Why Don’t We Have the Fair Tax Yet? A Late Night Rant.


IMG_0123About three years ago I published Ten Reasons that you should like the Fair Tax.   I gave ten great reasons that we should enact the Fair Tax – yesterday.  Things like not needing to keep records in case the IRS calls and asks.  Not needing to deal with the IRS at all.  Not needing to spend any time filling out forms.  Not needing to have special tax-sheltered accounts for anything.

How simple is this:  You walk into a store, buy something, and pay your Fair Tax when you pay your bill.  About 20% is added on to your purchase (assuming we stay with the same amount of government revenue).  This is compared with having 15% of your full income taken before you get it, plus another 12.4% for Social Security and 6% or whatever it is for Medicare.  If you spend all of your income, you pay 20% for the Fair Tax or about 30% with the income tax and payroll taxes.  If you spend less than your income and actually save, you pay even less with the Fair Tax.

The income tax punishes earning money.  The Fair Tax punishes spending money.

And it even gets better.  Because the company you’re buying stuff from doesn’t need to do fancy maneuvers to avoid taxes, like have a corporate headquarters in Barbatos, the price you pay for the things you’re buying are 10% less.  So you end up paying less than you pay now with the income tax.

So why don’t we have it yet?  Do you like keeping receipts?  Do you like funneling your child care money through a flexible spending account, and then risk losing it at the end of the year if you don’t spend it all?  Perhaps you like a check that is 25-50% smaller than it would be with the Fair Tax.

Maybe you’re worried that it doesn’t zap the evil rich guy enough and punish him for employing all of those people and making all of those products you use every day.  But then you forget about the prebate – money that comes to you to cover taxes up to a certain income level.  If you’re making $30,000 per year, you would still not be paying any taxes.  That evil high earning guy would be paying it all.  Ha ha haaaa….

So come on, what gives?  Why haven’t you called, emailed, and shown up on your Congressman’s door, demanding the Fair Tax?

Do you just like your accountant too much?  Do you like buying TurboTax every year?  ( Their ads talking about  your taxes being the story of your life do make it sound kind of exciting to spend an afternoon with your W2 forms and receipts.)

Tell me, please.  I’d like to know.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Picking Stocks for Long-Term Growth


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As I’ve said before, it is very difficult to predict the near-term future.  It is much easier to predict the long-term future, at least in the investment world.  This is not to say that it is difficult to predict if a given stock will go up or down the next day when some news is heard.  If a scandal breaks out, obviously the stock will fall in price.  Likewise, if a large drug company gets a new wonder drug approved, the stock will go up.  Sometimes a stock will still trade in an unpredictable way, such as when the price of the stock has already gone up so much on the expectation that the drug would be approved that it falls a bit after the actual announcement comes.  (This behavior is the reason for the old axiom, “buy on the rumor, sell on the news”.)  But in general the reaction of a stock’s price to news is fairly predictable.

The issue is that just as you can predict the direction of the stock due to the news, so can everyone else.  You will therefore never be able to profit off of the news since you’ll be in a long line to buy or sell the shares, and the people on the other side of the trade will have heard the same news and adjusted their prices accordingly.

The long-term side, on the other hand, does not seem to suffer the same fate.  While everyone has the same information and is able to do the same analyses, there still tend to be differences in price between what a company trades at and what it should be trading at given its future earnings.  Probably the reasons for this are that 1)it is more difficult to predict with certainty future earnings, so there is a “risk premium” included in the price and 2)people tend to get bored and therefore don’t have the patience to wait long enough for the mis-pricing to be resolved.  Whatever the cause, the behaviour of the markets works in the favor of the long-term investor.  It is normally fairly easy to pick stocks that will probably be worth more in the future (due to future earnings and dividends) and yet the price of the stock will not always fully take in these future earnings into account.  Buy buying a set of good prospects, the chances are good that one will outperform the markets, which are made of both good and not-so-good prospects.

So what are the traits for which to look?  I always look for as many of the following traits as possible:

1)A steadily growing stock price (a nice, steady increase over several years),

2) Earnings that have been growing steadily (which tends to cause the steadily growing stock price),

3)A respectable Return on Equity (15% or more),

4)Room for the company to continue to grow — the market is not yet saturated,

5) Consistency in the management team (don’t buy a stock when the people who made the business successful are moving on).

6) A strong cash position (low or no debt and a low debt/equity ratio).

7) A P/E ratio that is not high compared to historic values for the company.

Basically the idea is to find stocks that have been growing, have a management team that knows what they are doing, are well-functioning businesses that invest capital well, and whose share prices have not gotten out of line with future prospects.  In future posts, I’ll go into more detail on each of these traits.

 

 Your investing questions are wanted. Please leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Obamacare is failing. Here’s a better way.


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For years the Affordable Care Act was being rolled out in drips and drabs, and having portions delayed to avoid angering voters right before critical elections.  Now it is fully implemented and health insurers are falling out of the Obamacare marketplace left and right.  It is becoming clear that the predictions made by pundits as the law was being passed are coming true.  Healthcare premiums are rising way up due to the requirement that insurance have no limits and cover preexisting conditions (the money to pay for these things needs to come from premiums).  People are losing jobs as employers are cutting workers – both to stay below the 50 person threshold where health insurance is mandatory and to offset costs from increases in healthcare premiums.  Other employers are cutting fulltime employees and shifting them to part-time shifts (less than 30 hours per week) to reduce the number of full-time employees below the threshold.  Not only are people not getting insured – they are losing wages as well!

Predictions on the supply side are also coming to pass.  Doctors are quitting the practice to avoid having their payments dictated and face a mountain of paperwork.  Others are shifting to concierge practices and not seeing patients with insurance at all.   Networks are being shrunk to reduce costs, resulting in long drives to see specialists or even primary care doctors.  Copays are also going up as insurers try to cover costs.

Costs are also not decreasing  – they are increasing.  This is partly because individual who originally bought minimal plans, because this was what they could afford, lost those plans and had to pay for plans with a lot more services they may or may not use.  (This is like wanting to buy regular gas but being forced to buy premium.  Sure, it is better gas, but not worth the cost to many people.)  In addition, younger individuals are needing to subsidize the healthcare costs of older, sicker individuals.  Even with these increases in premiums, insurance companies are not covering costs.  Healthy individuals are deciding to go uninsured because the price is not worth the perceived value (if you are healthy), some individuals simply cannot afford the higher premiums, and the penalties for not signing up were delayed another year.  As a result, only the sicker individuals who are using far more healthcare than they are paying for are enrolling.  Because of this, premiums are not covering costs and it is expected that the government will need to bail out these insurers.

The Affordable Care Act actually exacerbates the issues that existed with traditional health insurance.  These are:

1) Everyone pays essentially the same cost whether they use healthcare or not, so there is an inclination to go to the doctor for every little thing and there is no reason to choose lower-cost treatment options.  Increased demand results in higher costs, and higher payouts result in higher premiums.

2) Pricing is greatly distorted by insurance.  Just try asking the front desk in your doctor’s office what a procedure will cost with your insurance (your portion and what the insurance will pay) and it is unlikely anyone in the office will know.

3) A lot of people aren’t paying, or paying very little, so those that do pay are paying for ten or twelve other people besides themselves.  (Imagine what eating out would cost if you had to pay for the meals of five tables sitting next to you.)  This makes fewer people willing to save up and pay because the costs are so much higher than the value received (for example, $10 aspirin in hospitals), so people would rather not save and then rely on charity when they need healthcare.

Realize that there is no magic that allows people to pay less than the cost of their care, on average.  If someone gets care for free, someone else must pay twice.  This is true of anything – someone needs to create the value that is used.  Everyone cannot have free cupcakes.  Someone needs to put in the effort to make the cupcakes and must buy the ingredients, and few people will make free cupcakes indefinitely if they are not compensated for their efforts.

The secret to reducing the price of healthcare, and making getting it a non-issue for virtually everyone just as buying food is a non-issue for anyone with a job, is to get most people to actually pay for it.  This means that they need to save up money for the inevitable times where they will need healthcare.  It also means having them pay for the services they receive to give them an incentive to use less or choose lower cost options when it really isn’t important.  The solution is therefore the following:

1.  Require that everyone sets up a Health Savings Account (HSA) and contributes a required portion of their income to the account, up to a certain dollar value of income.  The contribution percentage would decline after a certain amount is saved in the HSA, meaning that those who used little healthcare would have a higher take-home pay, providing an incentive to maintain high account balances and not spend money unless needed.  Those who cannot contribute enough to cover reasonable costs would have their contributions subsidized.  Any money left at death would be passed to heirs.

2.  Require that everyone also buy major medical insurance – insurance that pays for costs above a certain, large threshold, like $20,000.  Ensure that there are enough insurance companies competing that the price of this coverage is as low as possible and the service is as good as possible.   These policies must be clear on what is covered and government should fine any company that does not immediately pay for a covered service (no denying payments for sick people, hoping they won’t dispute the mistake and just pay the cost themselves).  The threshold could also be raised as an individual increased the amount in his HSA, thereby lowering the premiums.  For example, an individual with $40,000 in an HSA could have a major medical plan with a $40,000 deductible, which would cost less than one with a $20,000 deductible.

3.  Develop a high risk pool, subsidized by taxes, that covers those with really bad medical luck (like a major disease at 18 years old before starting a job and getting major medical insurance).  These individuals are rare so most people would be able to cover themselves with everyone saving up a portion of their income in an HSA, so spreading the risk out over the whole population won’t cost much.

4.  Require that all medical providers post costs and stick to those costs (no preference for one patient over another).  This would allow individuals to shop around for the best deal and eliminate price disparities as currently exist.

What would things be like after this plan is implemented?   Most people would just pay for their medical treatments out of their HSA when needed because they would have the cash saved up.  There would be no need for the doctor’s office to file insurance, reducing costs.  In addition, because most people were paying their bills and you wouldn’t need to pay for other people, costs would drop dramatically.  Imagine $20 office visits, $15 X-Rays, etc….  Hospital stays would be maybe $150 a day instead of the thousands they now cost per day.

There would also be incentive to save money, and therefore people would pick the cheaper option when it really didn’t matter and not use healthcare when not really needed.  This would cause less demand, and therefore lower prices.  Doctors could also provide a discount for procedures that really reduce costs like certain exams.  Prices would decline to the point where getting healthcare is no big deal for most people.  With most everyone paying for their own healthcare, the cost to cover those who could not would be easily obtained through charity or taxes.  Now that’s health insurance reform.

Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.