Why punish the rich for good choices?

Minneapolis Star Tribune ^ | 12/3/05 | Gregg J. Cavanagh

[rhema]

After reading the Socialist claptrap "Wondering if tax ride goes too easy on rich" (Nov. 20), I was left wondering if I should cancel my subscription to the Star Tribune. I decided to write a rejoinder instead.

Those in favor of soaking the rich cite "ability to pay" as if it were some immutable characteristic, like race or eye color. After all, if someone was lucky enough to be born with more "ability to pay," why shouldn't he or she share with the rest of us poor schlubs who were born without that attribute?

This attitude is fostered by the media's fixation upon the so-called "idle rich" -- those who acquired their wealth through the fortuity of birth. While I question society's claim on the assets of even those people, I can at least understand a philosophy that favors some redistribution of wealth to ameliorate the effects of truly random events.

But for most wealthy people (a class to which I do not belong), their "ability to pay" is the direct result of choices they made throughout their lives. They invested years in getting an education while others settled for entry-level jobs straight out of high school. They worked nights and weekends while others were enjoying happy hour or spending time on the golf course. They saved their earnings while others were buying new cars or big screen TVs or stereos. They invested their savings in start-up businesses or inventions or property or stocks. They steered clear of the temptations of alcohol, drugs, gambling and crime.

Could someone please articulate for me the moral principle that dictates that persons who study harder, work harder, relax less, save more, spend less and invest more should be compelled by government to give their earnings to persons who do precisely the opposite?

[Can i say that here?]

Respectfully, I disagree.

My greatest asset at the moment is my income. A paid for house means $640.00 of monthly income that I can do with as I please, or as I need.

If I invest it at a measly 10% (I saw 6 months savings bonds at 4.65 today) and save 6.25% in interest, that's a 16.25% turnaround.

With no house payment and no debts, I need a yearly income of only $40,000/year to fully fund 2 roth IRA accounts, two ESA's for the children and all of our monthly expenses.

Couple that with the emotional security that provides to a young stay at home mother who has no desire to re-enter the work force, and it is absolutely the right thing for me to do for my family at this point in time.

[Dawsonville_Doc]

time to spare. space to use. resources to manipulate. as well as: insurance. insulation. power. sex.

Exactly. Well said, KP. It will not grant you freedom, or love, or a clear conscience, but it will give you all these others. Speekinout, your word was not blessed- it was rich.

[Pukin Dog]

I wont attack you, because it is people like you who make it possible for people like me to make money hand over fist, because you are debt-averse. Actually, I wish there were more like you. There is too much competition for houses today anyway. A Roth IRA is a horrible investment compared to Real Estate.

Good luck.

[SDGOP]

I'm lost, could you explain perhaps in numerical terms why its better to keep debt on a house? (I dont know much on the issue)

[Can i say that here?]

Well now you've got me curious. What is it you do?

And anything I can do that makes me and a fellow freeper more prosperous is good in my book.

A quick anecdotal story about real estate. My in-laws owned a townhome outside of Pensacola Florida. They were positions to sell it at a hefty profit in August of '04 and then retire. Hurrican Charley struck Florida and all insurance Co's with binding new business and the sale was put on hold. Before they could finalize, Ivan struck Pensacola and damaged both the property for sale and the condo they had just purchased as it's replacement.

In addition, my FIL's work project was struck and put on hold for over 6 months.

They expected to retire as soon as the sale was finalized. A year and a half later, they are still trying to sell the property (Hurricane Dennis damage to repair) and also recovering from the setback of a recent surgery for compressed disks in his back; a product of being a workaholic trying to maintain retirement goals while juggling the debt of buying real estate in Florida.

Their current expectation is that he'll need to work at least 3 or 4 more years to fully recover from the hits they took from the hurricane damage to their properties.

I'm not only debt-averse, I'm also adverse to the risk that is inherent to it.

[TopQuark]

who pay 11 percent tax

Stop repeating this ridiculous socialist propaganda!

If she did pay 11% tax one year she did it for the same reason you would pay 11% or no tax at all: she had losses.

You should be ashamed of yourself to be repeating socialist propaganda on a conservative forum.

[Pukin Dog]

What do I do?

I dont do anything these days.

Most FReepers know that I used to fly for the Navy then for Delta, but since then I have been buying up houses in the San Diego area and renting them out, letting my tenants pay the mortgages while I get all the deductions. I own 6 homes and am working on 2 more.

The trick, is not to flip homes, but to combine equity and tax breaks to profit from being in debt. You see, if I get enough rent to pay positive cash flow towards the mortgage + the cost of the annual property tax, that's great. But, if I don't get enough rent, since my properties are held by a holding company that I created, it would be a net loss, right? Well guess what? Business losses are......tax deductible! So, it doesn't really matter if I cant find someone to pay enough rent to cover me. I win either way.

When I get enough cash over debt, I refinance the property to put myself more into debt, while pocketing enough to finance the purchase of MORE property (or a bass boat)courtesy of current tax laws.

Look at it this way: If interest rates go up, I get more of a tax deduction from the payments. If they go down, I can afford more property to be in debt on, so I get a bigger deduction again. I pay for gardening and landscaping on my properties to keep them attractive, and my other business expense is a full time handyman keeping the properties in perfect condition for sale or appraisal.

I get no income from this, but should the market turn downwards, I can sell the properties, close the business and pocket all the money from the sales.

That is a simplified explanation, but the key is to not be afraid to use your money to make more money. If I were you,(Can I say that here?) I would make sure that my family was living as close to the vest as possible, so that I could put aside at least 20% of my net income. You would be amazed at what Banks are willing to loan you, if you don't really need the money. You don't go out and buy the biggest house, you go out and find the one most likely to grow in value based on location, neighbors and condition.

It is a very dry subject, so most people don't like to read up on tax laws, debt and other things like this. But if you do, you will be ahead of the game.

But, reality is that bad things happen, so you still need to have that nest-egg available should things go badly. SAVE YOUR MONEY. Then, when the time is right, use it to make more.

[Rembrandt]

"I wonder how long till democrats propose a 'wealth tax' where they tax a ceartain % of your bank account/stocks."

Where have you been? It's called the Estate tax; GWB is trying to get rid of it to the chagrin of the Dims.

[SDGOP]

I know about the estate tax, but when i talk about a wealth tax i mean when your currently alive.

Ie i have 500k in my bank account and every year i get charged a 10% tax on my holdings, so i have to cough up 50k a year. I know they have these types of taxes in europe..

[Can i say that here?]

Thank you for your openness.

As I said, I live in rural southwest Missouri. I found out the other day that 33% of the the residents in my county live below the pover(y level. Not exactly a thriving rental market.

I'm not trying to delve too deep into your personal portfolio, but if you are willing to discuss it....

Have you ever calculated your actual net worth? Assets vs. liabilities? At age 28, we are currently at approximately $107,000 actual worth. (We owe $70,000 on a $150,000 property. Two used, paid for cars worth $8,000 and $20,000 in the bank)

Have you calculated your actual APR on what you are earning on the properties? I know that it becomes quite intricate when you factor appreciation, interest rates, tax deductions, etc. Your accountant probably does quite a bit more than ours does, but then again that is what you pay him for.

I'm asking out of genuine curiosity. At my age, I'm still learning all the amazing opportunities that exists in this amazing country of ours.

thanks

One question...Well guess what? Business losses are......tax deductible! So, it doesn't really matter if I cant find someone to pay enough rent to cover me. I win either way.

A $10,000 business loss translates into an approximately $2,000 tax deduction depending on your tax rates, correct? It appears that this would leave you 8 grand in the whole as you took a $10k hit to avoid $2k in taxes.

I'm currently paying approximately $4700 in interest resulting in a possible tax deduction of $1170.00 at a 25% tax rate. I can't see the reasoning behind paying $4600 in taxes to avoid paying $1200 in taxes.

I'm always willing to learn, so any info you are willing to submit will be greatly appreciated. I plan to be quite wealthy when I retire..not because I did something great, but becuase I did it right for a very large portion of my life. I'm always interested in learning from folks who have been there and done that.

thanks.

[Sundog]

Having been one of those brave young men, I am aware of the enemy and the sacrifice.

Freedom from budgets.... my friend.

[RunningWolf]

Wow.

We thought we had it bad.

Wolf

[RunningWolf]

I wish I was in your shoes at age 28

Have good plans but understand that life will throw many curves at you. Real life choices will be made, some will forfeit great $$.

For me, I was at one time a fairly successful amateur bond trader (CBOT FUTURES) Think I might try to get back into it.

I guess the point there is, go into something you understand and can work with.

Wolf

[latina4dubya]

thank you for the URL...

[UpToHere]

I have never met anyone who could not trim their living expenses by 20%. Most people living paycheck to paycheck could deny themselves something long enough to put 20% of their former expenses in the bank for a year or two.

Everyone should read Fred J. Young's book, "How to get rich and stay rich." He was head of the Chicago Harris Trust and Savings bank's trust department. This little book is a written presentation of his well received talks given to local interest groups.

Anyway, the main point of the book is, of all the trusts he has reviewed, his conclusion about becoming rich. Only three ways to do it:

1. Marry it (Kerry),

2. Inherit it (Kennedys), or

3. Spend less than one makes, and let compounding work.

He was a truly gracious man. Unfortunately he passed away a number of years ago - he had made his million.

[SDGOP]

Some of the loons i go to school with like the idea.. THe scary thing is in 20-30 years these people will be running the democratic party.. isn't that something to look forward to?

[TaxRelief]

Business losses are......tax deductible!

Not indefinitely.

[Pukin Dog]

Ive calculated my net worth, but I aint going into that on the Internet. I have almost no liabilities at all. I have a golden rule, which is that any liabilities that I do purchase,(cars, boats, electronics) I pay for with CASH. Except for a home, people should always pay with cash. Remember I said there is good debt and bad? Good debt is debt for assets. Bad debt is debt for liabilities. I consider anything that loses value to be a liability. You are correct that my accountant is responsible for all the calculations you inquired about.

Lets just put it this way; I can do what I want when I want, wherever I want, and that's all I want. Get it?

I'm currently paying approximately $4700 in interest resulting in a possible tax deduction of $1170.00 at a 25% tax rate. I can't see the reasoning behind paying $4600 in taxes to avoid paying $1200 in taxes.

Don't forget that you own the asset. Have you calculated the property value into this equation? I expect the value of each of my properties to increase by at minimum 15-25K per year. Now, if you had to pay 4700, minus 1170, to increase your net worth by say, 15,000 would you consider that a bad deal? And, you can consider that 15K FREE MONEY? When you sell, or even refinance, you can stick that money right in your pocket. But what most people do, which is really dumb, is to sell that asset and put it towards a larger debt which they can barely afford, instead of keeping the asset, refinancing it and taking money off the top to invest in a second asset, while still owning the first one.

So, year one you've got 15K. Next year 15 from another asset, and 20 from the first one, because its value is still going up. Note; renters are paying all the bills, and tax breaks are making up for vacancies and other losses because this is a business. I have not spent a personal dime beyond my original investment, but my assets are making money for me every day.

I cant get more specific, but my advice to you, would be to use your money to increase the value of your property. Simple landscaping from a professional can do that, as long as the home is already in good shape. Keep your cars in good running condition, and don't EVER by a new car unless you can pay cash for it. Financing a new car is the single dumbest thing that Americans do with their money.

If I were you, I would take at least half of that 20K from the bank and put it to work for you in the stock market. Don't be greedy, just get a no-load index fund. When you get back to 20K, buy another house and put good renters in it. They will pay for it, you will get the tax breaks, and every dime of value in the home goes in your pocket.

Do this two or three times, and banks will line up outside your door to loan to money to do it on a larger scale.

[jmcenanly]

Do you suppose Bill Gates would be making more money if he hadn't dropped out of college?
More likely, he may have learned that what couldn't be done.

[jmcenanly]

Usually, inherited wealth disappears after three generations if the kids go into something else. Consider the Rockefeller. John D. Rockefeller became the richest man in the world using tactics much like those of Bill Gates or Sam Walton. His children never went into the family business, and became country club republicans. The most recent generation, Jay Rockefeller, is somewhere to the left of Che.