Fair Tax

I just finished reading The Fair Tax Book today. I had heard about the fair tax before and have visited the website but I still learned a lot.

For those that don't know, the Fair Tax is a law in congress, HR 25 and S 1025, that aims to eliminate all personal income, estate, FICA, medicare and corporate taxes, abolish the IRS and replace them with an inclusive national sales tax of 23%. This means that if you buy a $100 item, the retailer keeps $77 and sends $23 upstream to the federal government. Because the taxes and cost of compliance with federal tax laws are already embedded in the cost of every item you buy (estimated to be around 23%) prices for the consumer are expected to remain the same or slightly decrease. Imagine the ability to take home all of your pay every two weeks and only pay tax when you choose to spend it.

Some of you may be wondering about those with little to no income, but not to worry the plan takes care of that by "prebating" every head of household in the US with the amount of sales tax on a twelfth of the inflation adjusted poverty level for the size of their family. This means that the poor's tax burden is removed entirely and still receive goods and services from the federal government.

I'm on board, but a ground swell of support is required to convince congress that this is a desired course of action. I encourage you to investigate the plan and then contact your friendly neighborhood congress critter with your opinion.

I consider this to be compatible with the Change Congress movement as the simplification of the tax law to a point where there are no loop holes or exceptions for anyone will lead to a congress more beholden to their constituents.

The greatest depression ever!

Given Dave's post on investing with leverage, I'd like to point out that the Great Depression wasn't so much caused by the Stock Market Crash of 1929 as the fact that people had posted their homes as collateral for loans to invest in the stock market. When the market crashed and the lenders saw that they weren't going to be repaid, they started foreclosing on houses and farms set as collateral. With people losing their jobs and homes the Great Depression set in.

Cautionary tale aside, people invest with leverage all the time. In a short sell, one sells stock borrowed from others with the promise to return it by a certain date hoping the price will go down and they will pocket the difference. In a long sell, stock is purchased at the current price with money the investor has borrowed, often from the brokerage itself,
with the hope the price goes up and they will pocket the difference. In both of these cases, the non-leveraged portion of the investor's portfolio is used as collateral. Performing long and short sells requires a margin account with a brokerage of some kind.

Additionally, investors at the Prosper Loan Market Place are using their high credit ratings to secure sub-prime interest loans to invest in other loans on Prosper. Because the loans on Prosper are unsecured, the speculator could be burned if enough of their purchased loans default. They would still be on the line for making the monthly payments on the money they borrowed. I think investing in these characters is attractive for a lot of people because they view it as safer because their money has been lent to a person with a good credit rating to protect. However, one never knows the confluence of events that could occur. The speculator's loans could default and they lose their job leaving them to default on their own loan.

I think the real lesson here is that "investing" with leverage is entirely speculative and as a general rule no more than 5% of your portfolio should be held in speculative investments.

Disclaimer: The above does not construe actual financial advice. If you lose all of your money it's your own fault.

Financial Independence

After reading jamin's blog post with links to desperate measures to get out of debt, I had a discussion with one of my office mates about how one gets into that kind of trouble in the first place. It turns out it is really easy to make the mistakes that get you there. If you aren't there already, there are some things you can do to avoid it.

• Pay off your credit cards in full every month. Making only the minimum payment will result in you paying for that geek gadget or shiny object long into the future.
• Save for your big purchases. If you have been lusting over some new toy that you simply can't live without, set aside money every month until you can afford it. You've been living without it this far and will avoid interest charges when you do buy it. In fact if you put your savings in a high yield money market account such as ING Direct's (disclosure: I have been very happy with my account there.) you could actually make money on the deal.
• Establish a safety cushion. Sock away at least 3 months worth of living expenses if you're single and more if you're not. If you have the cushion and hell breaks loose, you will be able to rely on savings instead of credit cards while you weather the storm.

There are plenty of more things you can do, but those are some of the biggies. Just remember that as the compound interest of the credit cards can work against you, if you have the money invested it can work for you.