28 December 2012

Tax Attack!

CBO chart showing predictions
under various scenarios.
Awhile ago, our legislators decided to kick a can down the road to protect themselves during the election season. The response in the media from politicians, "economists", pundits, etc. has been nothing short of amusing. Dire predictions are in order, with the dreaded 'recession' word being uttered to scare people even more. Numerous infographics have all been made as well to show the effects in all sorts of areas. From those responses, it certainly appears that come Tuesday, the world will end. Again.

One thing is for certain: tax rates will increase for virtually everyone. Just how much and at what levels is anyone's guess, but it will happen for sure. They're slated to return to the pre-Bush levels, but Obama and Boehner are bravely cutting short their holidays to try to work out a "deal". However, the pre-Bush levels certainly wouldn't be an impossible burden to live under since the "lost decade" has happened despite the cuts.

Yet, in the middle of the gloom, plenty people are still prospering. In accordance with the fiscal cliff, stock prices will probably head south. That puts some of the best cash cows on sale. If I were in a better position, I'd be preparing to get supreme deals on great stocks. Unfortunately, I still have other more pressing obligations, so I'll have to wait until the next sale comes around. However, if you've been sitting on the fence, now'd be a great time to dive into some sound companies. Or even an ETF/mutual that only invests in them.

Being an election year, taxes were a hot topic all year long. The Republicans all sparred about the finer points of their tax plans while Obama insisted that everyone making over $250k/year needs to pay more. This was punctuated in April by Obama trotting out his tax returns, then needling Mitt Romney for months to follow suit. After finally caving, it was revealed that Mittens enjoys a much lower tax rate on much higher income than you and I, or even the Obamas. The media and Obama campaign wasted no time in pointing that out.

But where they missed out was on a great opportunity to promote self-sufficiency and investment. This is mildly understandable, because then people might actually start seeing the light en masse. Can't have that. Nonetheless, the takeaway from Mitt Romney's example should be to maximize your investment income, not complain about how unfair the tax code is. Because it really isn't. The tax code embodies one of the core principles this country was founded on: self-sufficiency. With that in mind, you could literally have no tax liability at an income substantially above the poverty level if you live in the proper state. All it takes is the resolve to build the base to make that possible.

So as we soon enter this new year, don't get all bent out of shape by the media and politicians. As a citizen of this country, I have no problem paying my taxes because I'm well aware of the benefits they provide. At the same time, I do understand that due to years of neglect and mismanagement, they will have to be raised in the future to pay for the past. However, as long as they encourage us to invest, I'm going to be doing that. It really makes too much sense. Work for a few years while saving some to allow years of freedom or work for a few years, not save anything, and remain in slavery, having to work even more years to catch up. The choice is yours.

Image sourced from the Congressional Budget Office.

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