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Missed Fortune – An Object Lesson In Simple Economics

Posted on | September 18, 2011

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An Economic Tale of Two States

In a recent article in the Business Insider titled “Illinois Employment Plunges After Tax Hikes” we find a perfect object lesson in basic economics.

To fully appreciate this lesson we’ll have to contrast the two very different experiences of two different states and what occurred over the course of just a few months.

We have the state of Illinois which increased taxes and regulation vs. the state of Wisconsin which lowered taxes and decreased regulation on businesses.

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.

This can be seen in the dramatic difference between the two state where Wisconsin saw the creation of tens of thousands of private sector jobs after lowering taxes and lightening regulations on job creators.

Illinois, on the other hand, increased taxes and saw unemployment subsequently go up as a result.

From the article in Business Insider:

“[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.”

This contrast illustrates the futility of trying to cover profligate spending by raising taxes.  Illinois saw employment plunge as soon as they did so, while Wisconsin saw employment skyrocket when they cut spending and lowered taxes.

It’s perfect illustration of how what’s plaguing this nation is a spending problem rather than a revenue problem.

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

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

Marvels of Wealth Accumulation

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

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?

When your money accumulates tax-free now and in the future, thanks to sections 72E, 7702 and 101A of the IRS code, your money remains yours and transfers to your heirs tax free.

These are just two marvels 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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*Life insurance policies are not investments and, accordingly, should not be purchased as an investment

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