Tags: Tax Factor Is Key to Making Investment Decisions

Tax Factor Is Key to Making Investment Decisions

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Monday, 08 Nov 2010 08:35 AM Current | Bio | Archive

I usually hear about some great investment ideas while relaxing with a few colleagues over cocktails.

The regale me with their latest enticing investment strategy that will generate just a bit of a higher rate of return. What I don’t usually hear about is whether this return will be after tax.

Analysts like to look at data but data can only be known retrospectively. So figuring after-tax cash yield when the tax application is still unknown is something which gets downplayed, if not outright ignored.

If no one knows what tax rate will be applied, or even what will be taxed (and it certainly doesn’t appear to be anyone in Congress or the president), it’s difficult for an investor to make confident investment decisions.

With the tax factor unknown, what can be said with certainty is that there is a lot of real money at risk on any investment. Clearly, tax uncertainty doesn’t seem to make up much of the analysis by those who make their living brokering investments or investment services.

What this highlights is that tax policy is really just part of the political fraud we call campaigning. The tax system in place efficiently allows politicians to raise obscene amounts of campaign contributions.

At least in this election, the Tea Party — the Taxed Enough Already Party — tried to get some new blood who at least speaks out on the tax-system problem. But do you really think any of these newbies in Congress — or the pundits reporting on the election — have an inking as to how this massively complex tax system works?

It doesn’t take economists or lawyers or anyone else in Congress to see a simple truth. The government wants to get paid in cash. The government makes its payments — good or bad — in cash. Rationally then, the tax system should be based on cash. Cash is easier to analyze accurately than “profits” or “earnings.”

A cash-based tax system would be more efficient in raising money for the government and be better for investors in the market. Did you hear anyone in this election say something like that?

To be accurate, some in Congress have been pushing a tax system based on cash for years. The Fair Tax Act 2007, for example, did provide a laundry list of why the current income-tax system must be repealed. But this is not going to get very far unless those in Congress change the rules of how they raise money for elections from lobbyists.

The income system, designed for an economy that no longer exists, is perhaps, too great a political cash cow for it to be abandoned in favor of something that raises fewer campaign contributions — even if that might actually save the economy of the United States.

Clearly, the revenue side is but one part of a two-sided equation. No matter what tax system is used, when Congress and the president are spending $1.67 for every $1 dollar in tax revenue, the United States is going to go under. The U.S. economy is no more unsinkable than was the Titanic — only for the U.S. economy, debt is taking the place of the North Sea.

Limiting government spending is clearly on the mind of the voter.

Cutting spending will take time and political will. However, for investors who are putting their hard-earned cash on the line, it is the uncertainty of their current tax costs and the tax impact on what they are investing in which is the greater daily risk.

It seems obvious that investors will be looking for investments that avoid reportable taxable income or other investments that realize value based on growth.

Reasonably savvy investors will counter the uncertainty of their tax risk by making their investments through tax-deferred U.S. domestic financial products or plans, or by using tax compliant, and liability protected, offshore structures.

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Kleinfeld
I usually hear about some great investment ideas while relaxing with a few colleagues over cocktails. The regale me with their latest enticing investment strategy that will generate just a bit of a higher rate of return. What I don t usually hear about is whether this...
Tax Factor Is Key to Making Investment Decisions
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2010-35-08
Monday, 08 Nov 2010 08:35 AM
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