Half Empty or Half Full?

Optimist or Pessimist ?

“For myself I am an optimist - it does not seem to be much use being anything else. The pessimist sees difficulty in every opportunity. The optimist sees the opportunity in every difficulty."

Winston Churchill.

Most of the time, I share Churchill's sentiments, but tempered with a lot of apprehension about the huge amounts of money the government and the Federal Reserve have created out of thin air.

Do you recall a book called "Bankruptcy 1995" written by Harry Figgie and Gerald Swanson in 1992? I found it to be highly persuasive and wrote an article about different ways to cope with hyper-inflation. After it was published, Mark Skousen (an economics PhD, a friend and former co-worker) wrote to me and made the point that the 1995 hyper-inflation pinnacle predicted by Figgie and Swanson was pre-mature. He pointed out that the government has enormous powers and tools to "stretch the rubber band." Of course that was about 16 years ago and we have experienced a huge increase in money creation (inflation) since then with a lot more that will be coming in the foreseeable future. I read Mark's newsletter (Forecasts and Strategies) regularly and he is not predicting imminent doom and gloom but he is cautioning about monetary expansion which leads to inflation.

Instead of having to choose between being a pure optimist or a pure pessimist, a better choice is to plan for the best possible future but hedge your bets with some asset protection and risk management strategies. Having some assets offshore in a foreign LLC or a foreign trust would be worth considering along with some diversification out of the U.S. dollar plus investments in hard assets that are likely to keep pace with inflation. And having a portable business that can function from anywhere in the world would be another valuable hedge against severe inflation in the U.S.

Vern

Trickle Down or Trickle Up?

Keynes and his followers -- which includes nearly everyone on the left of the political spectrum -- claim that supply-side economics is a fallacy. They derisively refer to supply-side economics as "trickle down".

The logical implication is that there must be some sort of "trickle up"system of generating economic activity and prosperity.

But that raises the proverbial "chicken or egg" paradox. What causes income to trickle up? The Liberal's answer is that the government stimulates a depressed economy by borrowing or creating money and spending it. The money then filters through the economy creating jobs and prosperity. Pardon me, but isn't that the same process as providing private investment that then filters through the economy creating jobs and prosperity? Except for the source of the money, both methods involve putting money into the top of the spigot and then it uses economic gravity to give people money to spend and to thereby create jobs.

But when the government borrows money, it is paid back by taxpayers in the form of taxes. The actual repayment can be delayed almost forever, but in the meantime, taxes are being used to pay interest to the lenders. If the government creates new money by selling its debt to the Federal Reserve, that results in new money in the system and eventually causes inflation. Inflation causes a loss of purchasing power which has the eventual result of confiscating part of the value of any assets. Either way, if the government stimulates economic activity by spending more money, it will have a bad outcome in the future.

So what happens in the supply-side process?

In this theory, there are people who don't spend all of their available income. Like the Chinese, they save as much as possible. Then, in order to secure some income from their savings, they invest their savings in stocks, mutual funds or other investments. Most of that money is used by businesses to buy equipment, land and buildings that are necessary to produce some kind of product or service. That investment results in income for those who help to build the productive assets. Part of the money is also used to hire and train employees to produce the goods or services in the factories.

The money that investors provide to build factories and equipment results in relatively permanent jobs, which leads to an expansion of other businesses that serve the needs of the employees of the factories. And the money that is provided by investors is used by businesses to earn a profit. Businesses that are unable to use the money they get from investors to provide an attractive return to the investors will soon be unable to secure more funds. The businesses that do the best job of earning a profit for the investors will find it easier to secure more funds to expand their business and create more jobs.

Of course, the Liberals argue that the money spent by government also creates jobs. And some of them even claim that the government is "investing" borrowed money (or future inflation) to create jobs. But the government's concept of investing is far removed from the practical approach of the market place. An investment is something that has value as long as it is producing some income or growth in value. Few government projects provide an economic return or can be recovered by selling the alleged investment to someone else. Most government projects are politically motivated to divert money to the supporters of the politicians and to voter blocks that help the politicians stay in office. And when those projects fail to produce the results that were promised by the politicians, they inevitably are expanded and given more money. In a business, a project that doesn't work is closed up.

The free market is a hard task master, but it produces long term results.

Government stimulus is like another drink to an alcoholic or a fix for a junkie. It fees good for a short time but has no enduring benefit.

Vern Jacobs

http://www.vernonjacobs.com

http://www.offshorepress.com

Regulatory Chaos

Many, many years ago, it was standard practice for the legislature to hold hearings and invite comments on proposed legislation for many months or even years before putting a bill into the legislative hopper. The IRS used to draft proposed regulations and they would hold hearings for years before adopting the regulations. Major changes in the law often took up to ten years of hearings.

Today, the government rushes to pass complex new laws written by their staff and rarely read by any of the legislators. The president is pushing hard to pass his massive 1,000+ page health care proposal that no one has had time to read. Behind the scenes he is also pushing a massive new tax scheme called "Cap and Trade" to allegedly curtail pollution. To add to the nearly comic confusion, the President and some legislative supporters are trying to make fundamental changes in our very complex international tax system without serious consideration of the economic consequences.

Meanwhile, the IRS issues regulations dealing with complex financial matters and then responds to complaints after the fact. Early this year, the IRS issued what they apparently thought was a clear and simple expansion of the instructions to the Foreign Bank Account Reporting Form along with an expansion of the size of the form itself. Questions began to arise within a few months and increased up to the filing date of June 30th. Due to many complaints, the IRS extended the penalty free filing date to September 23rd for those who have reported all foreign source income, but the questions continued to roll in. The IRS was rushing to issue further clarification up to the filing date for the form.

And as of Dec. 26, 2009 the Congress has postponed extension of a variety of expiring tax provisions -- as well as failing to act before the estate tax rate changes to zero in 2010. While I'm personally in favor of total repeal of the federal estate tax, it would be generous to call that wishful thinking in the present political and economic environment. It can't be repealed, but it will cause a great deal of needless problems because of allowing the rate to fall to zero for even a few days in 2010.

And it seems that the IRS is only one of dozens of agencies that are subject to the ineptitude of the Congress.

Vern

The High Cost of Free Health Care

December 22, 2009

With a mere 5 votes out of 435, the House managed to pass their version of a health care bill. The bill (HR 3962) includes the infamous public option which will inevitably drive competing private insurers out of the market if it is included in a final compromise bill. The provision to prohibit the denial of coverage for pre-existing conditions will add to the cost of health care insurance which will lead to higher premiums or will put push many (if not most) health care companies out of the market. In addition, employers with more than a $500,000 annual payroll will have to pay an 8% tax on gross payroll if they do not provide health care to their employees. (At an assumed average payroll of $25,000 per employee, that represents a company with only 20 employees.)

On December 21st, the Senate voted 60 to 39 for cloture to stop further Republican efforts at a filibuster. Getting a few hold-out Democrats to vote for cloture was an example of old fashioned back-room Chicago politics at its worst. CNN said,

"Democrats call it compromise. Republicans call it bribery. But both sides agree that special deals are why the Senate is on track to pass a health care bill by Christmas. It wasn't clear whether Senate Majority Leader Harry Reid had the support needed to move ahead with his chamber's health care bill until Sen. Ben Nelson, the last Democratic holdout, had a change of heart this weekend. He agreed to support the bill in return for compromise language on federal funding for abortion and more money for his home state of Nebraska. As a part of the deal, the federal government will pay 100 percent of Nebraska's tab indefinitely for expanding Medicaid for low-income Americans."

Senate Majority Leader Reid even went so far as to say

".. those who missed out on the perks can blame themselves. I don't know if there is a senator that doesn't have something in this bill that was important to them. And if they don't have something in it important to them, then -- [it] doesn't speak well of them,"

With 60 solid votes in the Senate, final passage in that body is assured. The next step is for a joint committee to convene to work out a compromise between the very different elements of the House bill and the Senate bill. With Democratic control of the committee, it's likely the final bill be closer to the House version and will include the most costly elements of both.

It's a certainty there will be an overwhelming variety of provisions that will raise taxes or an assortment of fees, force insurance companies to raise premiums and cut back on coverage provided by Medicare. As I heard the President confidently state that this bill would reduce the deficit, I thought that this President is either woefully ignorant of basic economics or he is the best liar in recent history.

There is no way in the world that this bill can reduce health care costs, insurance premiums and the Federal deficit. And I'm appalled at the blatant self-serving position of many Senators who voted to move the Senate bill onward toward certain passage. I hate to be a pessimist, but this looks like the beginning of the end of the best health care system in the world. Even worse, it will greatly limit the funds that drug companies are willing to invest in new research because of political restrictions on what the insurance companies will be able to charge for new drugs that cost billions to discover and develop. But the worst outcome of this legislation is not the cost; it's the unavoidable consequence of having to ration health care and of making critical health care decisions by bureaucrats rather than by health care professionals.

Of course, this is just my not so humble opinion.

Vern Jacobs

www.vernonjacobs.com

Is Saving Taxes Worth the Trouble and Cost?

There are a lot of people who are eager to help you to pay less taxes.

There are the stock brokers who are selling tax exempt bonds or the insurance agents who are pushing tax deferred annuities. Real estate sales people are quick to remind you that you get lots of deductions when you own a home and that you can make up to $250,000 of gain on a personal residence that is tax free. Sales people who are involved in one of the dozens of multi-level marketing programs will point out the variety of tax breaks that you get from owning a business. Financial planners will often offer to show you enough tax saving opportunities to more than cover the cost of their fees. Tax preparers often offer to help you save taxes by finding over-looked deductions. Lawyers often encourage you to prepare an estate plan in order to avoid federal estate taxes.

But many of these promoters are slow or reluctant to explain the downside to their tax saving tactics. With very few exceptions, there is another side to every coin that represents some kind of tax saving opportunity. And it's not just the potential risk of a dispute with the IRS. The hidden downside is the time and the opportunity cost; it is the alternatives that are not utilized.

First of all, there is the cost of hiring the professional or the hidden risks involved with whatever investment they are promoting. For example, tax exempt bonds rarely pay as high a yield as U.S. government or corporate bonds. Thus, the difference in the yield is like a hidden tax. When a U.S. bond is paying 4% and a tax exempt bond is paying 3%, that's equivalent to a 25% tax rate. And exempt bonds are subject to unique market risks that require expertise to evaluate. An annuity might be a simple way to reduce your taxable income in some circumstances, but the return on your investment will be fully taxable, even if the annuity was receiving income from long term capital gains or tax qualified dividends. In effect you would be trading a potential tax rate of 15% (or even zero %) for 25% or more.

Financial planning and estate planning might result in a net tax savings over time that is in excess of the fees you will be paying to the professional. But don't overlook the time you will have to invest to engage in the process -- which will require you to gather and organize a LOT of your personal financial records and information.

I have seen very few tax saving opportunities that were not without some cost in time or money that reduces the payoff. Clearly, the goal is to find those particular opportunities that are suitable for you and that provide a payoff that is greater than the costs -- including the hidden costs.

Vern Jacobs
http://taxangles.blogspot.com/

IRS Propaganda and Disinformation

Have you read "1984" by George Orwell?

If not, it's worth getting a copy from Amazon.

For those who haven't read the book it describes a world where there are three main political units which are in a perpetual state of war. The European and U.K. government engages in extreme disinformation by twisting words and phrases to mean the opposite of their original meaning.

What's the got to do with the IRS?

Back in the late seventies I wrote about their propaganda and disinformation tactics and since then they have only gotten more skilled in the practice.

Everyone is familiar with the "voluntary" description of the income tax. IRS officials and politicians repeatedly refer to our tax system as being voluntary. But when pressed, the IRS explains that our tax system gives taxpayers the right to self-declare their income rather than having the IRS compute their tax. What they don't tell us is that if we don't "volunteer" we are not only subject to whatever taxes the IRS might impose (based on information returns of various kinds), but we will also be subject to some nasty penalties and interest.

If you read their instructions, you will encounter an extreme use of such words as "must", "required", "does not", "may not" and "shall not". Instructions and information that will increase your tax liability are stated in the most forceful and authoritative terms and in a negative context. References to penalties for non-compliance are used frequently.

Even when the IRS regulations and instructions are discussing some provision of law that explicitly permits taxpayers to do something to reduce their taxes (like investing in an IRA, claiming a deduction for business equipment or investing in tax-exempt bonds), the emphasis is about what must be done to qualify for the tax break. In many cases, their explanation of tax saving provisions of the tax law are so negative that they create the impression that using the break would be risky.

Each year, in the early Spring, the IRS begins a media publicity blitz with news about the successful conclusion of various court cases against tax evaders. As much as possible, they publicize criminal charges and jail time for highly prominent persons. The author of "The April Game" (an un-named former IRS agent) says that the conclusion of fraud cases are times to gain maximum publicity value.

Another tactic is to convince us that they can catch every tax cheat and tax return error. The truth is that only about 1% of all the returns are audited, and that only about 1 out of 200 returns of middle income taxpayers are audited.

Few taxpayers are familiar with the arcane language of the tax code and the IRS regulations. Since the income tax is based on income, it is necessary to have some understanding of what that means. However, the term is not defined in the tax code because it is such a broad and elusive concept. Without some education as to the meaning, most taxpayer will assume that every form of cash receipt is income. That's not true, but you will have a hard time finding any admission of that fact in the tax law or the IRS regulations or voluminous instructions.

To counter the IRS propaganda, taxpayers who do not have any training in the subject of accounting or tax law may need to secure help from someone who does.

To be Continued

Vern Jacobs

www.vernonjacobs.com

The Tax Angles Story

Tax Angles was the name of a very popular consumer tax guide that was published between late 1977 and about 1985. At its peak it had about 60,000 paid subscribers and it was one of the first publications that focused on showing taxpayers how to reduce their taxes. The unique element of our newsletter is that we didn't really deliver a lot of NEWS. Instead, we focused on giving our readers practical and legal tips on how to save taxes.

The marketing focus was on the idea that taxpayers could not afford to wait for their tax preparer to bring tax avoidance ideas to them; they needed to be more pro-active and look for ideas in our newsletter which they could show their tax preparer and ask for help to determine if that tip was suitable for the taxpayer. Needless to say, more than a few tax accountants and preparers took exception to our advertising and we got more than a small amount of hate mail.

But we found that a substantial portion of our subscriber base consisted of tax professionals who wanted to read about the tax tips in our newsletter and then pass them on to their clients.

I was the founding editor and principal author. The publisher was Kephart Communications, Inc. (KCI) -- a very successful publisher of multiple newsletters, based in Alexandria, Virginia. Prior to creating Tax Angles, I had been writing and self publishing a very tiny newsletter with the rather provactive title of "Tax Tricks and Techniques for the Self Employed". The owner of KCI was apparently one of my first subscribers and it turned out that he liked my approach to explaining tax saving opportunities to my readers. So he made me an offer that was too good to refuse. He bought my newsletter at an attractive price and then offered me a very generous royalty on the gross sales of the new newsletter.

From late 1977 through about 1984, I scoured various sources of tax news and information that was mostly aimed at tax professionals and explained what I found in plain English -- as much as possible without distorting the meaning of the law. KCI not only promoted the newsletter, they actively promoted me as an "authority" on the subject of taxes and made arrangements for me to be invited to be a seminar speaker at a variety of financial conferences like the New Orleans annual hard money conferences.

It's about 25 years later and I still encounter former subscribers of Tax Angles who still recall some of my more titallating tips on how to save taxes without going to jail. And although KCI is no longer in business I'm still pursuing my favorite avocation; explaining our insanely confusing tax system to the general public in plain English -- or as close to it as I can get.

Vern Jacobs

An Introduction

Welcome to Jacobs' Tax Angles

I've created this blog to serve as a platform for some of my personal views about taxes, politics, economics and an assortment of related topics. 

By way of introduction, I'm a tax author, teacher and accountant with a primary focus on international tax law. 

As an author I write and self publish books, reports and a web site dealing with asset protection and taxes. I have a second web site that provides information for those who have an interest in my professional services. 

Unlike a great many tax professionals, I do not look forward to more tax laws and regulations which represent opportunities for more work. I would much prefer to eliminate the Federal income tax by repealing the 16th amendment to the Constitution and to repeal the Federal Reserve Act of 1913. Despite my seemingly bizarre political views, I'm a long time student of the U.S. tax system and am aware of the heavy handed penalties that can be imposed on those who deviate from compliance with the law.

I am not an advocate of an assortment of "tax protester" theories that have been summarily and repeatedly rejected by the U.S. courts. Instead, I assist taxpayers who wish to avoid problems with the IRS by complying with the tax law and I limit my somewhat controversial  opinions to the written word where I have at least a modicum of protection via the First Amendment. 

Vern Jacobs

www.vernonjacobs.com

www.offshorepress.com