RPF0361-The_Power_of_If
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00:00:30.000 | - Here in the United States,
00:00:33.500 | we've just finished up a brutal two weeks
00:00:36.540 | of presidential politics being the central focus
00:00:40.640 | of our society.
00:00:42.140 | A week ago, it was the Republican National Convention.
00:00:44.840 | Then this last week,
00:00:45.880 | it was the Democratic National Convention.
00:00:47.780 | And if you're anything like me,
00:00:49.020 | this weekend, you're probably a little bit frustrated
00:00:51.920 | at the state of politics.
00:00:53.920 | Seems like most people are pretty frustrated
00:00:56.020 | at the state of politics.
00:00:56.860 | So today, I'm gonna try to give you an antidote
00:00:59.760 | to worrying about political elections
00:01:02.460 | and presidential candidates and all of that
00:01:04.860 | by talking about how,
00:01:07.060 | although the politicians might want to be in control,
00:01:10.780 | you are actually the one who's in control.
00:01:14.940 | (upbeat music)
00:01:17.520 | (upbeat music)
00:01:20.100 | Welcome to Radical Personal Finance,
00:01:32.660 | the show where we're focused on giving you the tools
00:01:34.660 | that you need to build a rich life now,
00:01:36.600 | while also building a plan for financial freedom
00:01:39.100 | in 10 years or less.
00:01:40.280 | Today, (laughs)
00:01:43.440 | hopefully a note of optimism in your day.
00:01:46.380 | Don't worry, I'm not gonna talk to you about politics.
00:01:49.120 | I'm gonna talk to you about freedom from politics,
00:01:52.920 | especially financial freedom from politics.
00:01:56.220 | (upbeat music)
00:01:58.820 | Desired outcome that I have for today's show
00:02:05.360 | is that you will go away from this show
00:02:07.840 | thinking about how much control that you really have,
00:02:14.140 | how much you really are in charge of your own life.
00:02:17.080 | Because frankly, it's hard. (laughs)
00:02:20.420 | It's hard not to be a little bit depressed
00:02:22.220 | by current political events.
00:02:24.360 | And if you're not listening to the United States,
00:02:25.660 | the same thing will happen in your country.
00:02:27.120 | It just might not be on the same schedule
00:02:29.420 | as it's happening here.
00:02:30.560 | And this event, none of what I'm about to talk about
00:02:32.720 | is particularly related to the 2016 election cycle.
00:02:35.420 | It just seems that there's more universal frustration
00:02:39.160 | and depression being reflected
00:02:41.000 | in this presidential election cycle
00:02:42.740 | here in the United States,
00:02:43.940 | than in many others.
00:02:45.700 | And the genesis of the idea for today's show
00:02:48.080 | came from an interaction that I had yesterday.
00:02:51.140 | So short story, there are a couple of young boys
00:02:52.940 | here in my neighborhood, about eight, nine years old,
00:02:56.220 | who have built a summer business for themselves,
00:02:59.560 | going around and washing cars.
00:03:02.080 | I'm very impressed with them.
00:03:03.460 | They didn't, I live in a neighborhood
00:03:05.160 | that we don't really have big lawns,
00:03:08.160 | and it's kind of a, let's see,
00:03:10.700 | I guess I would call it
00:03:11.540 | kind of lower middle class neighborhood.
00:03:13.340 | A lot of blue collar workers and whatnot living here.
00:03:16.540 | It's very much a rental community.
00:03:18.140 | And so these boys are from disadvantaged families
00:03:21.340 | and disadvantaged circumstances.
00:03:23.440 | And in speaking with,
00:03:25.540 | and they built this little summer business.
00:03:27.720 | They came one day, knocked on my door and said,
00:03:29.280 | "Hey, would you like a car wash?"
00:03:30.960 | So they use my hose.
00:03:32.260 | They bring around a bucket and some soap,
00:03:33.980 | and that's the extent of their equipment.
00:03:35.120 | And they're going around and building the business.
00:03:37.060 | And so I've encouraged them in their business.
00:03:39.660 | I've tried to seek to give them
00:03:40.820 | a little bit of encouragement and a little bit of advice
00:03:43.620 | and how they can learn a little bit more.
00:03:45.300 | But I really have a ton of respect for them.
00:03:47.540 | And because they've been going out and building a business.
00:03:52.060 | And so I've had them wash a few of my cars for me
00:03:54.980 | as a way to support them.
00:03:56.340 | Well, yesterday afternoon, one of the boys comes by
00:03:59.140 | and my family and I were just getting back
00:04:01.080 | from our Sunday morning church meeting,
00:04:02.920 | pulling into the driveway.
00:04:03.980 | And one of them comes by and asks me
00:04:06.620 | if I'd like our minivan washed.
00:04:08.400 | Now, they usually charge me 10 bucks for the minivan
00:04:11.340 | because it's a larger vehicle,
00:04:12.900 | and they do five bucks for the cars.
00:04:14.700 | And so one of these young men said to me,
00:04:16.740 | he said, "Hey, I'm trying to buy something.
00:04:18.380 | "I'm trying to buy a bike lock for my bicycle
00:04:21.180 | "so it doesn't get stolen.
00:04:22.500 | "So I need to earn a little bit of money.
00:04:24.160 | "Would you be willing to have me wash your car for five bucks
00:04:29.160 | "instead of the normal $10 rate?"
00:04:32.300 | I said, thought about it for a moment.
00:04:34.140 | I said, "Yeah, that'd be great.
00:04:36.000 | "A 50% discount is a pretty good discount in my book.
00:04:39.940 | "I'll take that deal."
00:04:41.540 | So I moved the van over into the grass.
00:04:43.500 | He washed the car for five bucks
00:04:45.660 | and gave him a little extra tip
00:04:47.380 | 'cause it was a hot afternoon.
00:04:48.900 | But, and it impressed me.
00:04:50.100 | I saw him about an hour later
00:04:51.180 | and he was showing off his new bike lock
00:04:52.820 | that he'd purchased for his bike.
00:04:54.220 | And it made me think about the financial circumstances
00:04:57.700 | that he faces.
00:04:58.520 | Here's this young man, I don't know, maybe 10 years old.
00:05:01.940 | He's, I think he's one of the older ones.
00:05:03.380 | He's a great young man.
00:05:06.100 | And he's got these goals that he has
00:05:08.540 | and he wants to buy this thing.
00:05:09.760 | And first, there's a whole podcast there
00:05:11.680 | if I wanted to talk about just how impressed I am
00:05:14.080 | that he is learning how to go and work for what he wants.
00:05:19.080 | What a great lesson there.
00:05:20.780 | He lives with an uncle.
00:05:23.020 | He doesn't have, his parents aren't in his life.
00:05:24.780 | He's got kind of a rough circumstance.
00:05:26.580 | But he's learned that he's not helpless.
00:05:28.940 | He can go and make business.
00:05:30.780 | And then I was thinking about his ability
00:05:32.660 | to offer the deal to me.
00:05:35.620 | And the fact that he was willing to work for cheaper
00:05:38.060 | than he normally would be willing to work for
00:05:40.260 | because he had something that he really wanted.
00:05:43.460 | And I was thinking about all the ramifications of it.
00:05:45.380 | Well, that turned me on to thinking about minimum wage laws
00:05:48.820 | which we face a interesting financial circumstance
00:05:53.760 | going into this election
00:05:54.940 | that it seems as though both
00:05:56.420 | of the major political candidates,
00:05:57.580 | obviously the Democratic candidate, Hillary Clinton,
00:06:00.740 | is in favor of increases in the minimum wage laws.
00:06:04.020 | And then recently I observed that the Republican candidate,
00:06:07.700 | Donald Trump, was also in favor of increases
00:06:10.740 | in the minimum wage laws.
00:06:11.660 | So both of the presidential candidates
00:06:15.580 | are proposing and encouraging and promoting
00:06:20.600 | the increase in the minimum wage
00:06:23.180 | from what it currently is in the United States,
00:06:25.180 | federal minimum wage is $7.25
00:06:27.940 | and an increase in that range to some other number.
00:06:31.740 | The number I believe I saw
00:06:32.900 | from the Donald Trump campaign was $10 an hour.
00:06:35.380 | And so the minimum wage laws are interesting
00:06:39.380 | because I'm convinced they are tremendously harmful laws
00:06:44.380 | because they eliminate the people from the workforce
00:06:47.540 | who aren't particularly well-qualified for jobs.
00:06:50.980 | They eliminate people like this young man
00:06:53.080 | here in my neighborhood who's not particularly skilled
00:06:55.820 | from being able to work.
00:06:57.260 | Because I would not have accepted,
00:06:59.060 | I didn't really need the car washed,
00:07:00.340 | I wouldn't have accepted his offer
00:07:02.440 | of wanting to wash my car at an offer of 10 bucks.
00:07:05.340 | That was more money than I wanted to spend
00:07:06.900 | for washing the car that didn't particularly need it
00:07:09.500 | all that badly.
00:07:10.620 | But I was willing to accept his offer of five bucks.
00:07:13.020 | And then because of his hard work,
00:07:15.080 | I was thinking about other things
00:07:16.860 | that he could do around my house.
00:07:18.300 | And I was considering that,
00:07:19.420 | well, I wouldn't be willing to pay him the going rate
00:07:22.180 | for a laborer, which is about 10 bucks an hour
00:07:26.100 | here in my area, if I were gonna go and hire a day laborer
00:07:29.140 | from one of the labor pools here locally,
00:07:31.120 | I would need to hire somebody at probably
00:07:32.820 | about 10 bucks an hour, and they'd be looking for
00:07:34.940 | at least about a five-hour workday,
00:07:36.940 | probably more about a seven-hour workday would be ideal,
00:07:40.220 | and they'd prefer it to be longer.
00:07:42.020 | I've hired day laborers,
00:07:42.980 | and that's pretty much the going rate.
00:07:44.820 | So I don't have enough work where it's worth it to me
00:07:46.540 | to go and hire somebody for 10 bucks an hour,
00:07:48.580 | but I would be willing to pay this young man,
00:07:52.060 | I don't know, five bucks an hour with a tip
00:07:53.700 | at the end of the day if he did a good job.
00:07:55.180 | And I got some very simple work
00:07:57.060 | that's not particularly skillful, but would help me out.
00:08:00.620 | But I would be barred, legally speaking,
00:08:03.740 | from making that transaction with him
00:08:05.260 | based upon the minimum wage laws.
00:08:07.700 | So in considering it, however,
00:08:09.860 | I was considering how would I circumvent that law
00:08:12.740 | and do it legally so I could offer him
00:08:15.820 | what we did with the car wash.
00:08:17.200 | I didn't track how much time it took him to do
00:08:19.420 | the car wash, we just simply made a contracted price
00:08:24.000 | that in exchange for a set rate,
00:08:26.060 | he would wash my car for me.
00:08:27.480 | So thus, I didn't make a contract with him
00:08:29.600 | for an hourly rate, I made a contract with him
00:08:31.860 | for a contract rate.
00:08:33.060 | And it's so relatively simple to get around something
00:08:36.020 | like a minimum wage law and establish a contract
00:08:38.860 | between two people to do the work.
00:08:41.380 | So that little exchange, I tell you the back story
00:08:44.140 | just 'cause I think it's interesting
00:08:45.300 | and there's some ideas there for you, for your kids,
00:08:47.840 | and I encourage you, encourage the young men and women
00:08:50.060 | in your neighborhood who are learning these skills.
00:08:52.500 | But I was thinking about how in reality,
00:08:55.040 | although the law might say one thing,
00:08:57.260 | I'm pretty free to come up with a different way
00:09:02.420 | of structuring things so that I can get around the law.
00:09:06.300 | And the great thing is that most laws are like that.
00:09:10.100 | And so today, if you've been a little depressed
00:09:11.880 | like I have been the last few weeks,
00:09:13.960 | if you're a little depressed paying attention
00:09:16.060 | to national politics, then here's my encouragement,
00:09:19.360 | turn away from that and recognize some of the ways
00:09:22.400 | that I'm gonna go over in today's show
00:09:24.300 | of how ultimately it's your choices
00:09:27.260 | that will influence what you do.
00:09:29.740 | And you always have the choice that this young man
00:09:31.740 | in my neighborhood had to make a free contract with somebody
00:09:36.020 | and agree to do a certain job for a certain rate of pay.
00:09:40.020 | And that choice is yours.
00:09:41.940 | And hopefully this empowerment will be conveyed
00:09:45.020 | through the message of today's show.
00:09:47.200 | And some of the specific examples,
00:09:49.180 | I'm gonna focus a lot on taxes about how,
00:09:52.340 | that's one of the major areas
00:09:54.220 | where government influences our lives,
00:09:56.040 | where they change our taxes and they increase our taxes
00:09:58.980 | and things like that,
00:10:00.020 | that you'll see that as incentives change, you can change.
00:10:04.260 | And there's always a way where you can adjust
00:10:07.040 | and arrange your circumstances of your life
00:10:10.340 | in a manner that's going to be advantageous to you.
00:10:13.840 | So we'll get to that in just a moment.
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00:11:06.140 | Now, continuing with the stories here,
00:11:11.140 | and I'm gonna give a little bit of stories
00:11:12.980 | just to get your creative mind thinking,
00:11:15.320 | and then we'll jump to the tactics.
00:11:18.300 | I was also thinking about an article that I saw
00:11:21.660 | this morning in The Telegraph.
00:11:24.100 | Quote, or excuse me, title of the,
00:11:25.820 | try again, the title of The Artograph.
00:11:30.940 | (laughing)
00:11:33.180 | The title of the article from The Telegraph in the UK
00:11:38.340 | is called "Britain Banishes Plastic Bags
00:11:41.900 | "as a 5 P Pence Tax Sees Usage Plummet by 6 Billion."
00:11:46.940 | Couple firsts of the leading paragraphs of it
00:11:49.460 | give you all the info you need.
00:11:52.340 | "Britain has virtually banished plastic bags
00:11:54.580 | "just six months after the government
00:11:56.000 | "introduced a 5 P charge to discourage shoppers
00:11:58.580 | "from using them, official data has revealed.
00:12:01.260 | "According to figures released today
00:12:02.500 | "by the Department for Environment, Food, and Rural Affairs,
00:12:05.300 | "shoppers are on track to use around 6 billion fewer
00:12:08.100 | "single-use plastic bags this year.
00:12:10.820 | "Since the policy came into force in England in October 2015,
00:12:14.760 | "the total number of carrier bags used
00:12:16.720 | "at the UK's biggest retailers
00:12:18.640 | "has fallen by an estimated 85%.
00:12:22.100 | "The total number used fell from over 7 billion a year
00:12:24.980 | "to less than half a billion
00:12:26.080 | "in the first six months of the policy,
00:12:27.900 | "saving 40,801 tons of plastic,
00:12:30.380 | "which is the equivalent weight of roughly 300 blue whales."
00:12:34.380 | So in short, they start this new tax on plastic bags
00:12:38.140 | and people stop using them.
00:12:39.260 | And it's a really great story and an example of incentives
00:12:43.400 | and how incentives work.
00:12:44.960 | Now, I, as a small government person,
00:12:49.680 | I get a little bit frustrated
00:12:50.900 | by the government intervention here.
00:12:54.060 | But the cool thing is that you don't have to wait
00:12:56.740 | on government coercion to do certain things.
00:12:59.460 | If a business, any business wants to make a change,
00:13:02.020 | they can just simply do it
00:13:03.360 | with an intelligent system of incentives.
00:13:05.460 | And the focus of today's show is incentives.
00:13:08.020 | How has incentives changed?
00:13:09.060 | You change your actions.
00:13:09.940 | For example, here in the United States,
00:13:12.860 | we have the grocery chain Aldi.
00:13:15.700 | It's very popular among the frugal living cohort
00:13:20.020 | of US American residents.
00:13:22.380 | And they've got great food at really great prices.
00:13:24.860 | Well, they've got a few different ways
00:13:26.100 | that they keep their prices low.
00:13:27.560 | One of the ways that they keep their prices low
00:13:29.640 | is by having fewer staff working
00:13:32.900 | and by lowering some of the expenses associated with this.
00:13:36.860 | They got this really neat system,
00:13:37.940 | if you've never shopped at an Aldi,
00:13:39.460 | where in order to get a shopping cart,
00:13:41.820 | you put a quarter into a little device
00:13:45.220 | that will then dispense to you a shopping cart.
00:13:47.860 | And then when you return your shopping cart
00:13:49.780 | to the front of the store, to the properly parked place,
00:13:52.820 | you'll receive your quarter back.
00:13:54.740 | And a quarter is not particularly meaningful
00:13:57.340 | in most of our financial lives,
00:13:59.780 | but it does the work of providing an incentive
00:14:02.340 | for you to take your cart from the parking lot
00:14:04.500 | and take it up to the front of the store.
00:14:06.300 | Works really well.
00:14:08.140 | When we go to the store, naturally,
00:14:09.980 | we try to make money anywhere we go.
00:14:12.140 | We'll grab a few carts.
00:14:13.080 | If there happen to be any in the parking lot,
00:14:14.580 | we'll bring them up.
00:14:15.500 | I don't mind getting a few extra steps in return
00:14:18.300 | for 50 cents or a buck of extra money.
00:14:20.900 | So we'll take the carts up and we'll get the quarters
00:14:23.420 | that are spit out from the machines.
00:14:25.780 | And so it provides a really great system
00:14:27.900 | where Aldi doesn't have to have employees
00:14:29.580 | wandering around the parking lot, picking up carts,
00:14:32.280 | but rather the customers will do that work for them
00:14:35.700 | because of a simple little incentive.
00:14:37.260 | Aldi does the same thing with their plastic bags
00:14:39.620 | that if you want plastic bags,
00:14:41.460 | let's see, do they have them and you have to pay for them
00:14:43.580 | or do they just not have them at all?
00:14:45.620 | Don't remember, but the point is that
00:14:47.460 | if you are incentivized to bring your own bags.
00:14:51.420 | The warehouse stores do a good job of this
00:14:53.180 | by offering lower prices and more self-service
00:14:56.340 | than they incentivize people to do without things
00:14:58.980 | like the bags and the bag systems.
00:15:01.820 | So incentives work.
00:15:04.340 | And these incentives are applied in every area of life.
00:15:08.480 | Now let's bring it down to something specific,
00:15:11.460 | something like taxes, which is where we focus
00:15:13.900 | a lot of our energy on this show.
00:15:16.700 | Because taxes for most of us are our number one expense.
00:15:20.260 | It might be number two for some of you,
00:15:22.280 | but if you total all of the taxes that you pay
00:15:24.940 | in their various forms, from taxes on your cell phone bill
00:15:28.420 | to taxes on sales taxes to property taxes to income taxes,
00:15:32.020 | for most of us, taxes are the largest
00:15:35.020 | single category in our budget.
00:15:38.740 | And there's a concept that I think is useful in taxation.
00:15:41.420 | It's referred to as the Laffer curve.
00:15:44.740 | Arthur Laffer is an economist and he came up with,
00:15:47.500 | well, he didn't come up with the idea.
00:15:48.540 | The idea has been around for a very, very long time.
00:15:51.000 | But he popularized the idea as the mythology goes.
00:15:54.080 | He wrote it on a, he was having,
00:15:57.420 | back in the 1974, he was having a meeting
00:16:01.340 | with President Ford's administrative officials,
00:16:05.260 | Dick Cheney and Donald Rumsfeld,
00:16:07.180 | and he sketches this simple curve on a napkin.
00:16:09.580 | So picture in your mind's eye an X, Y chart
00:16:13.380 | in an upward sloping curve that comes then down.
00:16:16.660 | Kind of looks like a hill, a gently, smoothly sloping hill.
00:16:20.900 | And the X axis is the tax rate,
00:16:23.660 | and the Y axis is the amount of government revenue.
00:16:26.500 | And the idea is that at the, some at 0% taxation,
00:16:31.500 | you have the lowest tax rate,
00:16:34.220 | but you also have the lowest amount
00:16:35.620 | of government revenue that's collected.
00:16:37.420 | And as the percentage of taxation increases
00:16:40.080 | to a certain point at the top of the hill,
00:16:42.220 | then at that point you have the highest amount
00:16:44.260 | of government revenue that's collected at some tax rate.
00:16:47.740 | And then as the tax rate continues to increase
00:16:51.040 | through that, say, 50% margin number to 100%,
00:16:55.180 | you'll eventually at 100% taxation
00:16:57.280 | have government revenue collection of 0%.
00:17:00.620 | So we don't know where that ideal number is,
00:17:04.220 | but in terms of maximum participation,
00:17:07.020 | maximum productivity, maximum government tax collection,
00:17:09.860 | and what that right rate is,
00:17:11.720 | but we do know that it's somewhere between zero and 100.
00:17:14.540 | Because if you had 100% taxation,
00:17:17.920 | then basically the theory is that
00:17:21.460 | practically all economic activity would switch.
00:17:25.820 | Or some people would argue that
00:17:28.060 | it would at least change forms
00:17:29.860 | from a form that can be tracked monetarily and financially
00:17:34.160 | to a form that can be in some other form, such as barter.
00:17:37.740 | So that's the Laffer curve.
00:17:39.100 | And this applies in taxation.
00:17:41.100 | So it's a very difficult thing to figure out.
00:17:46.100 | And that's where you try, there's always this balance.
00:17:48.440 | And so you have traditional conservatives,
00:17:52.060 | fiscal conservatives arguing that if you lower taxes,
00:17:54.920 | you'll have an increase in revenues.
00:17:56.820 | At lower tax rates,
00:17:57.740 | you'll have an increase in government revenues
00:17:59.740 | because there'll be more economic activity
00:18:01.940 | because it's incentivized.
00:18:03.660 | And then you have traditional liberals,
00:18:06.120 | social liberals, excuse me, fiscal liberals,
00:18:08.520 | arguing that if you increase tax rates,
00:18:10.720 | you'll increase government revenue collection
00:18:13.020 | because then everybody's paying their fair share.
00:18:15.660 | And so you see some form of this
00:18:17.260 | generally reflected in most elections.
00:18:19.600 | Well, the thing is, you don't have to worry
00:18:22.860 | about what the elected politicians have to worry about.
00:18:25.620 | All you have to worry about is what you do
00:18:30.160 | in response to the changes that they make.
00:18:33.100 | And the title of today's show is intentionally chosen,
00:18:35.980 | The Power of If,
00:18:38.100 | meaning that taxation schemes all work on the premise
00:18:43.460 | of if this, then that.
00:18:45.420 | If you fall under these certain categories,
00:18:48.560 | then you'll pay these certain taxes.
00:18:50.380 | But those are your options to pay.
00:18:52.540 | And the reason that your options to pay
00:18:53.900 | is not because you can't be forced to pay a certain thing
00:18:57.360 | or do a certain thing
00:18:58.180 | because you participated in the activity,
00:19:00.040 | but because your participation in the activity
00:19:03.140 | is voluntary.
00:19:04.160 | A good example is I was preparing the outline
00:19:08.620 | for today's show,
00:19:09.460 | I stumbled across an account
00:19:11.660 | of something called the window tax.
00:19:14.020 | A very interesting story.
00:19:15.220 | It was reflected to show that people change
00:19:17.940 | their activities based upon a taxation.
00:19:22.940 | So just the first paragraph here
00:19:25.180 | from the Wikipedia article on the window tax.
00:19:27.260 | The window tax was a property tax
00:19:29.140 | based on the number of windows in a house.
00:19:32.780 | It was a significant social, cultural,
00:19:35.240 | and architectural force in England, France,
00:19:37.500 | Ireland, and Scotland during the 18th and 19th centuries.
00:19:40.920 | To avoid the tax, some houses from the period
00:19:43.440 | can be seen to have bricked up window spaces,
00:19:46.160 | ready to be glazed or re-glazed at a later date.
00:19:49.540 | In England and Wales, it was introduced in 1696
00:19:52.220 | and was repealed in 1851,
00:19:54.300 | 156 years after first being introduced.
00:19:57.840 | France and Scotland both had window taxes
00:19:59.700 | for similar reasons.
00:20:00.920 | So the point here is that the taxes are based
00:20:02.900 | upon the number of windows in your house.
00:20:04.880 | Well, if you've got a 20-window house
00:20:07.740 | and your tax rate would be substantially less
00:20:09.820 | if you had a 15-window house,
00:20:11.740 | you call up the bricklayer and you say,
00:20:13.060 | "Hey, we're gonna take a couple of these windows out
00:20:14.540 | "and put some bricks in their place.
00:20:15.520 | "Now we have fewer windows."
00:20:17.100 | And that concept perfectly illustrates
00:20:21.260 | the choice that you have.
00:20:23.000 | Now, whether it's a tax that's based upon your windows
00:20:27.460 | or whether it's a tax based upon the amount of money
00:20:29.380 | that you have, the concept applies.
00:20:31.460 | On this show, I've demonstrated a lot of information
00:20:34.060 | and materials about how significant of a decision it is
00:20:37.740 | to live in one state versus another state.
00:20:40.380 | And there are various offsetting forces,
00:20:42.240 | but with regard to income taxes,
00:20:43.900 | you need to seriously consider the state that you live in.
00:20:47.900 | There was a story made famous back in the late 2000s
00:20:51.260 | with talking about the millionaire's tax in Maryland.
00:20:55.180 | And it was, I'll read the first couple of paragraphs here
00:21:00.180 | from a CNN Money article from January, 2011.
00:21:04.980 | Maryland millionaires will have a little more money
00:21:06.780 | in their pockets come 2011.
00:21:08.720 | The state's 6.25% tax rate on income
00:21:11.540 | of more than $1 million will expire in the new year.
00:21:14.580 | Maryland imposed the so-called millionaire's tax in 2008,
00:21:18.800 | along with several other measures
00:21:20.740 | to help close a $1.7 billion budget gap.
00:21:23.940 | I'm gonna pause for a moment in the story.
00:21:26.060 | What happened, and this is debated,
00:21:28.220 | I've read the debates and the rebuttals,
00:21:30.100 | but pretty confident that the data is accurate
00:21:33.540 | in this regard.
00:21:35.340 | But what happened is that Maryland had a significant exodus
00:21:39.980 | of high income earning people
00:21:42.420 | when they increased the tax rate by that amount.
00:21:45.020 | And that significant exodus significantly impacted
00:21:50.780 | their overall revenue collection.
00:21:53.220 | So they increased the tax and their collection went down.
00:21:55.660 | Now, there are people at this time, obviously,
00:21:58.020 | who went through a significant economic,
00:22:00.220 | significantly challenging economic crisis.
00:22:04.860 | And so the rebuttals to this theory
00:22:07.340 | or this explanation of the data generally indicate,
00:22:10.060 | well, it's not based upon millionaires leaving Maryland.
00:22:14.020 | It was based upon the economy.
00:22:16.260 | It was based upon the fact
00:22:17.300 | that people were earning less money.
00:22:18.980 | Perhaps there's some truth,
00:22:20.060 | but now I will continue with the article.
00:22:22.660 | Remember this when you hear people, politicians,
00:22:25.100 | talking about, well, as a Democrat, I'm gonna say this,
00:22:27.660 | or as a Republican, I'm gonna say this.
00:22:29.820 | And I'm gonna do this.
00:22:31.900 | Remember, supposedly Republicans,
00:22:33.420 | we're supposed to cut taxes and return it to the people,
00:22:36.420 | and Democrats supposedly we're gonna raise taxes
00:22:37.980 | and make taxes fair, continuing the article.
00:22:40.700 | And governor Martin O'Malley, a Democrat,
00:22:44.020 | does not intend to bring it back.
00:22:46.100 | Instead, promising to wipe out a projected
00:22:48.820 | $1.2 billion budget gap with spending cuts.
00:22:53.820 | Quote, "We can balance the budget through cuts
00:22:57.300 | "and without new taxes,"
00:22:59.180 | says Sean Adamek, O'Malley's press secretary.
00:23:02.780 | Maryland is one of several states
00:23:05.380 | that levied millionaires' taxes to raise money
00:23:07.100 | amid the Great Recession.
00:23:08.220 | Hawaii, New Jersey, New York, and Wisconsin
00:23:11.900 | raised taxes on higher earners in 2009.
00:23:14.780 | Oregon did so this year.
00:23:15.740 | You can read the article if you want to.
00:23:16.980 | It's obviously out of date at this point.
00:23:18.900 | But the point that I wanna draw your attention to
00:23:20.900 | is you have a Democratic governor
00:23:22.400 | who is sounding a whole lot like
00:23:24.260 | what Republicans used to sound like,
00:23:26.740 | saying that we can wipe out a $1.2 billion budget gap
00:23:30.140 | with spending cuts and there's no need to raise new taxes.
00:23:33.420 | So if you think that the cause of the decrease
00:23:38.220 | in taxation and tax revenues collected
00:23:41.740 | was entirely based upon the economy,
00:23:45.380 | my guess here would be that the governor doesn't think so.
00:23:47.980 | The governor is wishing he had a few more
00:23:50.060 | of those millionaires back in his state.
00:23:52.420 | So when a government makes a change in the laws,
00:23:56.760 | you have a choice.
00:23:59.040 | You can choose what you do.
00:24:03.140 | You can choose how you respond.
00:24:05.860 | And it's much healthier to focus on the choices
00:24:08.740 | that you can make in response to what's actually happening
00:24:13.380 | rather than worrying about how your vote is gonna change
00:24:16.620 | or not change what's actually gonna happen.
00:24:18.780 | There might be a time to vote,
00:24:21.420 | there might be a time to research that vote,
00:24:24.100 | but in general, it's far more empowering
00:24:26.380 | to spend your time focusing on what you can control
00:24:29.260 | rather than what you can't control.
00:24:31.940 | You have no control over national political elections
00:24:37.140 | in the United States or in any country that you live in.
00:24:40.300 | You have no control over statewide political elections
00:24:42.780 | in the United States or any election that you live in.
00:24:44.980 | You might have a little bit of control
00:24:46.540 | at your county commission,
00:24:48.380 | and that might be worth your pursuing,
00:24:49.860 | but you have no control on the rest of it.
00:24:52.140 | The good thing is that the power and the force
00:24:54.740 | of the free market is much stronger
00:24:57.140 | than the power and the force
00:24:59.140 | of a political system or ideology.
00:25:01.260 | Exhibit A, Governor Martin O'Malley
00:25:05.500 | doesn't intend to bring his tax rate increase back
00:25:10.140 | because all of a sudden his tax base disappeared.
00:25:13.580 | So don't worry about politics,
00:25:16.580 | don't worry about the problem, sure,
00:25:18.500 | get involved if that's what you're interested in doing,
00:25:21.260 | but spend the time focusing on what you can control
00:25:24.700 | and take the power back,
00:25:26.900 | and don't fall prey to the idea
00:25:28.820 | that because the Republicans think A, B, C, D, E,
00:25:32.340 | or the Democrats think X, Y, Z,
00:25:35.540 | that you don't have a choice.
00:25:37.780 | You have a choice,
00:25:39.740 | and you can always find a way to change your behavior
00:25:43.220 | in response to what happens and improve your situation.
00:25:48.780 | At the simplest, you've got the black market.
00:25:54.060 | We'll cover the black market at the end,
00:25:55.340 | but today I wanna just go through
00:25:56.820 | some specific examples for you,
00:25:59.500 | especially as they relate to finance.
00:26:01.820 | Social issues are incredibly important.
00:26:03.740 | Social issues have an if-then,
00:26:05.460 | and those impact finance,
00:26:07.740 | and those need to be discussed,
00:26:10.740 | but I'm not planning to talk about them today.
00:26:13.540 | But I make decisions in my life
00:26:14.900 | that impact me financially because of the social issues.
00:26:18.460 | But today let's focus on taxes.
00:26:20.500 | So what do you do if a government increases taxes?
00:26:25.500 | Well, simple.
00:26:28.740 | You make a choice to change your activity
00:26:31.140 | in such a way to reduce the impact of it.
00:26:32.860 | So let's talk about income taxes.
00:26:34.540 | Well, remember the fact that income taxes
00:26:38.180 | are a tax based upon income.
00:26:40.860 | Sounds simple, but remember,
00:26:44.420 | income taxes are a tax based on income.
00:26:48.260 | So if you'd like to improve the problem
00:26:52.260 | of your income taxes, avoid earning income.
00:26:55.980 | Couple different ways to do that.
00:26:59.620 | Live on your savings.
00:27:01.020 | So if you run into a period
00:27:02.020 | where the income taxes are very high,
00:27:03.300 | that's a good time to live on savings.
00:27:04.980 | Borrow money.
00:27:06.620 | You can live on borrowed money.
00:27:08.300 | This is what real estate investors do constantly,
00:27:10.220 | where they borrow money,
00:27:11.620 | they use it to buy an asset,
00:27:13.140 | they take some of the borrowed money
00:27:14.460 | and they use it to spend on their own circumstance.
00:27:17.380 | If the asset increases in value,
00:27:19.220 | they'll ultimately be able to pay the loan in the future,
00:27:21.380 | but their income is not taxed.
00:27:23.060 | When you borrow money, you're not taxed on income.
00:27:25.540 | You can also focus on gaining if you're being paid.
00:27:29.940 | For example, if you're being taxed on wages,
00:27:32.020 | then you can switch to a different system of taxation.
00:27:34.580 | You can switch to a system of capital gains.
00:27:36.660 | So you can focus on growing the asset values.
00:27:39.180 | If your income is being taxed very highly,
00:27:42.660 | but you look at your property and realize
00:27:44.780 | that well I could spend some of my time and energy
00:27:46.700 | improving this property, improving the value of it,
00:27:50.180 | and then I could sell it,
00:27:51.700 | and oh by the way, there happens to be an exclusion
00:27:54.380 | of $250,000 of capital gains
00:27:57.140 | for an individual filing singly,
00:27:59.580 | or a married couple $500,000 filing jointly.
00:28:02.660 | You can avoid taxation on $500,000 of capital gains.
00:28:06.580 | A handy person, instead of working at a highly taxed
00:28:11.580 | wage earning job, might simply choose to focus
00:28:15.860 | on improving the value of their property,
00:28:18.340 | and then turning around and selling it,
00:28:19.740 | and taking that tax free income.
00:28:21.400 | You might do this commercially.
00:28:24.260 | You might buy houses and improve them and keep them,
00:28:26.340 | or build businesses and improve their value and keep them.
00:28:31.340 | You can do this with various asset based businesses.
00:28:33.780 | I've heard a story one time of a family
00:28:37.200 | who would build hotels, and they'd buy the property,
00:28:40.740 | build the hotels, keep all the corporation.
00:28:43.000 | They're keeping all these assets in their family,
00:28:45.300 | and now they have an asset value that's growing,
00:28:48.200 | that they've done a lot of work to improve,
00:28:50.120 | and they're not paying income taxes on the money.
00:28:52.900 | You can do this with a business.
00:28:54.380 | If you build a business and you substantially grow
00:28:56.980 | the value of that business, the business assets,
00:29:00.460 | you can defer much of your taxation for the future.
00:29:03.900 | Then you can also make choices.
00:29:05.880 | You can choose to move to a different state.
00:29:07.980 | You can move to a different county.
00:29:09.900 | You can always move to a different country.
00:29:12.060 | You have a choice.
00:29:17.380 | And so recognize that this choice goes two ways.
00:29:19.460 | This choice serves as a natural restriction
00:29:24.460 | on the power of the government system,
00:29:26.580 | meaning that in the United States,
00:29:30.240 | if taxes grew too high, people like me
00:29:32.460 | who have a mobile business, I'd very quickly expatriate.
00:29:35.480 | Many people would.
00:29:38.260 | Many companies would.
00:29:39.740 | Many companies are.
00:29:41.020 | And so this serves as a natural restraint
00:29:43.980 | on a governmental system.
00:29:45.260 | Doesn't mean it's always going to be successful.
00:29:48.340 | Look at countries that destroy their economies
00:29:51.420 | by driving all the business people out.
00:29:54.420 | It happens.
00:29:55.300 | But it means that it's usually,
00:29:58.340 | for most thoughtful people,
00:29:59.460 | it's gonna serve as a restraint.
00:30:01.820 | So the key is to always look and read the law
00:30:05.020 | and say, ah, here is a tax, or here's something I don't like.
00:30:08.340 | What are the exceptions to this?
00:30:09.740 | What's the if statement?
00:30:12.140 | If income taxes.
00:30:15.660 | What else?
00:30:16.620 | Social security taxes, a good example.
00:30:18.740 | Okay, so we're gonna change social security taxes.
00:30:20.780 | Well, what do you do to plan for that?
00:30:22.500 | Well, if you want to avoid the social security tax
00:30:25.420 | or minimize it, then you just simply need
00:30:27.380 | to earn your income in a way
00:30:28.940 | that's exempted from social security.
00:30:32.440 | How do you do that?
00:30:34.860 | Well, you study the law and you understand.
00:30:37.620 | Ah, social security taxes are employment taxes.
00:30:41.060 | So what you need to do is simply avoid employment.
00:30:45.300 | That means that you should earn your income
00:30:47.160 | through some other means.
00:30:50.700 | Earn your income from interest or dividends or capital gains.
00:30:53.980 | All of those are exempt from social security taxes.
00:30:56.620 | Earn your income from rents or royalties
00:31:00.260 | on products that you've developed and are selling,
00:31:02.480 | books that you've written or intellectual property.
00:31:05.560 | There are a couple of other interesting little tidbits
00:31:08.260 | to the social security tax.
00:31:09.960 | If you're a student and earning student income
00:31:12.140 | that's being earned as an employee of a college
00:31:13.780 | or university while pursuing a degree,
00:31:15.620 | that income is exempt from social security taxes.
00:31:18.020 | Also, if you are receiving scholarships or grant money,
00:31:22.300 | that income is exempt from social security taxes.
00:31:26.380 | So when I talk a lot about applying for scholarships,
00:31:29.220 | applying for grants, you should take that information
00:31:31.660 | and you should filter it and say,
00:31:32.900 | ah, if I were working a job, I'd have to pay the 7.65%.
00:31:36.620 | Excuse me, that's including Medicare as well.
00:31:38.420 | You'd have to pay this six, what's the number?
00:31:42.020 | 6.6-ish percent social security tax.
00:31:46.340 | And so, now it's gonna bug me.
00:31:49.220 | It's, Medicare tax is 1.45%, 7.65%.
00:31:52.620 | So that means that the social security tax is,
00:31:57.620 | ah, I hit the wrong buttons.
00:31:59.780 | 6.2%, I think-ish.
00:32:03.580 | Six-ish percent of tax, you have a 6% increase
00:32:08.540 | if you can get that scholarship.
00:32:10.220 | And guess what else you're doing?
00:32:12.380 | If you get the scholarship income,
00:32:14.420 | you're not earning wages.
00:32:16.540 | So that's useful.
00:32:19.580 | There's a lot of ways to compound that.
00:32:21.580 | Why is it so beneficial for you to encourage
00:32:23.500 | your high school students applying
00:32:24.980 | for scholarships and grants?
00:32:26.100 | Because all of that money that they don't have to earn
00:32:29.420 | to pay for their tuition by working a job
00:32:32.340 | or by your working a job is gonna be much more efficient
00:32:35.020 | in the tax system.
00:32:36.100 | Disability benefits or social security,
00:32:40.860 | remember that only applies to the wage base.
00:32:42.900 | You have exempt wages.
00:32:44.300 | So the social security wage base in 2016 is $118,500.
00:32:49.260 | So if you were at $118,000 annual income,
00:32:53.700 | planning for social security taxes
00:32:55.180 | should be pretty high on your list.
00:32:57.100 | If you're at a $818,000 income,
00:33:00.340 | then social security wage taxes
00:33:02.540 | are an insignificant factor for you.
00:33:04.720 | What else?
00:33:07.420 | Well, if you don't like the sales taxes
00:33:08.580 | and the sales tax rates, just avoid them.
00:33:10.380 | Simple ways, buy used.
00:33:12.380 | Buy from a place that doesn't collect sales taxes.
00:33:14.340 | It used to be a major reason to patronize Amazon.
00:33:18.900 | Now I think it's a reason to patronize other retailers,
00:33:21.300 | online retailers other than Amazon,
00:33:22.820 | now that Amazon is participating in the sales tax systems.
00:33:25.420 | Or just simply buy used in the private market.
00:33:29.500 | Look at your property taxes.
00:33:31.240 | Choose where you live carefully.
00:33:32.380 | There are disparities in property taxes.
00:33:34.340 | If property taxes were to go too high,
00:33:36.380 | then people will make significant decisions
00:33:38.620 | and move to a different county
00:33:39.780 | or move to a different state.
00:33:41.180 | Or if property taxes were to go too high,
00:33:43.240 | people would respond just like they did in the window tax
00:33:45.980 | and choose not to improve the property value.
00:33:49.180 | All of a sudden, they would go to living in mobile structures
00:33:52.300 | or temporary structures instead of permanent structures.
00:33:56.620 | You would figure out instead of building a barn,
00:33:58.380 | I'm gonna figure out the housing needs
00:33:59.580 | for my livestock in some other way.
00:34:00.980 | Or I'm gonna figure out the housing needs
00:34:02.760 | for myself in some other way.
00:34:04.820 | And if you start reading the laws,
00:34:06.400 | you'll find all kinds of interesting little exemptions.
00:34:09.060 | For example, here in Florida, if you wanna own a boat
00:34:11.740 | and if you wanna save money on your boating fees,
00:34:13.740 | now, it's gotta be an older boat,
00:34:15.020 | but antique vessels in Florida,
00:34:16.940 | meaning that the hull and the engine
00:34:18.460 | are older than 30 years old, don't pay registration fees.
00:34:21.500 | If you go back and you think about the boating marketplace,
00:34:26.640 | you could probably find a vessel that was 30 years old
00:34:30.140 | and have a significant high-quality vessel still
00:34:36.820 | that can help you to avoid the registration fees.
00:34:40.180 | Now, maybe not.
00:34:41.060 | At the end of the day, you calculate the money
00:34:43.020 | and you figure out,
00:34:43.840 | is this an important dollar figure in my life?
00:34:47.740 | And it'd be silly, don't be penny wise and pound foolish.
00:34:50.740 | Don't spend all your time buying a 30-year-old boat
00:34:53.260 | and then living in an expensive high-income tax state.
00:34:56.440 | But you can make these choices.
00:34:59.220 | That's my point.
00:35:00.180 | Hotel taxes, parking taxes.
00:35:02.900 | I avoid places in town here in West Palm Beach
00:35:05.260 | where the parking is ridiculous, and most people do.
00:35:08.800 | So as the market regulates, and as the tax systems change,
00:35:13.060 | as the incentives change,
00:35:14.440 | you can change your own personal approach.
00:35:18.000 | That puts the power back in your hands.
00:35:22.300 | You have the choice.
00:35:25.820 | So today, I encourage you, take control.
00:35:34.020 | Recognize that there are often exemptions
00:35:36.640 | and you have a choice over the activities that you're doing.
00:35:40.940 | If you don't wanna be subject to a law,
00:35:44.340 | change your circumstances so you're not subject to it.
00:35:49.220 | Focus on the things that you can do,
00:35:55.100 | not on the things that you can't control.
00:35:57.820 | And I think your potential for happiness will be far higher.
00:36:02.980 | Sitting around and stewing about political events
00:36:05.100 | and talking about how bad things are,
00:36:06.940 | it's a good recipe for depression.
00:36:08.820 | Trust me, I get there.
00:36:10.300 | I've worked very hard not to pay attention to politics,
00:36:13.680 | and yet I still have that interest.
00:36:15.580 | And so it creeps in, and if I don't exercise discipline,
00:36:18.940 | and I didn't exercise my discipline the last few weeks,
00:36:21.100 | I started to pay attention, I started to get involved,
00:36:23.620 | and I just get sucked in,
00:36:25.180 | and it just destroys the joy out of life.
00:36:27.720 | And when I recognize that happening,
00:36:30.540 | I say, okay, time to walk away.
00:36:32.740 | Dump it all away, I can't do anything about that.
00:36:35.580 | But I can do something about what I do.
00:36:38.120 | Very simple concepts.
00:36:41.420 | Circle of concern and circle of control.
00:36:44.360 | There are many things that you're concerned about.
00:36:46.100 | Your circle of concern is very high.
00:36:48.940 | Excuse me, very big, very big.
00:36:50.980 | I'm concerned about taxes, I'm concerned about the weather,
00:36:53.920 | I'm concerned about my family,
00:36:55.280 | I'm concerned about my neighbor,
00:36:56.900 | I'm concerned about the general direction of Florida,
00:36:59.540 | I'm concerned about changing levels of sea level in Florida,
00:37:03.460 | I'm concerned about all kinds of things.
00:37:06.020 | But I can't control most of those things.
00:37:10.220 | And misery can be found in focusing
00:37:15.460 | on your circle of concern
00:37:17.260 | rather than your circle of control.
00:37:20.500 | Circle of control is much smaller,
00:37:23.300 | and it's located within, usually, the circle of concern,
00:37:27.460 | but it's much smaller.
00:37:28.280 | It's the things you can actually affect.
00:37:30.740 | Can't do anything about changing levels of sea level
00:37:35.020 | on the Florida coast.
00:37:37.740 | I can't do anything about the tax rates,
00:37:39.740 | but I can do something about my choices.
00:37:43.620 | I can do something about where I live.
00:37:45.640 | I can do something about how I earn my income.
00:37:51.100 | And I couldn't do anything about the laws
00:37:56.900 | regulating me and my ability to communicate with you
00:38:01.900 | being a licensed financial advisor.
00:38:03.940 | Can't change those laws.
00:38:06.420 | But I can change the authority those laws have over me.
00:38:12.260 | I encourage the same to you.
00:38:17.780 | Focus on your circle of control,
00:38:21.820 | the things that you can actually do something about.
00:38:26.100 | And then over time, as you focus on the things
00:38:28.660 | that you can do something about,
00:38:30.360 | your circle of control will steadily expand.
00:38:32.820 | And more and more things that are simply
00:38:34.500 | in your circle of concern will slowly
00:38:38.220 | come under the jurisdiction of your circle of control.
00:38:41.060 | But if you do it the other way around,
00:38:44.320 | it's a good recipe for misery.
00:38:46.880 | Hope these few thoughts are encouraging to you here.
00:38:52.220 | We live in interesting times.
00:38:55.800 | (laughs)
00:38:57.080 | Interesting times.
00:38:59.000 | And my hope is that Radical Personal Finance
00:39:00.560 | can serve for you as a voice of encouragement,
00:39:03.560 | a voice of motivation, a voice of, I guess, encouragement.
00:39:06.880 | And in order to do that, I gotta practice what I preach.
00:39:11.840 | I've gotta stay focused on the things that I can affect.
00:39:15.140 | But make a habit, and that's my outcome of today's show,
00:39:18.640 | make a habit of reading the if statements
00:39:21.360 | and then seeing how they can apply to you.
00:39:24.480 | Much of life is about incentives.
00:39:25.720 | When you understand the incentives that govern our lives,
00:39:28.960 | then you can understand a little bit more
00:39:30.680 | about our behavior.
00:39:32.560 | And so understand the incentives,
00:39:34.440 | understand the things that are affecting you,
00:39:36.520 | and then make good decisions in your own life.
00:39:39.060 | That's it for today's show.
00:39:40.120 | Thank you all for listening today.
00:39:42.520 | Couple of quick closing announcements.
00:39:46.880 | Tomorrow's show will be an interview
00:39:49.320 | with a listener of the show who's an Indian immigrant.
00:39:52.960 | He heard me, listeners, Manhar Patel,
00:39:55.640 | excuse me, Manhar Patel,
00:39:56.960 | and he emailed me and said,
00:39:58.280 | "Joshua, I heard you said you like to talk to immigrants."
00:40:01.120 | And he's got a great immigrant story,
00:40:02.720 | immigrated to the United States from India,
00:40:04.960 | has been here for a number of years.
00:40:06.480 | He's still working to establish his career.
00:40:08.760 | It's just a fun, interesting interview with a listener.
00:40:12.360 | And I think you'll be impressed and encouraged
00:40:14.440 | by how much progress he's able to make
00:40:16.000 | even though he faces dramatic difficulties.
00:40:19.440 | He's a credentialed physician,
00:40:22.320 | but he can't get into the medical market
00:40:24.080 | as working as a doctor.
00:40:25.400 | But I think you'll still be impressed
00:40:26.520 | with the progress that he's made in his life.
00:40:29.080 | It is a fun interview.
00:40:31.040 | Wednesday, I plan to talk to you about,
00:40:33.700 | this is my intention,
00:40:36.280 | is to talk to you about various types of business entities.
00:40:38.620 | We're gonna talk about sole proprietorships,
00:40:40.720 | partnerships, LLCs, C-Corps, S-Corps.
00:40:44.240 | I'm gonna cover this, all the data,
00:40:45.320 | all the business trusts,
00:40:47.040 | all this stuff from the CFP curriculum.
00:40:49.720 | Thursday, I got an interview planned as well,
00:40:51.680 | and then Friday, Q&A.
00:40:52.920 | Thank you all so much for listening.
00:40:53.920 | If you'd like to support the show,
00:40:55.280 | I would greatly appreciate that,
00:40:56.640 | radicalpersonalfinance.com/patron,
00:40:59.000 | radicalpersonalfinance.com/patron.
00:41:00.680 | If you'd like to speak with me
00:41:01.600 | about any particular consulting,
00:41:03.360 | area of consulting I might be able to serve you with,
00:41:05.480 | feel free to book a phone call with me
00:41:06.720 | at radicalpersonalfinance.com/phonecall.
00:41:09.640 | Be back with you tomorrow.
00:41:10.940 | (upbeat music)