On Wednesday, January 18th large internet companies such as Wikipedia blacked out their sites in protest of the Stop Piracy Act Bill (SOPA).  The nice-sounding bill threatens to destroy creativity and freedom of speech on the Internet by allowing the US Department of Justice and copyright holders authority to attack sites who enable or facilitate copyright infringement.

Imagine Financial Samurai sharing a piece of useful information on how to prevent credit card theft online, and the original creator is from some giant corporation who has a propensity to sue despite linking back and giving credit.  I will probably never bother to share this useful content in fear of having some overly paranoid lawyer sue me for SOPA infringement if this bill passes.  Our society is already litigious enough!

I’m proud of the Internet community for speaking out against SOPA.  The government, despite all its “good intentions” should not be in the business of regulating what we can share and say online.  Sure, there is a limit to what we can and should do, especially if someone is being untruthful, but for the government to get involved with what I can and cannot say on my own site is wrong and I am fiercely against SOPA and more government regulation!

You would think that those who are against big government would also be against big government who discriminates based on income, gender, and sexual preference, but you’d be mistaken.  To many, discrimination is OK, so long as they aren’t being discriminated against.

THE HYPOCRISY OF INCONSISTENCY

Let’s discuss income taxes. A progressive income tax system is clearly discriminatory.  Why does someone making over $380,000 have to pay not only a higher percentage of their taxes to the government (35% marginal tax rate), but also a much higher absolute amount of taxes vs. someone who makes $80,000 (25% marginal tax rate)?  Are the roads and libraries that much better for the wealthy?  After a certain minimum income standard above poverty, we should be treated equally with a flat tax.

There are people who believe it’s OK to vote on further raising another group’s income taxes, while not having to pay more taxes themselves.  How can we give people and the government this authority?  Imagine if one of the 40-50% of Americans who pays zero federal taxes votes for a President who wants to raise taxes on a group that already pays the most taxes.  The goal is to steal from one group to subsidize his/her own group.  This is shear hypocrisy.  We need to ALL pitch in if we’ve decided tax increases is the only way!  Just like we all need to accept lower services if cuts are to be made.

What about sexism?  We can all agree that sexism is wrong.  Men and women should have equal rights and equal pay for equal work.  So if everybody agrees that sexism is wrong, why aren’t more people up in arms about the government’s desire to tax couples making over $250,000 when they are targeting singles making over $200,000?  Why doesn’t $200,000 + $200,000 = $400,000?  The government expects inequality of one spouse upon marriage, that’s why!  Is one spouse suddenly supposed to go from making $200,000+ to $50,000 just because s/he got married?  This is nuts!

Very few people give a shit about the way government treats gender rights because very few couples make over $250,000.  But I’ll ask you again.  Is discrimination OK if you are not being discriminated against?  The answer is HELL NO.  Discrimination is never OK.

What about gender preference?  Why is the government in the business of regulating who we can and cannot love and what we can and cannot have if we marry?  Gay couples and straight couples should have the same rights.  Does being born gay make you a lesser being?  Does standing under 5 feet 8 inches tall make you a lesser man?  Should you have to pay more taxes just because you were born with red hair?  Of course not!  So why the hell is the government discriminating against gays and lesbians?  Why should a  straight man or woman dictate how a homosexual man or woman should live?  They shouldn’t.

If you studied American history, you will know that discrimination based on sexual preference is akin to racial discrimination in the 50′s and 60′s.  The government shouldn’t be in the business of relationships.

IF YOU ARE OPPOSED TO SOPA, PLEASE ACT CONSISTENTLY

If you are opposed to SOPA, you are against big government getting into your business of telling you what you can say, share, and write about online.  Since you are against big government, you should be against a government who practices discriminatory tax policy against people who already pay more than their percentage of income earned.  If you are are not subject to paying more taxes yourself, you have no right to tell another group of people what they should pay.  Yes, this includes those who say, “They can afford it” and other oblivious statements.  Instead, you should be fighting for equality in our taxation system.

If you are opposed to SOPA, you are against big government telling others who they can and cannot marry.  You are opposed to the government dictating the love of others and imposing sanctions against their rights because of their sexual preference.  Maybe you or your children will one day be targeted by the government, you never know.  Are you going to love your children less for being gay?  No, you will love your children unconditionally.

If you are opposed to SOPA, you are against big government penalizing you because of your sex.  You believe as an independent woman or man, you have the right to continue earning your income even when you get married.  You do no believe it is fair that $200,000 + $200,000 = $250,000 in the government’s eyes because of their sexist ways.

It’s OK to disagree, be it for moral, religious or personal reasons.  Just don’t impose your will on others, since they have a right to their liberties as well.

Alas, I know people will always vote for what’s in their best interests, even if it means screwing other people in the process.  Hence, despite all the noise about being against big government on the internet, we will have bigger government in the near future.  Forget studying hard in school.  Forget working 80 hours a week.  Forget starting a business on the side.  Forget one love and harmony.  Let’s just vote on politicians who will spoon feed us success and hurt others to better our own positions.  It’s much easier that way.  Oh yeah, and tell your representative to vote no on SOPA!

Readers, why do you think there are opponents of SOPA who also vote for big government?  Do people really just conveniently vote for what’s best for themselves?  Is discrimination OK if you aren’t being discriminated against?

Regards,

Sam

Photo: Iguana In Darkness, Yucatan Peninsula, 2010.  Sam.

If you are not a racist or bigot, and believe in equal rights for all please sign up for my RSS Feed or E-mail Feed to keep in touch.  If you are a racist, sexist, bigot who believes in inequality, and conveniently believes in policy that will only benefit yourself at the expense of others, I’d love to hear your reasoning why in the comments.

In my fiscally irresponsible state of California, Governor Jerry Brown (D) is proposing raising taxes on people making over $250,000 a year.  According to the SF Chronicle, 65% of those polled believe this is a great idea.  Well No Duh useless poll and uninsightful newspaper.  Most people or households don’t make more than $250,000 a year so of course they’d be for raising taxes on those income earners!

In fact, less than 5% of the population makes more than $250,000 a year, so why don’t 95%+ believe this is a great idea?  The reason is because Jerry Brown has also proposed raising the sales tax by another 0.5%!  Uh oh, suddenly since everybody has to pay for an increased sales tax, not everybody is for it!

Hey, what’s a 10.5% sales tax rate from the 10% now?  At least you have a choice in paying taxes, whereas if you are making above a certain income level, you don’t.  Let’s just raise sales taxes to 20% since rich people have a lot of money and buy way more things they don’t need anyway!

WHY ISN’T THERE PENSION REFORM?

I’m perplexed why the California government wants to raise taxes on all its citizens, but isn’t willing to reform their own pensions?  Is this not a double standard?  If the government really wants to help the schools, public transit, roads, and other state infrastructure, shouldn’t they reform one of the biggest fiscal burden in the State?

All the State has to do is lengthen the retirement age or increase the age at which someone can receive a pension.  You can retire at 50 if you want, but you’ll still have to wait 15 years until 65 to collect your pension, for example.  Pretty easy stuff.  The private sector doesn’t even have a pension, just a woefully inadequate 401K plan which one can only contribute $17,000 of their own money a year starting in 2012.  I doubt many private sector employees under 40 are expecting to receive their Social Security retirement benefits either.  Contrast that with tens of thousands of dollars of pension income for life, and it’s clear the dichotomy is huge.

Oh crap, I realize why there’s no pension reform.  Those making the laws are state government employees with pensions!  Why on earth would they be willing to sacrifice their own money for the good of the country, when they’ve sworn an oath to do what’s right for the State?  Silly me.

TIME TO UNDERSTAND THE NICE BUCKS

The average California state and local government employee makes $68,500 according to the 2008 US Census Data, while their average pension is $45,700.  Meanwhile, the average private sector employee wage is $46,500 vs. an average Social Security paycheck of only $15,000 a year with no pension.  The pension is literally triple the benefits received by the private sector employee!

Furthermore, the typical government employee works from 25-55 years old and then retires for 30 years while the private sector employee works from 25-65 years old and retires for 20 years.

There are more than 9,000 beneficiaries of CalPERS, the largest state retirement plan, who receive more than $100,000 a year.  That’s right, $100,000 a year+ for the rest of your life at a cost of $1 Billion+ dollars annually for this organization alone, and there are many more!

In other words, a State employee not only makes more while working, gets more while retired, and works for less amount of time!  Hook a brother up!

NOW YOU KNOW

Since everybody likes to spend other people’s money to fix the system and not their own, now you know why it is wrong to give people the power to raise taxes on others without paying more taxes themselves.

If you are a high income earner, usually defined by the government of $200,000 and above, you will always be screwed, even in a democracy thanks to mathematics.  You will be in the minority by nature due to your income, and everybody will want to get their hands on your money by voting to redistribute your wealth.

You must never, ever disclose how much money you make as a result.  In fact, if you can defer as much money as you can while living in a high income tax state or country, and receive distributions after you move, the better!  It’s important to pretend you are poor so nobody comes after you.  If the very government isn’t willing to make some sacrifices to help balance the budget, why should you?

Readers, I’d love to hear more about the shenanigans your State or Country is playing with regards to balancing their budgets.  Anybody out there from New Jersey, Illinois, and other fiscally irresponsible states? 

Note: I want to make it clear that this post’s aim is highlight the hypocrisy of the government, and is not an attack on any particular union group.  It’s only logical for each individual group to not give up some of their benefits for the greater good.  However, if that’ what we are being asked, then at the very least, government officials should reform their own pensions, and the pensions of all state employees if they are asking for more tax revenue from us.

Photo 1: Calwatchdog.com
Photo 2: Joshua Rauh, Northwestern’s Kellogg School of Management.

Regards,

Sam

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A temporary payroll tax cut extension or a temporary tax cut anything is a mistake.  The important issue to understand is what people do with their money during a temporary tax cut. If you know that a tax cut is temporary, you aren’t going to spend your tax savings because you know a tax hike is coming.

Given you aren’t spending your extra income, you are doing nothing to stimulate the economy. In fact, not spending your income is hurting the economy more than if there were no tax cut since we are robbing from Social Security in the future.  Giving tax revenue to the government would at least be wasted on some social programs.

A non-reaction to temporary benefits is as clear as day. We are taught this phenomena in high school economics, college economics, business school economics and observe our own actions in the work force.  Here are some examples to help illustrate:

Example 1: You won’t stop training your hardest if your next opponent after Peewee Herman is Mike Tyson.

Example 2: You won’t stop studying after your open book mid-term if your final exam is closed-book and accounts for 30% of your grade.

Example 3: Samsung Electronics won’t stop innovating its smartphones just because Apple didn’t release its iPhone 5.

Given you agree with the three examples, why would you ever spend your payroll tax cut income when you know you’ll have to pay more payroll taxes in 2013?

WHAT ABOUT THE REALLY POOR?

Let’s say you earn $20,000 a year in San Francisco or Manhattan.  There’ no doubt that you are poor.  With a 2% temporary payroll tax cut, you are saving $400 a year, or $33.3 a month, or $16.75 per bi-weekly paycheck in taxes.  Because you only earn $20,0000 a year, you live at home with the parents or rent an apartment with a couple roommates.  To spend much more than $500 a month on rent doesn’t really work.

$16.75 more income a paycheck should provide a boost to consumption since someone making $20,000 likely spends all their money on necessities.  However, if we look at it from a economic stimulus angle, given the bottom 50% of income earners account for just 12.75% of all income, there won’t be as big of a stimulus as desired.  Given payroll taxes go up to $106,800 in income, one might be tempted to think that a bigger impact would occur.  Again, after a certain subsistence level, people just save any temporary tax cuts for the inevitable increase later on.

One can argue though that the poor would have an even higher propensity to save the temporary tax cut because money is that much more valuable.  Sock away for a rainy day and do everything possible to increase one’s income.

A bigger issue lies in those who live outside their means.  At every income level beyond poverty, one should be able to spend less than they earn.  We must adjust our lifestyles accordingly.  Hence, to those who crave a temporary 2% payroll tax cut extension, ask yourself really why this is?

SOLUTION TO THE PROBLEM

We cannot blow a $100 billion+ hole in Social Security for temporary relief when the system is already underfunded. Would you rather pay for this payroll tax cut extension by charging a surtax on income over $1 million like Democrats want?  Or would you rather pay for the payroll tax cut extension by freezing salaries of Federal workers and firing more government employees like the Republicans want?

Since I neither make over $1 million a year or am a Federal Government employee, I am objective in saying do neither. Instead, implement a permanent Federal tax decrease for all levels while increasing the breadth of people who pay Federal taxes. A permanent tax decrease until the next President comes along will provide a tremendous signal for companies to start hiring again, and people to spend even more of their disposable income.

Readers, why is there a debate about the payroll tax extension when it is obvious that it will do more harm than good and do nothing to change consumption habits?

For those who make $100,000 or more, have you noticed a $2,136 increase in disposable income since the payroll tax was cut to 4.2% from 6.2%?  For those who make under $100,000, have you noticed any increase in disposable income?  Are you willing to hurt Social Security more since you don’t think it’ll be around anyway?

Note: My definition of “temporary” is one to two years.  The best definition of “permanence” is four to eight years max given the term limits.

Regards,

Sam

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The debate rages on whether the top income earners who pay most of the federal taxes or the bottom 47% who pay little-to-none of the federal taxes, should pay more taxes and help our country.  Clearly, the answer is that everybody should pay some federal taxes, since everybody is benefiting from the federal government.

Have you ever stopped to think who is really being screwed here?  If you are paying little-to-no federal taxes, is the government, rich people, and corporations really screwing you?  If you are in this situation, are you hoping to pay more taxes so you can get screwed more?  You can’t have it both ways now.

Perhaps the people really being screwed are the “HENRYS”, the Higher Earners Not Rich Yet folks who are in the top income tax brackets (33%/35%), and who don’t make the majority of their income from dividends and long term capital gains which are taxed at 15%?  This is something to really think about here, because for some reason, people equate the Top 1% with the Top 0.1% who are indeed like Warren Buffet paying a lower tax bracket than many of us middle class citizens.

Here’s a quote from Edward which sums up the point quite well:

If you want someone to blame for your high effective rate of taxation (which isn’t really that high internationally) it is less “welfare queens” and more a system in which actually working for a living is disincentivized. You’re right about the bite of taxes if you’re a high wage worker (say lawyer, doctor, CFO at a small company). You’re easy to track so you’ll probably be paying close to 30% in income tax, 6% in payroll tax, 8% in state tax, 1-2% in unemployment fund taxes plus sales tax, fees and all the rest. Heaven help you if you’re a small business owner earning a few hundred k and eat self employment taxes too.  It’s not hard to go above 50% of earned income if you’re a hard working small business owner in the 130k+ range.

On the other hand you have rich people who are not high wage workers. Who didn’t spend decades of blood, sweat and tears getting either themselves or their small business into a position to have the enviable problem of a 400k paycheck. They are the “investor class” who pay 15% on most of their income since they’re buying and selling stocks is somehow privileged over letting everyone else do the real work that makes that stock rise.

Not only is there a much lower income tax on long term capital gains, but of course payroll taxes, unemployment taxes and all the rest fall away too. This isn’t even getting into tax dodges like “like kind” exchanges which can let you buy and sell investments with literally 0 tax liability year to year or carrying forward losses to offset taxes on gains.

Warren Buffet and Bill Gates mentioned that with their investments and portfolios they could literally defer any and all taxes until after they’re dead. One of the world’s richest man can literally pay nothing in taxes for a decade or more in our current system while a Manhattan lawyer who grinded it out for 20 years of school and 10 years of 80 hour weeks eats a 50% effective rate.

That’s where HENRY (high earnings not rich yet) comes from, the teeming masses of strivers who do actually pay a lot of taxes. The almost rich who subsidize the super rich investor class. Honestly none should be out more forcefully against the wall street plutocracy then the high income worker since nobody gets screwed over more in favor of Wall Street types then them.

Thoughts everyone?  Should the people right around the 1% be the ones protesting instead?

Here’s another scenario analysis to help the discussion going: Let’s say the 53% who pay all the federal taxes somehow get expunged from society.  What do you think happens to our economic system?  Let’s say the 47% who pay little-to-no federal taxes are expunged, what happens to our economic system?

Which scenario would you choose to live in and why?

Photo: Chopped Cock, Delos, Greece, 2011. Sam.

Regards,

Sam

No matter how long it takes, I will fight for equality.  The best system for taxation equality is providing a flat tax above a certain poverty level or income level so that everybody pays something to support our country.  If the poverty level is $20,000 for a family of four, let’s keep federal taxes low to nothing since there are already state taxes, social security taxes, and medicare taxes to pay.  However, we should probably encourage further education on why it’s probably not a good idea to have any more children if one is having difficulty taking care of themselves, despite the misplaced policy of a $1,000 child tax credit for certain income earners and below.

Perhaps the flat tax income threshold is at $33,000, the halfway point between the top and bottom 50%.  After $33,000, everybody pays a flat tax rate of 20% on all income, which includes investment, dividend, and interest income.  No loopholes, no deductions, 20% is 20%.  If you’re making under $33,000, your tax rate is lower.

Or perhaps the income threshold is above $106,800, where social security and medicare taxes disappear.  We tax people progressively up to $106,800 and then a flat tax afterward.  One of the big arguments some have against a flat tax is that it’s regressive, since the rich don’t pay any more social security and medicare taxes after $106,800.  Well guess what?  Although you don’t have to pay those taxes above $106,800, you also don’t get any benefits either!  Do you really think there is a free ride with our government of waste?  Of course not.  Please understand this point.

With a flat tax system after a certain amount of minimum income, the person who makes 10X more, pays 10X more in absolute dollars.  Nobody can logically argue against equality.  But, for those of you who feel that discrimination is the way to go, here’s a story of Bar Stool Economics which I stumbled across on online that hopefully sheds some light.

BAR STOOL ECONOMICS

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.

The fifth would pay $1.

The sixth would pay $3.

The seventh would pay $7.

The eighth would pay $12.

The ninth would pay $18.

The tenth man (the richest) would pay $59.

So, that’s what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve ball.   ‘Since you are all such good customers,’ he said, ‘I’m going to reduce the cost of your daily beers by $20. Drinks for the ten now cost just $80.’

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men – the paying customers? How could they divide the $20 windfall so that everyone would get his ‘fair share?’

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

With the new system:

The fifth man, like the first four, now paid nothing (100% savings).

The sixth now paid $2 instead of $3 (33%savings).

The seventh now pay $5 instead of $7 (28%savings).

The eighth now paid $9 instead of $12 (25% savings).

The ninth now paid $14 instead of $18 (22% savings).

The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before and the first four continued to drink for free, but once outside the restaurant, the men began to compare their savings. “I only got a dollar out of the $20,” declared the sixth man. He pointed to the tenth man, “but he got $10!”

“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got TEN times more than I!” “That’s true!” shouted the seventh man. “Why should he get $10 back when I got only two? The wealthy get all the breaks!” “Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!”

The nine men surrounded the tenth and beat him up. The next night the tenth man didn’t show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something very important.  They didn’t have enough money between all of them for even half of the bill!

The people who pay the highest taxes get the most benefit from a tax reduction.  This is called, “No shit Sherlock”.  Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

For those who understand, no explanation is needed.

For those who do not understand, no explanation is possible!

Readers, why do you think people still accept discrimination?  Is discrimination OK, so long as you aren’t the one being discriminated against?

Regards,

Sam

If you’re about to have heart surgery, you’d rather have an experienced surgeon operate rather than a first year resident wouldn’t you?  If you’re looking for some entrepreneurial advice, you’d rather pay $300 to listen to Ron Conway, the godfather of angel investing, rather than some 19 year old kid with a failed start-up correct?

Given you agree with me 100%, why on earth would you ever listen to someone who proposes tax policy on higher income earners if they don’t make much themselves?  If you make $60,000 a year, you have no business telling what someone who makes $200,000+ a year how they should spend their money, how they should feel about paying more taxes, how much they are paying in taxes and why they should pay even more taxes.  Why?  Because a $60,000 income earner has no idea!

If you are making hundreds of thousands of dollars or more a year and once made just $25,000 dollars, you have way more credibility talking about appropriate tax policy and how to make money, at the very least.  You might even be able to talk about the merits of education and work ethic.  But of course, those who make less will get all up in your face for saying work ethic, education, and tenacity aren’t correlated.  They aren’t if you don’t want to make money.  They are, if you do want to make money.

If you’re making a middle class salary, good for you!  America cannot prosper without a strong middle class.  But, if you are an honorable middle class citizen, you just don’t have a say on how to tax those who make more.  If you so happen to be one of the lucky tens of millions who don’t pay any net Federal taxes, you should consider not voting on candidates who want to tax the upper income earners more.  Just count your blessings that you don’t have to give money to a government that is skilled at wasting your money.  The more noise you make, the more you will draw attention to yourselves, and the Sentinels will find and destroy you.

No income earner is better than another.  Whether you make $50,000 a year or $500,000 a year, you have the same liberties.  There’s only a problem when someone who has no idea of what it takes to make over $200,000 complains that the “rich” should disproportionately pay even more of their income to taxes.

Readers, shouldn’t we trust all wealthy people who’ve been poor before instead of poor or middle class people who don’t know what it’s like to earn more and pay more taxes?

Why do people in the lower income tax bracket think they know what’s best for those in the highest income brackets?

* $200,000 is an arbitrary number since this is the income level that is considered rich by the current administration.  $60,000 is less of an arbitrary number as it is roughly 20% higher than the median per capita income.

Regards,

Sam

View: You should defer or shield as much income as comfortably possible until retirement to minimize your present tax bill.  The odds of your retirement income equaling your working income is slim-to-none.  Therefore, your retirement tax rate will be much lower.

In the process of refinancing my primary residence mortgage down to around 3% for a 5/1 ARM, it dawned on me to also check what the rates are for my conforming rental mortgage.  I just refinanced my rental property last year from a 30-year fixed at 5.25% down to a 5/1 ARM at 4% because I took a stance that rates weren’t going anywhere, and that I would pay off the loan in 5-6 years time.

It turns out that I can refinance my rental property mortgage down to 3.375% from 4% with no out of pocket costs.  At 3.375%, all the costs are baked into the rate.   Conventional wisdom says to refinance your mortgage whenever you see rates 50bps (0.5%) lower than your existing loan, with a break even period of 12 months or less.  With a break even period of 0 months, and 75bps lower, refinancing now is a no-brainer!

My net income from this particular rental is around $1,000 a month.  That’s after HOA dues, mortgage interest, maintenance, depreciation and property taxes.  Not huge, but better than a poke in the eye.  If I had no mortgage at all, the net income would be closer to $2,400 a month at today’s rent, which is an income stream I’ve been planning for since first purchase.  Unfortunately, I pay about a 30-33% effective tax rate (federal + state) on the rental income thanks to the progressive nature of our income tax system.

Then a light bulb went on………….

HOW TO LOWER YOUR TAXES BY DOING A CASH-OUT REFI

Banks always want to make money, and one of the ways is by lending good creditors lots of money!  The mortgage officer said that I could do a cash-out refinance up to 75% LTV of appraisal value.  In other words, if the property appraises for $700,000, and I only have a $300,000 mortgage (43% LTV), I could cash out $225,000 ($700,000 X (0.75-0.43)) and increase my mortgage size to $525,000 ($700,000 X 0.75)!

Wouldn’t you like to have an extra liquid $225,000 lying around for only 3.325% a year to charter a private jet and make it rain in Vegas? Tempting!  But realistically, let’s understand how doing a cash out refinance shields you from taxes.

Using the handy dandy Bills.com mortgage calculator on the top right of this site, we discover that a $300,000 mortgage at 4% costs about $1,433/month, and after all other costs, the net rental in this example yields $1,000/month.  Meanwhile, a $525,000 mortgage at 3.375% costs $2,321 a month.  The net rental income of $1,000 practically gets wiped out, which is a good thing, because now you won’t have to pay 33% taxes on it while working!  That’s a nice $3,960 LESS taxes to pay a year thanks to a cash-out refi for now.

The other benefit of having $225,000 cash in the bank is that you can choose to invest, gamble, blow yourself up, or do whatever you want.  Ideally, you would simply find a tax free and “stable” municipal bond fund that pays over 3.375% and hold it to maturity.  There are actually tons of muni bond funds that pay over 6%.  Finally, let’s say the property market absolutely detonates, at least you’ll have pulled out a good chunk of change and have something to show for it.

Only when you’re retired, and no longer earning an income that commands a 33% effective tax rate will you pay off the entire mortgage.  During retirement, I expect my effective income tax rate to fall to 15%, thereby saving 18% (33%-15%) X $12,000 = $2,160 a year.

YOUR RETIREMENT INCOME WON’T EQUAL YOUR WORKING INCOME, SORRY!

People fool themselves into thinking that if they can make say $100,000 a year on average from their job, they can generate $100,000 a year in passive/interest income by saving and investing for decades.  Newsflash!  At today’s risk free rate of 2% on the 10-year government bond, you will need $5 million bucks to generate $100,000!  And if you are in the top tax bracket and make say $1 million a year, you will need $50 million bucks to generate that level of income and pay the same taxes!  This is the argument why paying taxes now and doing a ROTH IRA is dumb.  It’s better than not saving, but tax planning wise, it’s foolish.

Stop deluding yourself into thinking you’ll be making the same amount of money in retirement.  Your goal – especially for those of you in the highest income tax brackets – should be to pay as little taxes now, and defer as much income as you can comfortably allow during your retirement years to minimize your tax burden.  The government isn’t putting your money to good use, and half the US population isn’t contributing any federal income taxes.  As a result, you might as well not contribute as much either!

Readers, have you ever thought or heard about this idea of cash-out refinancing to lower your taxes?  Is this a good or bad idea?

Should we be deferring as much income as possible towards our retirement years?

Do you believe you will be able to generate as much retirement income from your investments as you do from your day job income?  Do you believe in unicorns?

NOTE: Talk to an accountant and mortgage officer about what the tax implications are. You’re technically not allowed to write off the interest expense from a cash out refi or HELOC if you are using the proceeds for anything other than on the maintenance and improvement of your home. That said, there’s a lot you can do!

Regards,

Sam

Generally it’s pretty poor taste when a billionaire tells other people to contribute more money to anything.  It’s like sharing a cab ride with Warren Buffet and he asks you to pay with your last $10 bill when he’s got a wad of $100s.  Not cool.  However, Warren’s New York Times op-ed piece finally highlights what Americans everywhere have been wondering all along.  Who are these “millionaires” President Obama and the Democratic party in Congress keep targeting?

In practically every speech on taxes, President Obama likes to pit the wealthier population against everyone else by using the term “millionaires” to pay their “fair share” of taxes.  Class warfare is unnecessary.  As you know, President Obama wants to raise taxes on individuals making $200,000 and families making $250,000.  First of all, why does $200,000 + $200,000 = $250,000 instead of $400,000 as a couple is beyond me.  Is one spouse supposed to suddenly make only $50,000 from $200,000?  Give me a break.  Talk about blatant sexism.

What’s more interesting is how President Obama keeps on referring to those individuals making more than $200,000 as “millionaires”.  Last time I checked, if you make $200,000 a year, you aren’t necessarily a millionaire.  In fact, you are likely far from being a millionaire!  But according to President Obama, it takes you a nanosecond to become a millionaire once you make $200,000 a year.

HOW LONG DOES IT REALLY TAKE TO BECOME A MILLIONAIRE?

If you are earning $200,000 a year in California for example, your after tax take home pay is roughly $140,000 (30% effective tax rate).  Let’s say the very next day after getting your Master’s in whatever, you hit the jack pot and land a plum job making $200,000 at the age of 31.  You are a Financial Samurai reader and save an aggressive 50% of your after-tax income ($70,000), earn a 2.3% risk free annual rate of return, and never stray from your savings habits.  It would take you roughly 14 years, at $200,000 a year in gross income to become a millionaire!  Not bad by the age of 45, but you’re living like a 25 year old in the process.

Now let’s get more realistic here and assume that you save 20% of your after tax income, $28,000 in this case.  The other $112,000 is spent on tuition for two kids, food, travel, clothing, rent/mortgage, transportation, things and vacations.  It would take 36 years to accumulate $1,000,000 in savings.  You’d be 67 years old by then and ready for Social Security, if it’s still there!  But, because your taxes just went up by another 5% if our government gets their way, it will take you closer to 43 years to get to millionaire status, or 74 years old, hooray!  Even if you model a constantly 4% rate of return on your $28,000/annum savings, it would still take you more than 25-30 years to accumulate $1 million.

Finally, let’s get brutally realistic here and go by the national savings rate of 5%.  If you were to save a pitiful 5% of your after tax income a year, it would take you 143 years to get to that magical $1,000,000 nut!  In other words, you will never get to millionaire status at $200,000 a year because nobody lives until 174 years old except for Yoda and Sookie’s boyfriend Bill from TrueBlood.  14 years, 36 years, 43 years and 143 years is a far cry from a nanosecond, don’t you think?

I’m sure many of you believe that you will have returns like Warren Buffet and get to millionaire status much quicker than the examples above, even though the markets have gone nowhere for the past 12 years.  I wouldn’t expect anything less than genius investors from the Financial Samurai community!  Unfortunately, some of you will also waver from your savings rates and actually lose money in the markets too.  Hence, let’s just go with the 10-year yield risk free rate and monk-like savings discipline shall we?  Thanks.

THE DEFINITION OF A MILLIONAIRE = A MILLIONAIRE

Warren Buffet sets our clueless politicians straight by suggesting we raise taxes on those making over $1 million a year.  Brilliant!  Let’s raise taxes on millionaires, you know, those who make over $1 million a year.  If the President insists on using the word “millionaire” during his tax speeches, then let’s keep things consistent.  By the time you are making $1 million a year, undoubtedly you will have a net worth of close to a million if not much more.  Even if you graduated from college and started earning $1 million a year, and saved 90% of your tax income, it would still take two years to have a million bucks in the bank.

The Democrats could EASILY pass a tax increase on those making $1 million a year.  Instead, they keep butting heads with Republicans and the general public by trying to push for tax increases on anybody making over $200,000.  This is just politics because it doesn’t matter whether taxes are increased on the top 10% or the top 1%, it’s still not enough to do anything to help our budget deficit.  A 50% tax rate on income over $1,000,000 from 35% would only raise $48 billion in revenue over the next decade according to the Tax Policy Center.  Remember, the S&P wants us to cut $4 trillion in that time frame!

Nobody will openly argue that raising taxes on someone making over $1,000,000 a year is not fair.  If they did, they would probably get publicly flogged.  I just don’t know why President Obama calls people who make $200,000 a year “rich” and “millionaires”.  Maybe you do.  Millionaires are those who either make $1 million a year or more, or who have a net worth in the multi-millions and still earn at the highest federal tax bracket of $380,000+ as far as I’m concerned.

LET’S FOLLOW BUFFET’S LEAD

If the Democrats want a taxation victory, a way to marginally help increase revenues, and ensure a Presidential victory in 2012, follow Warren Buffet’s suggestion and raise taxes on millionaires.  Don’t go after the hard-working doctors, professors, and business owners who make $200,000+ a year.  They aren’t the millionaires we refer to because the majority of them are likely not millionaires!

Thanks to Warren for knocking some sense into Washington DC.  I’m all for taxing millionaires more so that the rest of us can benefit.  Being able to vote to raise taxes on other people and not on ourselves to help ourselves is a beautiful thing.  Once we implement this tax compromise, we’ll get President Obama for four more years, I guarantee it!

Readers, why do you think President Obama is so hard up on raising taxes on those making over $200,000 when it does next to nothing in balancing the budget?  Why doesn’t President Obama understand that $200,000 is not a million dollars?

How long will it take for you to become a millionaire based on your after tax savings rate average and assumed investment rate of return?  If you are already a millionaire, what is your definition and how long did it take you to get there? 

Why didn’t Buffet just write a US$50 billion check to the Federal Government to help us instead of give it to the Bill & Melinda Gates Foundation?

Regards,

Sam