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Missed Fortune – The Economic Power of Choosing Wisely

Posted on | October 16, 2011

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Two States At An Economic Crossroads

With so many eyes focused on the efforts of state and national government to turn the economic tide towards recovery, the states of Illinois and Wisconsin have provided a powerful object lesson. One state demonstrated exactly what to do to promote economic and job growth, the other showed us exactly what not to do.  All states should learn from their examples.

Anytime government suffers for lack of tax revenue to pay federal employees and programs, they have the option of raising taxes to bring in more revenue, or lowering taxes to increase the revenue being taxed.  They can also increase regulation of employees and the associated costs of doing business or they can deregulate and create certainty and confidence among employers so they’ll hire more workers.

Only one of these approaches is consistent with making unemployment go down.

In Illinois, lawmakers raised taxes in January of this year and saw unemployment increase dramatically.

This is described in detail by Business Insider magazine:

“[I]n addition to the worst bond rating in the country, the state lost the most jobs of any state last month. The Illinois Policy Institute reported the grim news that “Illinois lost more jobs during the month of July than any other state in the nation, according to the most recent Bureau of Labor Statistics report.

After losing 7,200 jobs in June, Illinois lost an additional 24,900 non-farm payroll jobs in July. The report also said Illinois’s unemployment rate climbed to 9.5 percent. This marks the third consecutive month of increases in the unemployment rate.”

There is a clear correlation between January tax increase and the subsequent drop in employment numbers. It’s a perfect illustration of the futility of trying to conceal the results of runaway spending by imposing punitive taxes on producers rather than simply cutting the spending.

Ask yourself, if you were a business owner in Illinois, would higher taxes motivate you to grow your business?

By contrast, during this same time frame, the state of Wisconsin saw jobs increase dramatically with 39,000 new private sector jobs were created with 14,100 jobs in manufacturing. Wisconsin’s non-farm growth is now two times the national average. One other happy note: the state also managed to turn a $3.6 billion deficit into a surplus in that same time thanks to the increased revenues.

So what did Wisconsin do differently?

Governor Scott Walker asked employers why they weren’t hiring people. Business leaders told him they were feeling uncertainty about whether taxes were about to go up or not. So Wisconsin chose to lower taxes and to deregulate in order to provide the certainty and confidence that job creators were seeking.

The results speak for themselves.

If we wish to see unemployment grow and business continue to wither, Illinois is a great example of how to do that.   However, if we want to see unemployment reversed and business incentivized to grow, Wisconsin is the better example to follow.

Economic growth and prosperity only occur where job creators are operating in a climate of certainty and confidence.

Certainty and confidence are the result of sound strategies. This is true of states, nations and individuals.

Standing At Your Personal Financial Crossroads

If you’re seeking greater certainty and confidence in your personal financial future, you’ll need to incorporate proven strategies based upon sound principles.  Here are two principles that can give you an edge.

The first is the miracle of compound interest. It’s a principle Einstein said was one of the least understood phenomena on the planet.

A single dollar, doubling every period for 20 periods, will grow to $1,048,000 if that growth is tax free.

If you have to pay tax on every gain your money makes, that dollar being doubled every period is instead being eaten up by federal or state income taxes. If you’re in a 25% tax bracket that means you’ll actually only have $72,000 to show after 20 doublings. In a 33% tax bracket it will only grow to $27,000.

This is why tax-deferred or taxed-as-earned investments should be avoided in favor of strategies that allow your money to actually grow through compound interest.

The second principle is that of tax-free accumulation. Most Americans accumulate their money in the worst possible place by paying tax on their income as they earn it. Then they place that money in taxed-as-earned investments and pay tax on any of the gains they make. Finally, they pay more tax when that money is transferred to their heirs.

As a result, what should have been a sizable nest egg is quickly consumed by taxes and ultimately ends up as a fraction of what it could have been.

It’s like crawling towards the finish line of financial independence when they could be running or flying. Is it any wonder why so many Americans are dependent upon Social Security and Medicare?

A better choice would be a vehicle that allows your money to accumulate tax-free now and in the future, thanks to sections 72E, 7702 and 101A of the IRS code.  Not only does your money remain safely yours, but you can access it and ultimately transfer it to your heirs tax free.  That’s the power of choosing wisely.

These are just two key principles of wealth accumulation. Missed Fortune strategies incorporate these and many other principles that enable you to enjoy certainty and confidence in your financial future.

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