The Amateur Financier

Ah, the Fair Tax.  It seems hard to argue with a Tax that has ‘Fair’ right in the name, doesn’t it?  It also isn’t a half bad idea; taxing spending rather than income, greatly simplifying the labyrinthine maze of taxes that currently exist, and making taxes more transparent and obvious are all arguably good goals.  Heck, in my early days as a blogger (almost a year ago to the day, actually), I was pretty strongly in favor of the Fair Tax, and I’m still more in favor of it than I am of our current tax system.  (Not that that’s saying much; there are few tax systems that would NOT be an improvement on our current situation.)

In the time since I first published that post, though, I’ve become more disenchanted with the tax; the flaws (included some I mentioned in that initial post) are shining more brightly while the advantages seem to be tarnished.  So, when Joe Plemon asked if the Fair Tax was too good to be true, I had to respond with a resounding YES, and provided several points that I’ve yet to see addressed by the Fair Tax supporters.  Here’s three points I raised in my comment, ones which I’d love to see addressed by Fair Tax supporters:

1) The Fair Tax is more complicated than it looks: One of the major selling points of the Fair Tax is that it’s much simpler than the current tax system; just a single flat tax rate on all purchases (with some exceptions; see below for more on these), a ‘prebate’, or monthly check to everyone in the country, (which is equivalent to the Fair Tax on income up to the poverty level), and that’s it.  No complex forms to fill out every April, no need to wade through piles of old receipts to maximize your return, and no (or a greatly reduced in size) IRS!  It sounds like a dream, right?

Well, it’s not that simple; even the Fair Tax has its complications.  For example, it exempts corporate spending from taxation, as well as the sale of used goods.  These exemptions do make logical sense; corporate taxes are passed along to the consumer (corporations, being legal fictions, can’t truly pay taxes), while taxes on used goods would be a form of double taxation, on the original sale and on the used product.

But in order to track all of this, you end up having to make things more complicated.  How are purchases for businesses going to be distinguished from personal expenses?  Won’t we see the same sort of abuses of ‘business expenses’ as we see under the current system?  (For example, luxury airplanes considered as business necessities.)  Used items represent another problem; the need for the seller to keep receipts (or have some other way of proving that the item is used) in order for the buyer to save on taxes.  Given the difficulty people have keeping receipts when it saves them money on taxes, why would they be any more responsible when it’s not their money they need to worry about?

2) The Fair Tax tax rate would need to be higher than claimed to generate enough income: Proponents of the Fair Tax maintain that the tax rate of 23% they tout will be adequate to (more than) generate the current level of income from all the taxes it would replace (not only the income tax, but corporate taxes, Social Security Taxes, estate taxes, etc.).  That number is little bit odd; it’s tax inclusive, meaning it incorporates the amount of tax in the total from which the percentage is derived.  If you read it as a normal sales tax (which is tax exclusive), it would be 30%.  A $100 item (before Fair Tax) would have a $30 Fair Tax added; $30/$130 gives us 23%

All of that said, in order for the Fair Tax rate to be as low as proponents maintain (whether you consider it a 23% tax or a 30% tax), the number of goods that fall under the tax has to be significantly larger than those currently subject to sales taxes.  As FactCheck.org notes, for the Fair Tax to provide the income amount it claims at the noted tax levels, many things we don’t currently pay sales taxes on would have to be taxed.  These include things like purchases of new homes, rent, doctors’ and lawyers’ fees, and interest on credit cards and mortgages.  If you start exempting any of these items from the Fair Tax, you’ll have to make up the income in some way, likely by increasing the rate of taxation on everything else.  (FactCheck, in that same link, also makes a decent case that the rate would have to be higher than the 23%/30% being discussed in order to make everything revenue neutral anyway, in part because people would inevitably cheat on the tax as they do on taxes now.  They found research suggesting a 34-39% tax exclusive rate would be needed for revenue neutrality.)

3) How will foreign nations react to the Fair Tax?: This, more than any of the my issues so far, seems to be something that nobody has answered.  The Fair Tax website makes quite a few claims about how the Fair Tax will boost US competitiveness in the global market; it’ll make US exports cheaper to other countries, foreign imports will become more expensive (since the Fair Tax will add on top of the taxes the foreign manufacturer paid in their own country), and jobs and investment money will flow into the United States.  It’ll be a golden time for Americans!

But the problem is, changes like this don’t occur in a vacuum; other countries will react, perhaps badly.  Imagine for a moment that the shoe was on the other foot; say the European Union decided to switch over to a Fair Tax style system, and all the predictions the Fair Tax supporter are making come true to benefit them.  The EU becomes a competitive dynamo; their exports are cheaper in our stores, our products are more expensive over there, and businesses start to uproot to relocate in Europe, taking jobs with them.  Heck, even sales of American items to tourists declines, since all goods purchased in a foreign country are subject to the Fair Tax on being imported.

Given this situation, you’d expect the US to respond in some fashion, possibly imposing tariffs on imported goods, possibly insisting that US made goods be sold Fair Tax free, possibly by switching over to the Fair Tax ourselves to negate the competitive advantage.  As America goes in this little example, so goes Europe (or possibly some of our other major trading partners) if America opts for the Fair Tax.  At best, the advantages of the Fair Tax would be blunted (if the Europeans enact their own version), at worst, it could spark a tariff war that leaves everyone worse off.  Without having some idea of how the other major countries of the world will react, it’s impossible to say whether switching to the Fair Tax will be a net benefit to the country.

Those are the three big issues I see with the Fair Tax; but there are some other ones to consider.  While not as potentially harmful to the case for the Fair Tax as those mentioned above, they could change some opinions if people knew the Fair Tax:

• Can be regressive.  For a short example, consider this: you and I spend the same amount, paying the exact same amount in Fair Tax.  But if you earn twice as much money as me, your tax rate (as a proportion of your income) will be lower than mine.  (For a longer example, FactCheck’s article (near the end) notes that people who earn between $15k and $200k will pay more under the Fair Tax, while those who earn above $200k will pay less.)
• Could encourage ‘under the table’ spending.  Taxes on income lead people to hire workers off the books, so as to avoid paying said taxes; in the same way, sales taxes, particularly one as sizable as the Fair Tax (however you want to calculate it) can drive purchasers to the black market.
• Would devastate the tax preparation market. There is a fairly sizable market out there devoted to helping people prepare their taxes each year, covering computer programs, accountants, and any number of tax guides.  If the Fair Tax is passed, there’s much reshuffling of these businesses (and the IRS, for that matter) which will need to be done.

Readers, What’s your take on the Fair Tax?  Am I being too critical of a great tax plan?  Did I miss any flaws in the system?  Any non-Americans who can give me more insight into how foreign government would react to the US enacting this tax plan?

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I’ve been thinking quite a bit about perception and reality.  Particularly, if being successful at something causes you to believe that it’s easier to do than it actually is, or that ‘anyone can do it’.  If you make yourself a success at something, no matter what it is, do you start to think that other people could achieve your level of success, no matter what their situation?

In The Blogging World

What got me started thinking about this topic was reading a somewhat old blog entry from Trent of The Simple Dollar.  When reviewing the book, ‘Bargain Junkie’, he commented that the author should start a blog, as ‘she’d probably end up earning more revenue from it than she would from this book over the long run.’  It’s not the first time he’s touted the profitability of blogging over other online activities; one instance that sticks in my mind is his commentary on Mechanical Turking, when he mentioned building something for yourself (like a blog), rather than spending the time to earn $7.61 an hour Mechanically Turking.

It’s probably a good time to add a little bit of a different perspective here: I’ve been a blogger for well over a year, I’ve written close to four hundred posts (this will be 393 of the ones published here), and I’ve recently managed to turn my blog into one of the two hundred thousand most popular on the web.  I’ve also just recently managed to earn my first $100 dollars from this blog; if you count the costs of setting up the blog (and some technical help I’ve gotten along the way), I’m still several hundred dollars behind. If we assume that each entry I’ve written took one hour to complete (a much lower amount of time than it actually takes, plus one that ignores the time reading and responding to comments, setting up and monitoring the blog itself, etc.), I could have earned $2990.73 by Mechnical Turking during that time, a much higher profit level.

Don’t misunderstand me; I have a great amount of respect for Trent.  He works hard, writes well, and is by all accounts putting in the hours to make The Simple Dollar a success.  But I can’t help but wonder whether that same success causes him to think of blogging as a (potentially) highly lucrative activity, while for me (and most of the other 100 million bloggers out there, if Monevator is right about the average blogger’s daily earnings), the reality is that blogging is much less profitable than many other pursuits he would consider not worthwhile.

Investor’s Choice

It’s far from just Trent and other bloggers, though; just about everyone seems to take the view that the things they can do, everyone else can do. When you master a particular talent or skill, it soon becomes a second nature, and you sometimes forget that not everyone can, say, take a car engine apart and put it back together or figure out complex math problems in their head.

To cite one example from my own life: I never learned how to ride a bicycle.  There’s a number of reasons, from the fact that I spent much of my free time as a child reading to being in day care much of the time and not getting much of an opportunity to learn.  So, when people say things like ‘as easy as riding a bike’, they’re indicating a much different view of bike riding than I have; to my mind, it’s a rather difficult feat.  My experiences have shaped my view of bicycle riding, in the same way (but with the opposite end result) as those of the kids who learned to ride and biked everywhere.

You see this tendency to some extent with investors (or at least, with those investors who end up writing books); when they have success with a particular investment type, they start to see it as highly profitable and usually easy, and recommend that investment (and many times, only that investment) to others. Investors who have success investing in a particular instrument, whether it be stocks, bonds, options, futures, real estate or something else entirely, consider their option one of the best.  So, you end up with Robert Kiyosaki promoting real estate and building a business, for example, while Jim Cramer is strongly in favor of stock investing.  Each of them had success in a particular field, and as a result, they lean strongly toward those types of investments, in some cases even insulting other, equally good investment options.  Success skews their perception of the investment landscape, leading them to focus on some investments as opposed to others.

On The Other Hand…

Of course, the inverse situation is also possible; failure can skew your perception, as well.  Perhaps Trent has a clear view of the effort/reward ratio for blogging, while I (with my admittedly low earnings thus far) have a distorted perspective.  There’s a psychological concept, learned helplessness, where an animal or person, if repeated prevented from helping itself in unpleasant or harmful situations, continues to act helpless even if it is no longer restrained.  Perhaps my situation is similar; with so little profit made on my blog in the first year I was writing it, perhaps I’ve simply internalized the idea that try as I might, I can’t actually make a living by writing a blog.

Of course, it might go even further than that; perhaps I’m finding messages in Trent’s writing about the profitability of blogging that aren’t really there.  Perhaps, because of my own interest in blogging and relative lack of success therein, I’m attributing to him ideas he doesn’t really have regarding the ease and profitability of blogging, when he’s mentioned nothing of the sort.  Perhaps I’m projecting a strawman of a professional blogger onto him so I have something to attack to feel better about my own lack of success.  (Nah…)

All of that said, I’m still not sure just how much our successes and failures influence our outlook on life; they clearly do, but just how is a question a bit tougher to determine.  How difficult a particular activity will seem and the potential for profit or other rewards depends a great deal on the person who is doing it, their skill, knowledge, and abilities.  The truth, as it so often does, probably lies somewhere in the middle; blogging (to go to our original example) can be profitable, and it can be unprofitable.  It all depends on factors both inside and out of your control.

Does success at something skew your view on its difficulty?  How about failure?  How much does our perception affect our reality?  (Alright, now I’m going WAY beyond the scope of the original question.)

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Alright, a little background before we get started on this entry.  Because I am in between jobs, and because I’ve been trying to improve my blog, I spend quite a bit of time online at home.  Thanks to my Yakezie membership, I’ve downloaded the Alexa Taskbar, which, among other features, displays some of the most popular trending stories and topics near the top of my web browser.  This arrangement mean that I have the opportunity to see some of the most popular topics of conversation as they develop.

Today, there was an especially unusual topic: Noah’s Ark was found!  At this point, I had to go and check the calendar, to make sure that April Fool’s Day wasn’t moved to the 27th while I was attending a ceramics convention with my fiancee.  (Just in case you were worried: no, it wasn’t.)  No, the truth is possibly even odder: an expedition in Turkey claims to have found the actual remains of Noah’s Ark.

The Arc they found is decidedly less cartoony

If true, the results could be quite profound for history and science. Meteorologists have long maintained that there simply isn’t enough water in the world to flood the entire world up to the top of Mount Ararat, and proof that a boated sailed up to that height would certainly raise some interesting questions.  History would have to be altered to note the new reality of the Arc as truth rather than myth.  The changes would be quite profound.

(That said, I think the impact on religion is less than what some might claim.  The story of Noah’s Ark is part of the Talmud, the Bible, and, if memory serves properly, also mentioned in the Koran; finding the Arc doesn’t ‘prove’ any of these religions correct.  Plus, there are other traditions that maintain a belief that there was a great flood; even proving that there was a Noah who built an Ark, gathered animals, and sailed in it to survive the flood doesn’t preclude other survivors elsewhere.)

The Lessons to Learn

1) Expect the Unexpected: It seems no matter how odd your expectation become, life manages to be even weirder.  Of the many things I may have expected to happen today, finding Noah’s Ark would not have made the list.  I doubt that finding Noah’s Ark would be on the list, well, ever, really.

In the same way, unexpected things happen during our daily lives; being prepared for multiple eventualities is an important part of life.  (See how I tied this back into personal finance?)  It’s impossible to prepare for absolutely everything (like the rediscovery of a five thousand year old boat), but the more prepared you are, the more circumstances you can handle, the better off you will be.

2) Trust, But Verify: A great policy from Ronald Reagan, one that you should especially keep in mind when confronted by things that seem to stretch the bounds of your imagination.  While one can hope that things of such importance are handles truthfully, that’s not always the case.  Even though news of this discovery has only been up for a day, already there are skeptics doubting the Ark.

While you shouldn’t automatically assume that everyone is lying, you need to have healthy skepticism, particularly when discussing issues of this nature, where there is much to be gained from false claims.  There have been plenty of claims involving the discovery of the Ark, dating back to at least the 1930′s.  While it’s quite possible that this time it’s different, we still need to retain our skepticism.

3) People are Basically Good: As with any discovery that threatens to greatly change our perception of reality, the universe, and life itself, there’s quite a bit of disagreement.  As is too often the case with discussions on the internet, foul language is tossed around, intelligence is insulted, and generally, things get very unfriendly, very quickly.

Here’s the truth: the people who believe that this is the true Noah’s Ark are, by and large, good, hard working, and intelligent people, led by faith or their own feelings to their beliefs.  Here’s another truth: the people who doubt that this discovery is Noah’s Ark are also mainly good, hard working, and intelligent people who have good reasons for their doubts.  Neither group is evil or stupid; there’s simply a disagreement on the truth of the matter.

On that note, I suppose I should share my view on this Ark discovery.  I am currently leaning toward skepticism, although I’d be willing to be proven wrong.  (Unless, of course, the discovery and confirmation of the Ark triggers the end of the world; I’m perfectly happy for the world not to end for another half century or so, at least.)  I’m interested to see how this whole thing will play out; it is surprisingly engaging.

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Since I’ve read Baker’s Unautomate Your Life, I’ve been meaning to take some serious steps toward simplification and making my life less stressful.  In a possibly ironic twist, it seems that since reading it and dedicating myself to that goal, my life has gotten even busier.  Between my recent trip and the fact that finals are steadily approaching for Sondra (leaving her with less time at home and more chores for me), it seems to be all I can do to keep up with everything, let alone getting far enough ahead to actually take a break.

Still, one of my favorite suggestions in the e-book was to make a list of everything you own (or everything in one room) and then to get rid of half of it.  The idea of cutting down on my stuff and getting rid of some of the dead weight sounded rather good.  So this weekend I finally got started on my own plan to reduce the amount of stuff I own, beginning with one of the biggest collections I have: my books.

The Plan

The basic plan is pretty simple: create a list of all the books I own, divide them into different groups, and then handle them accordingly.  I’m planning to be a bit more elaborate than Baker, though; I’m not content with just selling or keeping my books.  The four groups I intended to use are as follows:

1) Keep: The books I most want to keep go in this category.  My goal is to keep it to one third to one half of the total number of books I own; otherwise, it starts to defeat the whole purpose of trying to sort through my books.  I’ll have to fight the urge to keep all of them.

2) Sell: One of the major goals of this whole experiment is to cut down the number of books that I own.  Selling several of them would help to clear out the old bookcase AND raise a few bucks as well.  My plan is to use the Selling on Amazon to clear out between one quarter and one third of the books I own.  The only possible problem is resisting the urge to spend all the money I earn on more books… (The books I’m giving away for my contest are in this category; speaking of which, there’s still plenty of time to enter.)

3) Trade: While we’re on the subject of getting more books, I intend to trade one third to one half for even more books.  I intend to use PaperBackSwap to trade some of the books I haven’t read in years (heck, there might be a few I haven’t read since last millenium, for that matter).  It is a bit opposed to the grand plan of cutting down on the number of books I own, but since there’s no way I’m going to stop acquiring new books, at the very least I can cut down on my costs.

4) Unread: The last category consists of all the books I purchased, and haven’t yet had a chance to read.  It’s not really a permanent category like the rest of them, but more of a ‘To-Do List’.  Sadly, it’s nearly a quarter of the books that I currently own; on the plus side, that means there’s plenty of things that I have yet to read.

The Progress

Well, I’ve managed achieve my goal with the books in category one, keeping them all.  I’m currently working on setting things up on Amazon and PaperBackSwap; I made a list of (almost) all the books I currently own, but never having used those services before, I wasn’t sure just how much information I needed.  I’ll need to go back and gather the ISDN numbers from all my books in order to use those services (well, I don’t need to for Amazon, but since I’m doing it for PaperBackSwap, I might as well do it for all the books).

Once I have things up and running, I’ll have to let you know where you can find the books I’m selling (although most of the books I’ll be selling will be humor and fantasy, rather than economics or money-related, so I’m not sure how many of you my readers will be interested).  Here’s hoping I can cut down my book collection, get some more books, and maybe make a little money, to boot!

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