3 Things 2-7
02/07/2022 Although MAS is a financial services company, not everything published herein will be about numbers or investing. But no matter the topic, we hope for three things: 1) That you find the time you spend engaged worthwhile. 2) That you’ll reach out to us for help in any of our areas of expertise if something we discuss creates an urging in you to do so. 3) That you’ll share this with somebody new each time you read it. Thing One Go Ahead, If You DARE We all generally understand how bonds work. We buy them and we get interest payments and, at some point in the future, we get our money (principal) back as well. And, assuming the interest rate on the bond is higher than the inflation rate, we’re better off financially at the end of the transaction. It might be helpful for all of us to think of debts as the opposite of bonds or even as negative bonds. Instead of getting interest payments, we make interest payments. Instead of getting the principal returned to us, we eventually return the principal to some financial institution. At the end of the transaction, we are worse off financially that we would have otherwise been (unless we have invested the proceeds and earned a higher rate of return than the interest we’ve paid). In a perfect world we wouldn’t need any debt. Whatever we wanted, we’d have the ability to pay for out of the cash in our pockets. Of course, we don’t live in a perfect world. Many of us have more needs than we have the cash to satisfy so debt sometimes becomes a necessary evil. In those cases, we would do well to keep the acronym, DARE (another stolen concept by the way) in mind. Debt Avoidance Reduction and Elimination, in other words, should be our mantra. Debt Avoidance: Don’t take it on at all if you can figure out how not to. But if you have to, avoid as much as you can by properly categorizing and addressing wants versus needs. Reduction: If you have debt, you are paying interest and opportunity costs. Pay it down with that in mind rather than on the creditor’s “generous” payback schedule, which maximizes his profits at your expense. Eliminate: If you follow the reduction step you can eventually wipe the debt slate clean and move back to the avoidance step for future purchases.
Thing Two Math Is Math With the recent announcement about the US debt reaching $30 trillion, there was the inevitable chatter about budgets and deficits. That triggered some of our own thoughts on the subject that we decided to share. To start with, here’s an excerpt from a blog that we gratuitously steal from and share with you (with the permission of its author of course) from time to time. “..Here's the deal. Raising taxes by 100% on 100% of the taxpayers would in all likelihood not produce a balanced budget. That's right -- a 100% tax increase on 100% of the taxpayers wouldn't eliminate our deficits. That's why we need solid and sustainable economic growth led by the private sector, but that's not where we're headed anytime soon. Unfortunately. Fairness, like beauty, is in the eye of the beholder. Unfortunately, people’s judgment is often based on anecdotes that distort rather than illuminate. The story of the undertaxed Warren Buffett and his overtaxed secretary looms larger in the public’s mind than it should. Are higher taxes across the board and reduced welfare entitlements up ahead for We the People? Yes, both are going to happen sometime soon. And they will hit all of us. The problem is simply too big to be solved by a small percentage of the population. It's just math…” Believe it or not, the above was written nine years ago. Now let’s fill in the gaps with some current numbers data. The estimated federal tax receipts for 2021 are ~$3.6 trillion (corporate and individual combined and all other sources). The total estimated federal outlays for 2021 are ~$7.2 trillion. The top 10% of individual earners, a generous definition of “the rich” given that an annual income of $158,000 annually puts you in that category, paid roughly 70% of the individual income taxes. Individual income taxes account for roughly 50% of total federal revenue. Using those numbers, here are some calculations: 2021 Total Outlays: ~$7.2 trillion 2021 Total Receipts: ~$3.6 trillion 2021 Total Deficit: ~$3.6 trillion 2021 taxes individual paid by the top 10%: ~$1.3 trillion 2021 taxes individual paid by the bottom 98%: ~$500 billion 2021 Total individual taxes paid: ~$1.8 trillion That means if we increased the taxes on the rich (as defined above) by 100%, they would pay another $1.3 trillion but we would still have a deficit of $2.3 trillion. And even if instead went big and increased all individual taxes (on the rich and everybody else) by 100%, and thereby collected $1.8 trillion, we’d still have a deficit of $1.8 trillion. And that’s only in theory. We’d actually likely have a much larger deficit since the unintended negative economic consequences of such a tax hike would significantly reduce GDP and therefore tax receipts. Nine years have passed but it is still just math. The government and politicians aren’t likely to do the right thing with spending reforms - yet. But we can’t afford to compound that error by making villains of the job (and incremental tax revenue) creating private sector. Businesses, small and large, are the heroes, not the villains. Please remember this the next time you hear of a politician shooting at one of his favorite target.
Just A Thought
"Behold the turtle. He makes progress only when he sticks his neck out." James Bryant Conant