Create a Tax

How To Create A Fairer Tax Environment

Can lawmakers who don't have the courage or intelligence to outlaw texting while driving really be expected to create a saner tax structure? Hmmm.

Developing a fairer tax environment is much less an economics problem than it is a political dilemma and, as many of you observed, it is unlikely that anything "tax" will be improved upon until there is some serious facial (and cultural) change in Washington.

Politicians focus on one issue at a time, and pretend to have problems dealing with inter-related programs. Tenured politicians have a vested interest in resisting any change that involves their spheres of influence. Both parties are embarrassingly mired in twentieth century class warfare that stifles all forms of productive debate.

Tax cuts don't just benefit the rich. In fact, they provide the opportunity for everyone to attain greater wealth. Demand directs resources far better than punitive taxation. Money in consumer hands will fuel social and environmentally friendly change.

"You cannot eliminate revenue from one program without replacing it from another, equally complicated, one", career politicians will say philosophically.

They have little to gain from simplifying the tax collection system --- yet it is obvious that a whole new approach would solve most of the economic woes plaguing us today, domestic and international.

So what would become of all the CPAs, tax attorneys, and offshore laundries--- new jobs as consultants, auditors, and regulators perhaps?

Survey responses outlined constructive and manageable solutions to our multiple tax problems. If they could only be dealt with as a whole "New Deal" (catchy phrase), a fairer tax structure would be in reach.

Several basic concepts need to be accepted: (a) don't tax the job creators, (b) tax consumption instead of income, and (c) regulate shareholder abuse in the form of obscene executive pay. Then, enforce compliance with the intent of a simplified tax code.

A smarter tax system would allow more people to become wealthy honestly; smarter regulation of thieves in high places would improve the image of big business (and big government) significantly.

There are 44,000 pages in the Internal Revenue Code (IRC) alone, 5.5 million words, incomprehensible at best. Obviously, there is a lot more to be said about each of the ideas that follow. Here are the top survey ideas; the first two were discussed in previous results articles as consumer spending enhancers and job creators, respectively.

One: Social Security. Replace it with a plain vanilla, individually, and flexibly funded fixed pension program. Every person has his or her own personal pension plan for both mandatory and limited voluntary contributions --- limited to a maximum percent of income.

Two: Corporate Taxes. Eliminate income and Social Security taxes and all other nuisance fees and charges that increase corporate expenses and lead to higher prices--- a "Free Trade Zone" only policy. Monitor employers to assure that their savings are translated into new job opportunities and/or lower prices.

Cap total compensation (all "perks" included) at mid seven figures. Allow one year-end bonus split among all employees and shareholders. Invade every boardroom with well-paid and expert compensation auditors.

Three: The Fair Tax. Adopt the plan that has been negligently ignored by congress for decades. It replaces the entire IRC with a Federal Sales Tax, and without Social Security, a number between 10% and 12% would probably work.

It's easy to understand, eliminates the lobbyist gifts and bonuses that current IRC loopholes produce, taxes the underground economy, and gives back (with necessity only debit cards) to lowest tier wage earners. All businesses would be audited to assure collection compliance, and a cap would be set on the total take for all levels of government. There would be no sales tax on food, health care, and educational expenses.

Four: The Flat Tax. Institute a 10% Federal income tax, with no exclusions, exceptions, deductions, credits etc. All income, regardless of source, is taxed at the same level, and the total from all levels of government capped at 15%.

A combined Flat Tax and Fair Tax environment would increase jobs and spending, while reducing tax fraud and credit abuse. Any number of approaches could be used to assist the lowest wage earners, and Social Security benefit payments would be tax-free forever.

Compensation creativity such as stock options, country club dues, and first class airfare, need to be dealt with to protect shareholders and employees from their leaders--- new jobs for those displaced professionals.

Total annual employment compensation above $5,000,000 would be subject to a flat tax of 55%. This would apply only to employees of publicly traded companies and elected public officials. Entrepreneurs, celebrities, lottery winners, etc, must not be penalized for their creativity and good fortune.

It is likely that both new taxes will produce returnable surpluses quickly.

Five: Death & Gift Taxes. Give them death; they deserve it.

Six: Property Taxes. Reduce them each year for all persons receiving Social Security benefits. Retirees would pay no property taxes after ten years.

Seven: Tolls, Licenses, & Fees. Eliminate all collections and charges for government provided public transportation (roads, bridges, tunnels) and recreational facilities (parks, museums).

Eight: Value Added Tax (VAT). Several of the suggestions above should reduce the prices of American exports. But if our trading partners assess a VAT on those exports, lets negotiate elimination or return the favor.

Health care reform is next, with tons of ideas not being considered by Congress.

How To Create A Fairer Tax Environment

Both parties are mired in a type of class warfare that stifles all forms of productive debate. Tax cuts don't just benefit the rich. In fact, they provide the opportunity for everyone to attain greater wealth. Demand directs resources far better than punitive taxation. Money in consumer hands will fuel social and environment friendly change.

Can lawmakers who don't have the courage or intelligence to outlaw texting while driving really be expected to create a saner tax structure? Developing a fairer tax environment is much less an economics problem than it is a political one and, as many of you observed, it is unlikely that anything "tax" will be improved upon until there is some serious facial (and cultural) change in Washington.

A combined Flat Tax and Fair Tax environment would increase jobs and spending, while reducing tax fraud, waste, and credit card abuse. Any number of approaches could be used to assist the lowest wage earners, and Social Security income payments would be tax-free forever.

African investment

African investment

Africa's economies were on the rise when the financial crisis hit in 2008. Growth was running high on the back of commodity price increases, with African exports almost doubling between 2000 and 2006. Over the same period, foreign capital flows quintupled. Yet the crisis has jeopardised this progress, resulting in a severe investment slowdown, particularly in oil and mineral production, and halving Africa's growth rate from 5.7 % in 2008 to 2.4 % in 2009.

There are numerous new opportunities for private and international investors in Africa. For example, investment in Africa's energy sector, an essential engine of growth, falls short of US$40.8 billion a year. At the same time, demand is overwhelming: more than three-quarters of Africans lack access to electricity, presenting an impediment to both human and economic development for the continent.

How can African governments channel scarce resources into productive investment in the energy sector? An effective solution would be to increase private participation in power infrastructure. "In the global race for green growth, increasing investment in clean technologies is critical," says OECD Deputy Secretary-General Mario Amano. In new markets, such as renewable energy, gaps in investment financing could also be filled.

While Africa's future is inextricably linked to global markets, it is also dependent on home-grown regulatory reform. Critical bottlenecks in, or obstacles to, the development of African energy sectors include weak regulatory frameworks, expensive credit, underdeveloped capital markets and a lack of innovative risk-mitigation instruments. Keeping markets open to international investment is also vital, particularly given commitments made in G20, UN and OECD contexts.

As a lead reformer in Africa and a member of the G20, South Africa is an ideal host for the 4^th NEPAD-OECD Ministerial Meeting on Mobilising Resources for Trade and Investment and Boosting Energy Investment and Carbon Finance in Africa. Key messages from the meeting, held in Johannesburg on 11-12 November, will be sent to the UN conference on climate change in Copenhagen in December. Says Ibrahim Assane Mayaki, CEO of the New Partnership for Africa's Development (NEPAD): "It is important to design Africa-owned national, regional and continental policies that provide a sound basis for emerging from the crisis."

The NEPAD-OECD Africa Investment Initiative's Ministerial Meeting and Expert Roundtable events gather key policymakers, the private sector, regional organisations, international partners and technical experts from African and OECD countries. They are hosted by South Africa's Department of Trade and Industry and are organised by NEPAD.

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Investing for Retirement Using a Self-directed IRA

Most investors stick with ordinary types of investments in their retirement accounts, opting for stocks, bonds, mutual funds, and ETFs. Historically, these investment vehicles have certainly performed admirably for many individual's portfolios in years gone by. But what worked yesterday may not be the best choice for tommorrow, and many investors are looking for alternatives to secure their retirement- enter the self-directed IRA.

Tired of seeing their retirement balances go down, a growing number of investors are turning to self-directed IRAs. Like traditional individual retirement accounts, self-directed IRAs have the same contribution limits and rules for withdrawing money. The difference is what is inside these accounts, which could include real estate, precious metals, or shares of a privately held business, among other things. Real estate has always been permitted to be held inside IRA retirement accounts, but few people know about this option. Investments with a Real Estate IRA are fully permissible under the Employee Retirement Income Security Act of 1974 (ERISA).For more detail regarding using your self-directed IRA specifically for real estate investments, click here.

Investors with self-directed IRAs go out and find the asset to invest in rather than relying on the never-ending selection of mutual funds and other investments available through companies such as Vanguard or American Funds. You may purchase real estate, notes, commissions, options, private placements, accounts receivable, timber deeds, crops, cattle, stock, bonds, mutual funds, certificates of deposit-- anything which is not prohibited or collectible as defined by the Internal Revenue code. And many investors are moving out of the traditional financial arena, into unique areas such as ethanol, wind energy, real estate in Mexico, motion pictures, even to finance a business start-up!

What Are Prohibited Transactions?

You cannot invest in Collectibles, S Corporations or Life Insurance Contracts. There are also certain transactions in which you cannot participate when using IRA funds, designated as "prohibited transactions". Prohibited Transactions are defined in IRC § 4975(c)(1) and IRS Publication 590. These transactions were established to maintain that everything the IRA engages in is for the exclusive benefit of the retirement plan. Sometimes professionals refer to these as “self-dealing” transactions. Self-dealing occurs when an IRA owner uses their individual retirement funds for their personal benefit instead of benefiting the IRA. If you violate these rules, your entire IRA could loose its tax-deferred or tax-free status. There is more detail on prohibited transactions at the end of this article.

Selecting and Setting Up a Self-directed IRA

Creating a self-directed IRA is easy. In order to own these special assets in a retirement account, you'll have to find a firm that offers a self-directed IRA. You can't buy real estate or other special assets with a basic IRA, so the first step will be to open a self-directed IRA. A number of financial institutions such as banks, insurance companies and brokerages can assist you in opening a self-directed IRA, but most likely your investment options will be limited to the products they sell and service. To buy these special assets with your IRA you will most likely have to find an independent administrator to serve as a trustee or custodian, and you must do your homework in this selection as well. Here is an explanation of the different types of administrators that you may encounter:

• Fee-based administrators. A set fee is charged for each transaction you request the administrator to perform.
• Asset-based administrators. A set percentage of your total asset value is charged annually regardless of the tasks performed. The percentage will typically be 1.5% or lower, contingent on total asset value, the commission percentage decreasing as asset value increases.
• Hybrid-based administrator. This type of management involves a combination of asset and fee, and seems to be the most predominant method used currently according to our research.

Some examples of well-known established companies that handle this sort of IRA include Entrust, Equity Trust, Guidant Financial or Pensco Trust. When selecting a company to administer the IRA, consider that experience is key. You'll want to ensure you fully understand the fees involved, but ask hard questions to ensure they are well-versed in the requirements involving the type of investment you plan to utilize. Many companies/administrators do not even take on real estate contracts, as the complexities are numerous. For a sample list of the questions you might to interview potential custodians for your new self-directed or real estate IRA, click here.

Decide on the Type and Funding of the Account

You can either setup a new account and deposit the IRA contribution limit or you can rollover an existing IRA, 401k or other qualified retirement plan. You do not have to rollover all of your existing IRA or retirement account. For example, you may want to experiment with this method by moving a portion of your retirement into a self-directed plan. Decide on the type of account that will work best for your needs. An example would be a Roth IRA, traditional IRA, solo 401k or others. Your administrator should be able to assist you in choosing the appropriate type of account.

I've Set Up My Self-directed IRA- What Next?

You've selected an administrator to act as the trustee of your account and facilitate investments on your behalf. They keep the books, disburse money, and collect profits for the IRA, but they may not give investment advice. So now comes the real work: you must go out and find the asset to invest in. You are competely responsible for the due diligence involved; once you've selected the property, business or asset, your administrator can assist you in the transaction. The key is, all income or proceeds from the investment are returned to the IRA. Transactions that can be interpreted as providing immediate financial gain to self-directed account or other disqualified persons holders are not allowed.

A disqualified person in accordance with (IRC 4975(e)(2)) is defined as:

• The IRA owner
• The spouse of the IRA owner
• Lineal Descendents (such as daughters, sons, grandchildren)
• Spouses of Lineal Descendents (such as a son or daughter-in-law)
• Lineal Ancestors (Mother, Father, Grandparents)
• Fiduciaries (those providing services to the plan)
• Investment advisors
• Any business entity in which any of the disqualified persons as defined above has a 50% or greater interest.

Prohibited Transactions: Defined in IRC 4975(c)(1) and IRS Publication 590, these rules were established to maintain that everything the IRA engages in is for the "exclusive benefit of the retirement plan". Often referred to as "self dealing" transactions, this section of the code identifies prohibited transactions to include the following (either direct or indirect):

• Lending money or other extension of credit between a plan and a disqualified person. For example, you cannot personally guarantee a loan for a real estate purchase by your IRA.
• Selling, exchanging, or leasing, any property between a plan and a disqualified person. For example, your IRA cannot buy property you currently own from you.
• Dealing with income or assets of a plan by a disqualified person who is a fiduciary acting in his own interest or for his own account. For example, you should not loan money to your Financial Advisor.
• Furnishing goods, services, or facilities between a plan and a disqualified person. For example, you cannot use furniture from your primary residence to furnish your IRAs rental property.
• Transferring or using by or for the benefit of, a disqualified person the income or assets of a plan. For example, your IRA cannot buy a timeshare condo you or your family intends to use.
• Receiving any consideration for his or her personal account by a disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan. For example, you cannot pay yourself income from profits generated from your IRAs rental property.

For a complete explanation of the requirements, refer to the IRS publication 590.

In summary, the use of a self-directed IRA is an excellent method to diversify your retirement accounts, if you do your due diligence effectively as well as utilize informed, effective advisors. Real estate and other special investments have a potential higher rate of return through the combination of cash flow and appreciation, potentially accelerating the value of the IRA quicker than some traditional methods. Due to the complexities of the IRS rules and regulations regarding this type of investment vehicle, it is also a necessity to be diligent and informed. Following this advice, the self-directed IRA as an investment can be a very good choice.

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Asset Allocation Lessons: The 70% Inflation Solution
For investors only' and for speculators who need to invest their winnings.

Yes Virginia, it's true. You don't need all of your money in the stock market to beat inflation!

Lesson One: Asset Allocation is an Investment Planning Tool, not an Investment Strategy...few investment professionals understand the distinction, because most think that Investment Planning and Financial Planning are the same thing. Financial Planning is a broader concept, and one that involves such non-investment considerations as Wills and Estates, Insurance, Budgeting, Trusts, etc. Investment Planning takes place within the Trusts, Endowments, IRAs, and other Brokerage Accounts that come into existence as a result of, or without, Financial Planning.

Lesson Two: Asset Allocation is a planning tool that allows the Investment Manager (you, if you haven't hired one) to structure the investment portfolio in a manner most likely to accomplish the goals of each specific investment portfolio AND of the investment program as a whole. Asset Allocation is the process of planning how an investment portfolio is to be divided between the two basic classes (and only these two classes) of investment securities: Equities and Fixed Income. Security sub-classes have little relevance.

Lesson Three: Equities are the riskier of the two classes of securities, but not because of the price fluctuations that are their basic character trait. They are riskier because they represent ownership in a business enterprise that could fail. The risk of capital loss can be moderated or minimized in the security selection process and with a management control activity called diversification. The primary purpose for buying Equities is to sell them for capital gains, not to save them as trophies to brag about in chat rooms. They are less risky than other, non-fixed income endeavors.

Fixed income securities are less risky because they represent debt of the issuing entity, and owners have a claim on the assets of the issuer that is superior to that of Equity holders and their salivating class action attorneys. With proper selection criteria and diversification, the risk of capital loss is negligible and price fluctuations can be ignored except for the trading opportunities that they provide. The primary purpose of these securities is income generation, either for current consumption or for use later in life. Capital gains here should be taken'and bragged about in chat rooms!

Lesson Four: An Asset Allocation Formula is a long-range, semi-permanent, planning decision that has absolutely nothing to do with market timing or hedging of any kind. It is designed to produce the combination of Capital Growth and Income that will achieve the long-range personal (pay those bills) goals of the individual. Thus, it must not be tinkered with because of expectations about anything, or rebalanced arbitrarily because of natural changes in the market values of one asset class or the other. Thus, an asset allocation fund is an oxymoron.

Lesson Five: Asset Allocation is the only proven cure for inflation. If properly managed using 'The Working Capital Model', it will almost certainly increase the level of portfolio income by more than the rate of inflation, which is a measure of the purchasing power of your dollars, not the dollar value of your purchased securities. Six figure portfolios allocated 100% to Equities are not nearly as inflation proof as those that are more balanced' see Lesson Six.

Lesson Six: In addition to the potential of failing to keep up with inflation using an Equity Only asset allocation, regardless of your age, greed management becomes much more of a problem. In a rising market, evidenced by more profit taking opportunities than lower priced bargains, investors tend to take positions in lower quality issues, current story stocks, newer issues, etc' just to be in there. A 30% or so Fixed Income allocation can be a major focus factor. How's that for throwing cold water on an ancient Wall Street maxim.

Lesson Seven: These are just some of the lessons to be learned about asset allocation.