has the highest unemployment rate in the nation.
The Fair Tax includes a provision to repeal the sixteenth amendment which abolishes the income tax. The abolishment of the payroll tax, SS tax, Medicare tax, etc. are included in the bill.
One last word, politicians are pushing the idea but the idea came from economists from various institutions. Also, I have noticed that most people have spoken out against the fair tax but nobody offers a viable alternative. I fear nothing will get done and as I have mentioned before that most of us will see the day that our Roth accounts become taxed.
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Steven,
Your last comment is fascinating.
Oregon has no sales tax. We have relatively high income and property taxes. Like most Oregonians, I’ve always been opposed to a sales tax. In recent years, though, I’ve begun to reconsider my position. Your story does more than anything to make me re-evaluate my position…
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JD and readers:
I was actually off a bit. The states sales tax is 9.25 not 8.25 and groceries are taxed at 7.75% (per my last receipt at Sam’s Club).
Filing my state sales tax takes all of five minutes which is nice.
I think I would prefer the idea of a sales tax as the individual could determine when they want to pay tax with the products they purchase. Currently citizens must pay income, SS, and Medicare taxes.
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JD,
Here great article that break down the taxes state by state
Tennessee ranks toward the bottom (lowest taxes) and Oregon is in the middle of the pack.
http://articles.moneycentral.msn.com/Taxes/Advice/TheBestAndWorstStatesForTaxes.aspx
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Steven,
I wonder if you have read the book or have subscribed to the website?
—-Yes, I have read both. I remember the idea when Boortz thought of it when he was just a local Atlanta talk show host 14 years ago.
I am not even going to debate with you on economic matters (you would win) but I do want to present one example that may work against your conclusion.
—-Well, thanks for the win there, but you can debate me. Sales taxes are by nature regressive. And the NST proponents are disingenous as to how they calculate the rate. Sales taxes are, by and large, stated by their tax-exclusive rate, so its misleading for them to characterize it by its tax-inclusive rate. They do this because polling has shown little support for a 30% tax.
TeTennessee is enjoying prosperity with ideas such as “tax free” days while Michigan has the highest unemployment rate in the nation.
—-Isn’t Michigan’s problem more to do with a failing US car industry rather than its tax structure?
The Fair Tax includes a provision to repeal the sixteenth amendment which abolishes the income tax. The abolishment of the payroll tax, SS tax, Medicare tax, etc. are included in the bill.
—-That must be a new inclusion. So HR25 abolishes SS (despite SS being a very well run government program if you look at its cost structure and understand its coffers have been raided repeatedly by the government to cover its shortfalls, despite this being not allowed).
One last word, politicians are pushing the idea but the idea came from economists from various institutions.
—-It’s come from think-tanks.
Also, I have noticed that most people have spoken out against the fair tax but nobody offers a viable alternative.
—-Is the progressive income tax broken? It may be pretty complicated, and I’ll grant that, but there’s alot of good financial incentives (mortgage interest deduction for one) that are good policy prescriptions.
—-Here’s the issue on the NST. We economists like to speak of ones Marginal Propensity to Save and Marginal Propensity to Consume. For people with lower incomes than average, MPC is much greater than MPS. For people with higher incomes, MPC is less than MPS, or at least the incentive. Any wealth maximizing person who is wealthy will cut their consumption and then move to a country that doesn’t have this issue for retirement. I believe I’ve seen studies done by the GAO that determined that the actual tax neutral rate for a NST is around 40% (tax-exclusive rate).
In the meantime, making homes 30% more expensive, cars 30% more expensive, sure seems disadvantageous to younger, and poorer, households.
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JerichoHill,
Yes, I have read both. I remember the idea when Boortz thought of it when he was just a local Atlanta talk show host 14 years ago.
— Good, I am glad to hear that you have at least investigated the matter for yourself. Hopefully, I can address some of your concerns. I am not an authority on taxes but have studied moderately since 2004 when I started pondering all the taxes that we pay.
Well, thanks for the win there, but you can debate me. Sales taxes are by nature regressive. And the NST proponents are disingenuous as to how they calculate the rate. Sales taxes are, by and large, stated by their tax-exclusive rate, so its misleading for them to characterize it by its tax-inclusive rate. They do this because polling has shown little support for a 30% tax.
— I, actually, enjoy the idea of a regressive tax and have little problem in believing that all the nation’s citizens should be paying the same amount of taxes. We pay regressive taxes at the state level (with some exceptions). Why should the Federal Government be any different? Concerning NST proponents being disingenuous, the sales tax is calculated in a tax exclusive manner. If someone spends $1.00 in Michigan then will pay $1.06 total at the register. The Fair Tax is an inclusive tax due to the necessity of revenue neutrality. Jericho, I know you understand the difference but hopefully others reading will be curious. I am in no way trying to insult your (Jericho) intelligence.
Check out chart 5 from the link for a break down in tax inclusiveness vs. tax exclusiveness – http://www.fairtax.org/PDF/Tax%20Notes%20article%20on%20FT%20rate.pdf
Isn’t Michigan’s problem more to do with a failing US car industry rather than its tax structure?
— Actually, the auto industry is only part of the problem. Michigan’s anti-business climate, entitlement behavior, and complicated tax structure has compounded the state’s struggles. Regarding the state tax structure, Michigan’s citizens have to pay a 6% sales tax (excluding groceries), 3.9% income tax, 19 cent per gallon gas tax + 6% sales tax the total sale, a license plate tax using a percentage of the car’s MSRP, and property taxes on up to 50% of the home’s value. If you smoke then there is a $2/per pack tax. Michigan’s businesses pay a business tax which shifts a huge 1.5+ billion dollar tax burden on banks, insurance companies, and real estate agencies. The headaches only increase for a self-employed individual and a small business owner.
That must be a new inclusion. So HR25 abolishes SS (despite SS being a very well run government program if you look at its cost structure and understand its coffers have been raided repeatedly by the government to cover its shortfalls, despite this being not allowed).
— A new inclusion??? I thought you read the book. HR25 does not abolish the SS program but it does abolish the tax. I thought I mentioned the Social Security tax in a previous post and not the program itself. The tax would be abolished as it is rolled into the NST.
—-Regarding the running of the program, I am not sure how you could consider a program being “well run” and then comment on the government’s repeated raiding of its coffer. The fact that government is able to raid its coffers leads me to conclude that the program is not well run. I think this is were you and I may have a philosophical difference. I hate Social Security and believe it is an outright (legalized) theft of the US citizen’s money. I can break down why its theft in a different post or forum but the idea of government taking a citizen’s (and business’s) money for forty years and only returning a portion if that person is lucky (lives long) repulses me.
— One last comment on SS, the progressive tax system allows for our government to repeated steal from the programs coffers. Why leave the money alone when you can spend it and then replace the money from the following ways: raising one of the many federal taxes, cutting benefits, raising the retirement age, or taxing the Social Security recipient (double taxation).
It’s come from think-tanks.
— Correct. American’s for Fair Taxation produced the Fair Tax. The group includes economic scholars from Harvard, MIT, Boston University, the University of Maryland, and Rice University. Also, individuals from think tanks such as the Cato Institute, the Heritage Foundation, and the National Bureau of Economic Research are included.
Here is the group’s wiki link: http://en.wikipedia.org/wiki/Americans_For_Fair_Taxation
Is the progressive income tax broken? It may be pretty complicated, and I’ll grant that, but there’s alot of good financial incentives (mortgage interest deduction for one) that are good policy prescriptions.
— I don’t think broken is the correct way to assess the tax system. I would say overtly complicated, punitive, and deceptive are adequate terms. I did not realize how complicated our system was until I attempted to complete an estimated income tax sheet as I am now self-employed. The form itself was not entirely complicated but it referred to three sub forms which had sub forms of their own. This is just to figure my PROJECTED income and SECA taxes. I filled out the first form to the best of my ability and used common sense basing my calculations on the tax rates (Federal, SECA). I can’t imagine what a small business owner has to endure. An individual almost has no choice but to hire an accountant.
— The tax code is punitive in that interest groups are able to negotiate wonderful deductions while the rest must make up for those who receive the tax break. Also, a low income individual who pays no taxes are given a huge earned income credit for each child while the society’s producers end up funding the bill. I philosophically disagree with the idea that it’s the government’s job to take care of poor people or senior adults (SS). I have no doubt that individuals, families, and charitable organizations will provide better aid then the government.
— The tax code is deceptive as the numerous amounts of federal taxes allow for government to increase taxes with little awareness to the tax payer. US Citizens currently pay a Federal Tax, Social Security Tax, a Medicare Tax, 18.4 cent/per gallon gas tax, capital gains tax, alternative minimum tax, death tax, etc. Also, there is the payroll and unemployment taxes for businesses. Self-employed individuals have to pay SECA taxes. I am most definitely not listing all the taxes. The quantity of these taxes encourages government spending as elected officials have a plethora of taxes that they can possibly raise. Could you imagine the difficulty politicians would have in raising taxes if we had a NST?
Here’s the issue on the NST. We economists like to speak of ones Marginal Propensity to Save and Marginal Propensity to Consume. For people with lower incomes than average, MPC is much greater than MPS. For people with higher incomes, MPC is less than MPS, or at least the incentive. Any wealth maximizing person who is wealthy will cut their consumption and then move to a country that doesn’t have this issue for retirement. I believe I’ve seen studies done by the GAO that determined that the actual tax neutral rate for a NST is around 40% (tax-exclusive rate).
In the meantime, making homes 30% more expensive, cars 30% more expensive, sure seems disadvantageous to younger, and poorer, households.
— Your Marginal Propensity to Consume is based upon percentages and not dollar amounts. Under the Fair Tax those who spend more (dollar wise) will pay greater taxes. The code is still fair because the individual CHOSE to spend more. The pre-bate provision within the Fair Tax will not hinder those from providing the necessities in life. Also, I hate to break it to you (after being poor myself as I earned $9,900 of income in 2003) but poor people do not buy new cars or houses. They cannot afford new cars. Used goods including cars will not be taxed if the Fair Tax is implemented.
—Those that make less will ALWAYS spend a higher percentage of their income but they ALWAYS spend a lesser amount in total dollars. No government provision or tax will change that fact. However, the poor will benefit because of those who save. The individuals who save will not be placing their savings in a mattress but will invest into the nation’s markets. The bolstered increase in investments will benefit EVERYONE.
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Thanks for not posting about the elections, and mostly steering clear of tax schemes. I’m Australian, so it’s usually irrelevant to me. I’m not sure how many of your readers are international, but I love that most of your content is universally applicable.
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Steven,
A regressive tax is unfair to the folks on lower incomes. They will share a higher proportional burden than someone with a higher income. While we can debate whether a progressive or neutral tax is ideal, a regressive tax that harms those who are less fortunate doesn’t sit quite right with me. It also doesn’t sit well with NST proponents, since they propose a national rebate system that makes the NST less regressive.
The term “regressive tax” describes a distribution effect, which can be applied to any type of tax system (income or consumption) that meets the definition. It is frequently applied in reference to fixed taxes, where every person has to pay the same amount of money. The term regressive refers to the way the rate progresses from high to low. The opposite of a regressive tax is a progressive tax, where the tax rate increases as the amount to which the rate is applied increases. In between is a proportional tax, where the tax rate is fixed as the amount to which the rate is applied increases. Regressive taxes reduce the tax incidence of people with higher incomes, as they shift the incidence disproportionately to those with smaller incomes.
The regressivity of a particular tax often depends on the propensity of the tax payers to engage in the taxed activity relative to their income. In other words, if the activity being taxed is more likely to be carried out by the poor and less likely to be carried out by the rich, then the tax may be considered regressive. To determine whether a tax is regressive, the income-elasticity of the good being taxed as well as the income-substitution effect must be considered.
Michigan’s tax system doesnt seem that different from Maryland or Virginia, and their economy seems allright. I think we’re seeing the effects of a declining industry in Micigan, not its tax structure which doesn’t appear that different from my review of state tax structures. That’s my opinion as an economist.
The SSA has a remarkably low cost ratio for what it performs. However, Congress has seen fit to raid its coffers despite this not supposed to be happening. I don’t blame the SSA. I blame the politicos.
I’m well aware of those economists. They speak for a minority of economists. The loss of tax incentives to affect consumer behavior would be quite detrimental to our economy.
Poor households will spend more money as a percent of their income than higher income households. Punishing these households is poor economic policy.
The NST proponents use the tax-inclusive rate (23%). Since you agree with me that sales taxes are reported with the tax-exclusive rate, should not proponents of the nST use the tax-exclusive rate.
We also do not know how consumers will respond to a drastic change in the cost per unit. We know that extra taxes (say on gas or on cigarattes) will retard consumption. It is quite likely that, to some degree, a higher consumption tax will reduce consumption, and therefore, reduce GDP.
If you want to discuss this further, let’s take it to the forums.
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Re the money vs time issue–I am currently negotiating with my employer to take my next raise in time instead of money. Much like the idea of sticking with your current style of living and saving/investing raises, I’m going to stick with my current levels of living and saving (I save a lot of my income already), and have more free time. The interesting thing is that HR is totally confused about how to calculate how much more vacation time I should get, given that I was going to get a 2% raise–do they just calculate my hourly rate and give me that many new vacation hours, or something else? Apparently no one has ever asked them to do this before!
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Thanks to everyone that visited the site over the past two days. I’d like to point out that I posted an excellent walk-through piece on Warren Buffet’s stock picking method.
Please go to my site:
wwww.bxcapricorn.wordpress.com
and select the “Walkthroughs” category, to read those that I’ve featured, including Phil Town’s terrific “Rule #1″ method.
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