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Tax Inversions: The Most Unpatriotic, Selfish, And Shortsighted Decision Companies Make

By Frugaling 6 Comments

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Corporations Tax Inversion Evasion No Revenue

Tax evasion is persecuted heavily in the United States. If you’re caught keeping income away from the federal government, you could be looking at a hefty prison term and fine. This very crime that put Al Capone, the notorious mafia-gangster, behind bars. And yet, when companies dodge taxes, their shareholders rejoice. Nowadays, rapacious corporations are pushing the limit of U.S. tax laws by engaging in one of the sneakiest tax-dodging practices ever: tax inversions.

What are corporate tax inversions?

Bear with me as I try to explain a fairly complicated procedure. Essentially, corporations pay certain tax rates in America. Sometimes motivated by intrinsic greed — at other times by shareholders — corporate executives decide that moving their official headquarters to another, overseas location would be better for taxation. In switching to another country, with lower tax rates, they can pass on those savings to shareholders via greater earnings per share (via profit and revenue), larger stock buybacks, and more dividends. All they have to do is purchase another company that already has its headquarters in a tax haven.

When you own shares in a company like this, you can easily get swept up into this grand, wonderful idea. You’ll be getting more money for your investment and the company will be even more competitive. These are significant advantages — until you look at the dirty consequences.

When robber barons are more patriotic than today’s businesses…

Robber barons — 19th-century industrialists/capitalists — knew how to make money hand over fist. They could squeeze workers and make millions of dollars (billions when accounting for inflation). Many of these elite capitalists formed companies in finance, manufacturing, oil, and transportation. These industries were at the heart of American success; although, the robber barons made a lot more than your average, everyday peon.

There was a uniting factor to these antiquated moneymen: pride in country. They made their riches here, and much of the money flowed back into America. For instance, Andrew Carnegie, who started one of the largest steel manufacturers in the world, gave much of his wealth to schools (Carnegie Mellon University), museums, and libraries.

As America matured, tax laws and corporate structures evolved. Workers were offered more rights due to union memberships. Talk of a fair wage encouraged companies to pay more and protect workers. America became a booming economy, despite these new restrictions. Social welfare programs developed, as well, which sent people to college (affordably) and created Social Security. There was a respect for those who worked 40 years. The country believed they deserved to live safely after working so hard. Today’s businesses seem to have a different motivation.

How much do American companies have to pay in taxes?

Now, hardly a day goes by without a corporate executives complaining about excessive taxation. Steve Schwarzman famously compared the pressure for increased taxation to the invasion of Poland by the Nazis. Classy! Or, how about the Home Depot founder, Ken Langone, who said that increasing taxes, awareness of income inequality, and the Democratic agenda was “was what Hitler was saying in Germany.” Holy hyperbole! And the last one (that I’ll include in this article) comes from Tom Perkins, whose net worth is said to be around $8 billion. He said, “[there’s a] progressive war on the one percent…In the Nazi area it was racial demonization, now it is class demonization.” To put it simply, he’s saying that poor people clamoring for help is comparable to Nazis killing Jews. Better to bite your tongue, perhaps?!

Beyond the disturbing question of why some bigoted wealthy people freely invoke the Holocaust and its accompanying atrocities, I’m left wondering how bad it is in America for them. If people are that stirred up and eager to fight back poor people, tax increases, and basic rights for workers, these executives must be struggling. Alas, avoid the wellworks, the aforementioned Nazi-invokers are all billionaires. I trust they’ll find a way to pay their next meal.

Despite these clarion calls for tax revolution, American companies are doing well. In fact, corporations are seeing record profits year-over-year. How can this be happening in these awful, tax heavy times? Well, for large-cap corporations, they’re not. Armed with restless lawyers, accountants, and lobbyists, the largest companies march up to Capitol Hill and demand tax breaks. And you know what? It works.

Yesterday, CNBC reported on 20 (to name a few) companies that pay 0% in taxes. Take a look and see if you recognize any:

1. Merck
2. Seagate Tech
3. Thermo Fisher
4. General Motors
5. Public Storage
6. Iron Mountain
7. Newmont Mining
8. Eaton
9. Avalonbay
10. Kimco Realty
11. Prologis
12. Boston Properties
13. Apartment Investment
14. Plum Creek Timber
15. Citrix Systems
16. Crown Castle
17. Macerich
18. News Corp.
19. Essex Prop.
20. First Solar

These companies are likely benefiting from tremendous tax loopholes and writeoffs that are only available to them. From federal investments to research grants to special “one-time” discounts, they add up and suddenly the bill comes to $0.

That means that the preceding list doesn’t contribute a single dollar to our federal budget via traditional taxes. Moreover, they don’t properly fund our infrastructure that they rely on. Without the education, federal investments/breaks, transportation system, etc., these companies would have a devastatingly hard time finding success here.

Business-first media outlets such as the Wall Street Journal swiftly defend companies by saying:

“We’ve written for years about how the U.S. has the highest corporate income tax rate in the developed world, and that’s an incentive for all companies, wherever they are based, to invest outside the U.S.”

In this strange time when taxes are demonized, it’s important to realize that many companies aren’t paying their fair share. These claims that America has the highest corporate tax rate in the world don’t reflect the numerous benefits; after all, membership has its privileges and sometimes that includes sizable tax breaks.

How do corporate tax inversions hurt countries?

Despite this business-friendly reality, some companies still seek to lower their tax burdens — wherever they can find them. Tyco International, Fruit of the Loom, Ingersoll Rand, Transocean, and Eaton Corporation all successfully left the U.S. (for tax purposes), but they all still benefit from the infrastructure and development here. See, even after you leave a country, its people, and suck another $1 billion into your coffers because of the move, we welcome you to do business here with open arms.

It’s sickening. Companies vacate the U.S. for places like the Cayman Islands, Ireland, and Switzerland, where the corporate taxes are zero percent. Americans, again, lose all that tax revenue that would’ve gone to state and federal programs. This all contributes to widening budget gaps, shortfalls, and growing austerity measures. Then, the welcoming nation holds out open arms for the new company. But despite the new headquarters, they make zero percent from their new neighbors.

This is a brutal act that causes disruption for both countries. With zero percent coming in for either party, they both suffer the consequences of a newly globalized world.

Globalization was supposed to bring greater diversity and talent. Suddenly, the world is flat, right? Aren’t we supposed to be benefiting from a shared upward mobility? When tax inversions are employed, it’s hard to see how anyone could possibly benefit — except for a select few shareholders and corporate executives.

Filed Under: Social Justice Tagged With: Business, Companies, federal, Government, invest, irs, market, Robber Barons, stocks, tax inversions, taxation, taxes

Think Compounded Interest Is Always Good? Think Again.

By Frugaling 11 Comments

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Manhattan Beach Undertow of Debt

When I had nearly $40,000 in student loans, every purchase felt like an impediment to conquering my debt. It was debt on debt. A tragic snowball effect, each item cost more than the sticker price — every time. I didn’t think I could leave this cyclical world — doomed to mistakes for decades to come.

I was dissatisfied with my spending choices. For instance, after my first installment of student loans, I promptly bought new furniture for my apartment and splurged for a nice car (made possible by another loan). Oh, the humanity! I was making some horrible decisions.

I had entered the world of debt without an escape plan. And I just kept spending. Then, a major wakeup call hit me: debt could prevent me from living the life I want to lead. Excessive student loans would nearly force me into certain career trajectories, as well. I wanted to make a change, but still saw little hope of reducing my debt (while in graduate school).

With greater financial literacy and competency, I developed an eagerness to make some sort of change. One of the largest lessons in the personal finance world is compounding your gains via interest, dividends, and other regular income. Essentially, you earn a regular income from your investments, which can then build even more wealth. By using this method of saving and building income, your money will work for you. It’s a brilliantly simple way of making sure you continue to amass wealth. I wanted to make this happen.

Unfortunately, I was filled with dread, as I realized I was on the wrong side of compounded interest. My $40,000 in loans were actively earning interest for banks and the federal government — ranging from 3.5 to 6.8% APR. Money was working for someone else. I was fighting against a sinking ship of debt, which compounded every day. Every day, I ended with less money than I started — even if I didn’t swipe or spend a dime.

When compounded interest is working against you, it feels like the Pacific Ocean’s undertow. You step into that warm water (spend a little bit of money you don’t have), and it slowly takes you out to sea. At first, you don’t notice the gradual loss of sand beneath your feet (the bills beginning to add up). It can be pleasant — relaxing even — to swim (and spend). And as you swim, you lose sight of the shoreline. Suddenly, you’ve been sucked out to sea and it can be hard to see how you get back to square one.

A fluke — one-off — happened to me over the last year-and-a-half. I started Frugaling.org, recreated a rock-solid budget, made more money than ever, and began to invest. The debt was handily defeated. It was at a precipice in my budget — my net worth reached zero, again — when I realized the powerful hold that compounded interest had over me. I was now free from the undertow of debt, and I ran away as fast as I could.

We have a horrific, metastasizing problem in America today: student loan debt. What happens is that people in their late teens and early twenties begin to rack up massive figures before they see their future paychecks. It’s a recipe for disaster, and the country will suffer from this.

Unfortunately, there’s an even bigger problem from delayed income and growing debt: we delay saving and building for retirement. We eschew the benefits of compounded interest — in our favor — and suffer under the debt. This restricts our ability to become entrepreneurial, live healthily, take risks, and build a better future (for ourselves and future generations).

Today, I’m standing on the other side of compounded interest — the one where I steer and control my finances. I feel empowered by it. I don’t necessarily want more and more wealth, but I don’t want to be back in debt ever again.

I’m done with that undertow.

Filed Under: Loans, Save Money Tagged With: compounded, debt, Interest, invest, loans, money, savings, student, undertow

How To Use Dividends To Reduce Taxes And Protect Income

By Frugaling 6 Comments

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Dividends Photo
Photo: LendingMemo

Over the last few months, I developed plans to minimize my tax bill, earn more money, and invest in the stock market. Much of this financial planning is motivated by an upcoming tax burden that’s sure to sting.

The problem starts with self-employed earnings. These are filed under Schedule C of the U.S. tax code. Unfortunately, those earnings don’t include withheld funds that support Medicare and Social Security. To account for this, the federal government requests about 30% in self-employment taxes.

As someone who’s funneled as much cash as possible to swiftly pay off student loans, I don’t necessarily have a lot of liquidity or extra funds to pay this tax bill (yet). The U.S. government doesn’t adequately account for someone paying off student loans when asking for the tax bill at the end of the year (and this is just the tip of the iceberg for financial aid concerns).

With these worries in mind, I took time today to restrict my spending ability, increase my regular income, and provide a bit of a tax shelter. And it all starts with dividends.

One of the most contentious elements in our tax code has to do with capital gains and dividend taxes. Whereas normal income from work is taxed at steep, progressive rates, these stock-affiliated earnings receive an artificial discount. If you make over $406,750 as a single person, you pay only a 20% tax on dividend earnings. And if you hold stocks/assets for over one year, you also qualify for this reduced rate.

Dividend income
Only 20% of qualified dividends and long-term capital gains are taxed for those making over $406,750 per year.

For me, as a single filer with projected earnings of less than $36,900 for 2014, I’m looking at a brilliant tax rate of 0%! You heard me right: zero percent! That means for every stock that I hold onto for over one year or qualified dividend I receive, I should be able to keep the entirety of that income. Here’s where nifty financial planning will help lower my tax burden and increase the money in my pocket.

Today, I made a small (large for me, though) investment in Apple Inc. (AAPL). The stock is currently valued at $95.25, as of August 5, 2014. At that value, it is hardly one of the greatest income earners, but it pays a substantial 2% dividend yield. Simultaneously, Apple is still highly favorable among stock analysts — Yahoo Finance suggests that the collective price target is $104.79 within 1 year.

Based on stagnant yield growth, I should make about $31.96 per year from dividends. That’s all income that should receive a 0% tax due to those gains. Based on about a 10% (possible) appreciation in Apple for one year, any gains will be completely protected from taxation — even after I sell the stock. I will again have the 0% tax liability.

Long term capital gains and dividend income
This is the benefit! I’ll be paying nothing via qualified dividends and long-term capital gains taxes!

The political climate around changing capital gains taxes is terrible. The regulations should change — they need to stop benefiting the wealthy. Warren Buffett has frequently complained about this tax code inconsistency, and suggested that it unfairly rewards the wealthy. I think he knows a thing or two about investing, too! Until then, and as a low-income earner, I need to use this system to my advantage to reduce my tax liability and increase earnings.

Filed Under: Make Money Tagged With: Capital, Dividend, dividends, gains, Income, invest, Investments, stock, Stock Market, taxes, Warren Buffett

Riskiest Place For Money: Mattress, Bank, Or Stock Market?

By Frugaling 10 Comments

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Cash counting machine 20s

Over the last year, I developed a budget, started making more money than ever, and used credit cards to hack travel costs. I’m more motivated than ever to save money. Using this tactful budgeting and planning, I now have a surplus of savings! After years of bleeding red to student loan debt, it feels deeply satisfying to see the positive, green numbers.

Now that a little nugget of savings has developed, I’m realizing a different anxiety. There are various market actions that can negate your savings plans, and it’s important to protect against them. It seems like every place I look, there are risks for your nascent savings. Today, I wanted to spend some time explaining a few of the risks that await your new wealth.

Under the mattress?

Pros. The classic paranoid and/or privacy-minded decision is to just stick your extra savings under your bed. My late-grandmother seemed to be deeply concerned about her possible access to funds — likely influenced by the Great Depression — and she would constantly have funds hidden away around the house. I thought this was rather bizarre, but appreciated her desire for some amount of cash in case of emergencies. Most importantly, you are not exposed to stock market risks or banking fees.

Cons. Sticking your little nest egg in a little home safe or inside your mattress comes with some risks, too. Not only is your money literally exposed to the elements (i.e., fire, flood, or other natural disasters), but saving your money at home may be put your household at risk for burglars. Lastly, this decision makes you completely vulnerable to inflation (which is a serious long-term concern), you don’t appreciate from interest, or gain stock market exposure that averages about 7-10% per year.

In the bank account?

Pros. Take your paychecks, bonuses, and side income and leave it in your bank account. This could not be easier, and you don’t need to spend any more time deliberating and considering financial decisions. Although, if your money is deposited into checking account, I’d recommend transferring funds to a high-yield, online savings account. You don’t bear any of the stock market risks and there isn’t any risk of loss. All checking and savings accounts are insured through a government organization called the FDIC (Federal Deposit Insurance Corporation). The deposit insurance covers each account up to $250,000.

Cons. Even if you’re using a high-yield checking and savings account, you’re likely receiving less than about 1% interest. Inflation is a nasty, hidden force that can eviscerate your savings. For the month of April 2014, inflation in America was about 2.0%. Effectively, just holding it in a bank account will cost you 2% or more if inflation becomes worse.

In the stock market?

Benjamin Franklin Quote Personal FinancePros. Benjamin Franklin really said it best, “A penny saved is a penny earned.” Now that I have some savings, I’d like to make the most of it. I want to send my dollars out to work for me. I opened a couple financial accounts, one of which is an E*TRADE brokerage account. With low transaction fees and commission-free ETFs, this was an easy decision. I’ll be making about 7-10% per year, and attempt to invest in high dividend stocks. This method defeats inflation and puts it to work, as I build a little savings.

Cons. Of all the methods mentioned, this is definitely the riskiest. Investing is not free from thievery and scum; hell, I’d prefer a burglar sometimes, as they do less damage. The Dow Jones fell over 50% during the most recent bubble and crash. (Interested in getting an in-depth understanding of the crash? I highly recommend reading The Big Short by Michael Lewis.) Most investors were decimated by the stock market’s movement, which was caused by bubbling housing prices, credit default swaps, and a variety of predatory practices by big banks. By joining this arena, I’m exposed to criminals on the grandest scale.

There’s no perfect, safe place to store and build a savings. Every option contains risks, and it’s important to consider each and every one of them to make the smartest decision for yourself. For me, I’m taking risks and putting my money in the market. I’m young and looking to put my money to work as fast as possible. 

Filed Under: Save Money Tagged With: Accounts, Checking, Income, invest, investing, money, Save, savings, Stock Market

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