Now is not the time to pay off debt faster

Now is not the time to pay off debt faster

I’m sure there’s a politician somewhere who can spin the information to arrive at a different conclusion, but most of us are dealing with the following financial realities:

• Property values are down.
• Interest rates are down.
• The stock markets are down (then up for a while, and down some more).
• The US dollar is down – and the cost of living (especially fuel) is up.
• Our US economy is down (due largely to the real estate and financial crises).

As a result, many Americans are worse off than they were a year ago. Given these negative financial circumstances, where many people have less money and are less inclined to takes risks with it, I am reading commentary from financial “experts” saying the prudent thing to do now is to re-direct saving and investment dollars to pay off debt.

I’m all for eliminating debt. Debt is a financial millstone around the necks of most Americans, and it is debilitating, financially and psychologically. But while I’m sure many of these financial experts are well-intentioned, I would argue now is not the best time to pay off debt. Rather, now is the time to save money. Let me explain:

The argument that most pay-down-your-debt advocates make goes like this: If you don’t think you can earn above-average returns in stocks, and interest rates are low in guaranteed vehicles (like Treasury instruments, Bonds, CDs and Money Market accounts), then why not use your investment dollars to pay off high-interest (and usually non-deductible) debt? After all, if your credit card company is charging you 15-18%, making extra payments on the balance is “like earning 15-18 %.”

Superficially, this argument makes sense. Mathematically, you can “prove it.” But while this strategy is logical, it neglects some of the financial realities. Let’s use a hypothetical “real-life” example to illustrate.

Suppose you decide to follow the advice of the pay-down-your-debt gurus. Instead of saving or investing in your 401(k) or some other accumulation vehicle, you commit an additional $200 each month to paying off credit card debt.

If you make an extra $200 payment on the credit card, will you still have a payment due next month? Yes. Will the monthly payment be significantly less than the month before? Probably not. There may be some decrease, depending on the size of the balance, but especially if your balance is high enough that it would take a year or more of extra $200 monthly payments, the monthly decrease isn’t going to be that great. So while you technically “earned” the interest you saved, you don’t have more money in your pocket, and you still have a financial obligation next month.

Let’s inject a little more “reality” into this scenario.

Assuming you have used your “extra” $200 for the past few months to pay down your credit card balance, how will you pay an unexpected but necessary expense, such as an $800 automobile repair? If you don’t have any liquid savings, most likely you’ll end up using the credit card. If you do, your outstanding balance is goes back up, and so does the interest charge.

Here’s another “reality” situation. In the next few months, what happens if you lose your job, or have to take a pay cut? If you don’t have as much income (or no income) and no liquid savings, the likelihood is there’s not going to be a payment to the credit card company. And more than likely, one late payment will trigger a higher interest rate (along with fees) on your card – and your credit score is going to take a hit as well.

One of the reasons most people have high-interest credit card debt in the first place is because they haven’t learned the discipline of saving. They haven’t developed the habit of living below their means and paying cash for big-ticket purchases, vacations, emergencies, etc. In fact, the only saving many people do is through their retirement plan, where money is withheld from their paycheck. Thus, their default budgetary model is “if it’s in the account, I can (and will) spend it.”

Of course, this approach is ill-equipped to deal with unexpected expenses or large purchases, so borrowing becomes the other default action in their financial lives. There’s always the intention of paying the credit card off next month, but a few years later, unpaid credit card balances are a permanent part of their budget. Five years later, the monthly payments are putting a strain on current expenses. Consolidation may temporarily relieve cash flow pressures, but because the underlying behavior hasn’t changed, it isn’t too long before the balances are going up again.

If you really want to fix your debt problems, start saving and stop borrowing. Building a pool of savings (call it your emergency fund, rainy day fund, save-to-spend account, whatever) will keep you from going back to the lending trough. Having savings will keep you from missing payments if your employment situation changes. Having $10,000 in a liquid, safe account will change your life.

By the way, even if you already have $10,000 or more set aside, and have a very secure employment situation, I would still recommend saving instead of extra payments on debt, even credit card debt. The better approach is to make the scheduled payments each month until your savings balance is large enough to pay the outstanding debt in full.

Part of this is a matter of control. If Visa is satisfied with $100/mo., why send them $300? Keep your money under your control, and when it suit you, pay the balance in full.

The other reason for saving instead of paying off debt is that the math isn’t as favorable as you might think – even if there’s a significant different between the rates of return on your savings and the interest charged by the credit card company. For an eye-opening illustration, check out this article on www.worksaveown.com.

Saving money is not the same as paying off debt. Saving money is a behavior that leads to financial control and freedom. Paying off debt, even at a faster pace, may help relieve some financial pressure, but it doesn’t move you forward. If you don’t establish the saving habit, you will always be at risk of going back into debt. Bad habits not only need to be avoided, they need to be replaced.

With all the uncertainty surrounding the present economic situation, the best financial decision is to save.

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Making Atlas Shrug

I read Ayn Rand’s Atlas Shrugged for the first time when I was in high school, and more than thirty years later, it has remained one of the most influential books in my life. I have seen reviews that dismiss the literary merits of the book, and those criticisms may be valid. The power of Atlas Shrugged is not in its prose, but in its ideas.

Atlas Shrugged is a novel in which “men of the mind” become so disgruntled with socialism and elitism that they quit; the productive members of the society (industrialists, innovators, technologists, etc.) simply “resign” from their work and emigrate to a secret enclave where they re-establish a world based on personal liberty, free-market capitalism and merit. These producers “disappear” through a technology that allows them to live unseen behind a “force field.” It’s like a magician’s trick that makes the elephant disappear – it’s there, but you can’t see it anymore.

As this “brain drain” occurs, it is as if Atlas – the mythical titan who carries the world on his back – has shrugged, relieving himself of the burden of the non-productive parasites of society (especially governmental and media figures) who provide no value while taking as much as they can through political power and social pressure. When the “men of the mind” quit, they leave politicians and other non-producers nothing to commandeer. Slowly, inexorably, the stability and progress of society begins to disappear.

Just from this brief overview, many readers won’t understand the conflict in Rand’s story. They don’t see government or “social activists” as enemies of productivity or freedom, and they won’t understand why anyone would want to “quit” being productive. But if you read the book, you’ll get it. Of course, the book is over 1000 pages, so for those who can’t handle the volume, here’s a summary of the essential conflict of Atlas Shrugged:

“When the minds of men are free and the resources of the world are apportioned under free enterprise, those who rise to leadership are those who combine original thought, resources and strong work ethics. In a shackled society, those who rise to leadership are those who use their minds to enslave and control others. The latter people fear men who can actually make things and do things, and they work constantly to maintain control over them.”

The preceding was a quote from a September 2007 article from Access to Energy, a “Pro-Science, Pro-Technology, Pro-Free Enterprise Monthly newsletter.” I don’t think you can find a better three-sentence summation of the conflict between producers and controllers, between freedom and socialism, between an ethic that produces wealth and one that wants to seize it.

For Rand, it takes a fictional contrivance to free productive human beings from those who would attempt to control them and subordinate their productivity. In real life, it’s hard to escape the clutches of greedy governments and envious individuals. But that doesn’t mean productive people can’t effectively “shrug” off some of the parasites that beset them. Sometimes, quitting is a very effective response to controlling individuals and organizations. From personal experience, I have found the Atlas Shrugged approach to be effective in some situations, although it may require to taking steps backward in order to go forward. As an example:

For past five years, I was very involved in a non-profit organization. Not only did I volunteer my time, but the bulk of my charitable giving went to the organization as well. Over the course of my involvement (including a stint as treasurer), I became increasingly aware of some negative actions on the part of the organization’s leadership. Several other individuals shared these concerns. After further investigation confirmed the detrimental behaviors, we attempted to correct and improve the situation. When these efforts were rebuffed, we withdrew our financial support and left the organization.

It was difficult to leave behind friends, and walk away from the personal and financial investments we had made in the organization. Further, I know our collective departure immediately impacted the financial well-being of the organization, which has made it harder for the good people still there. And since I am committed to charitable involvement, I’m faced with the task of looking for new places to invest my time, energy and dollars. Initially, leaving was a step backward.

But continuing to stay in the organization (and continuing to fund it) would have enabled the leadership and allowed the procedural problems to persist. Ultimately, our departure spurred direct action from the remaining members, exposed some of the issues to a wider audience, and prompted an oversight committee to be brought in.

SHOULD ATLAS SHRUG AT THE VOTING BOOTH THIS FALL?

As it has been for the past century, the focus of the upcoming 2008 presidential election will be on the Republican and Democratic candidate. But what if you don’t particularly like either one? What’s the value of voting for someone who doesn’t remotely represent your perspectives?

The problem here is that both the parties and the media frame the election discussion as an exclusive contest between the two parties. Everyone in America has to choose between red and blue; there are no other options.

For the pundits, not voting is considered an act of treason, and voting for anyone other than the two major party candidates is a waste of “your precious vote.” But the logical consequence of this you-must-vote-either-Democrat-or-Republican perspective is to support someone you don’t like who will probably deliver some things (via taxes, legislation and the bully-pulpit) you don’t want. Is this a win-win arrangement? I don’t think so. Continuing to vote for unacceptable candidates because you see them as the “lesser of two evils” only allows the evils to be perpetuated.

If enough people stopped voting, it is much more likely that better candidates and better ideas would come forward. Instead of seeing their chances as almost nil because of the two-party monopoly, the number of non-voters would be great enough to convince third- or fourth-party candidates that they had a real chance at winning. And knowing there exists a sizable number of potential voters which could remove them from office, the two dominant parties would have to seriously consider adjusting their policies as well.

All governments, even repressive ones, know the power of their citizens. If the populace is against you, your regime cannot last. In repressive political systems, the tipping point comes when the people’s dissatisfaction overcomes their fear of punishment. In democratic societies, political parties lose their power when people stop voting for them. As long as people keep voting for one of the Democrats or Republicans, they continue to give the two parties power and relevance.

Of course, the short-term consequences of a non-voting approach could initially make things worse. If the only remaining voters are “true believers” who support the principles and candidates of the two dominant parties, their zeal might embolden them to more aggressively pursue their agendas. For either the Republicans or Democrats, this will mean more governmental control and less personal freedom. The apologists for the current two-party system will say “If only you had voted! Your vote, and others like yours, could have been a moderating influence and lessened the damage.”

Perhaps. But continuing to vote for organizations and individuals that don’t represent your views or values may only prolong your problems. And it will almost certainly never solve them. (Do you really think either the Democrat or Republican parties are on the verge of repudiating their current policies and returning greater economic and personal freedom to the citizens?)

If there isn’t a candidate worthy of your vote, then voting for the lesser of two (or more) evils only enables bad candidates to believe they are worthy. Maybe it’s time for the American voter to shrug like Atlas.

 

“I, Pencil” – A Free-Market Classic

The inspiration for this post comes from a December 9, 2006 “Evenings with FEE” speech,  by author George Gilder. FEE, the Foundation for Economic Education, posts “classics” in the sidebars of its daily “In Brief” commentaries on current events.

As prologue to his speech, Gilder made reference to the writing that most influenced him to embrace libertarianism and Austrian economics. It was I, Pencil, written by Leonard Read.

Gilder called this short work of fiction about the making of a pencil “the single most important essay of liberty ever written,” and “an inoculation against Socialism.” He added that once you read I, Pencil “you just can’t believe in massive government planning…it becomes evident that people who imagine that whole economies can be planned are just imbeciles.”

Gilder is right. I, Pencil is a brilliant piece of writing. The logic is tight, and so are the conclusions.

For a short, yet effective dose of free-market clarity to counter the fog of government-think, click to here to retrieve I, Pencil from our reading room.

In the End, Socialism Breeds Barbarians

(Note: As I mentioned in the previous post, the Wall Street Journal is a newspaper for adults. Thus, some of what follows is Rated PG-13, at least)

I mentioned I often find good reading in old Wall Street Journals. In one of my “reading binges” to clear out the backlog in my office, I came across a book review about a topic so powerful that it has stayed with me since I read it more than a month ago. The review also convinced me I will never buy the book.

The article is “Witness to Horror,” by Omer Bartov. Published on January 22, 2008, it is a review of “The Unknown Black Book,” a compilation of eyewitness and survivor accounts of the Nazi genocide of the Jews in occupied portions of the Soviet Union. According to the article, “‘The Unknown Black Book’ is the first publications of materials excluded for political reasons from ‘The Black Book” a collection of survivors’ testimony that ran afoul of the Stalinist regime.” The Soviets suppressed the book because it revealed that in many cases Soviet citizens were enthusiastic and willing accomplices in the Nazis’ systematic extermination of the Jews.

Even the few excerpts briefly recounted in the article are hard to read.

“When the Germans began murdering Jews with gas vans, as extra entertainment ‘young women had their hair tied to the axles of the vehicles in such a way that they were dragged alive through the city’ while ‘the killing by gas of those who were inside the mobile vans was being carried out.’”

“Toward the end of the month, all the male Jews, numbering some 5,000, were first subjected to prolonged torture and humiliation and then murdered. ‘The earth on top of the pits was heaving the entire time, since many had been buried alive. For an entire week after this, blood burst from the pits like a fountain.’”

The review includes several other excerpts, equally as graphic. As Bartov says, the “few examples provide an inkling of the nature of the material.” For me, an inkling was enough.

“”The Unknown Black Book” records that while many Soviet citizens, and even German soldiers, were appalled by these atrocities, a substantial segment of the Soviet population participated side-by-side with their Nazi invaders, raping, killing and looting with gusto. Yet surprisingly, one group of Russians is recalled with almost uniform respect: the peasants. The poorest members of Stalin’s communist society were the ones most likely to offer sanctuary for hunted Jews.

Maybe it’s because I’m older (I have children and grandchildren), but even the brief descriptions of barbarity horrified me. I was almost physically ill by the time I finished the article. The cruelty and savagery were incomprehensible.

As I shook my head in disbelief, two questions came to mind:

1. How could human beings act this way toward other human beings, particularly non-combatants, and innocent women and children?

2. What can be done to keep history from repeating itself?

I think the first question is relatively easy to answer. There is evil in the world. And unrestrained, there is almost no limit to the depravity and cruelty of evil men. As Proverbs 25:26 says: “A righteous one who falters before the wicked is like a murky spring and a polluted well.” Absent the influence of righteous men and women, Nazi Germany and Soviet Russia were two regimes of unrestrained evil, and neither party recognized any moral authority other than the power of an almighty state. And their evil polluted entire generations.

The areas overrun by the Nazi in 1941 had already been brutalized by Stalin in the 1920s and 1930s. As a result, anyone with courage and a moral conscience – members of the clergy, party idealists, or private citizens – had been either purged or pummeled into servile obedience. The rest of the masses could see the price of resistance. Seeking to survive, they pragmatically chose to align with their oppressors. Thus, by the time the invading Germans arrived, the Soviet citizenry didn’t see them as true enemies, just new dictators. In this type of amoral environment, evil becomes commonplace, even exalted.

So how does one stop the spread of such evil? That’s a tougher question to answer.

There is an obvious need for moral instruction, teaching that argues right and wrong from an ethical perspective instead of a power perspective. Even for people who don’t want a “religion” forced upon them, the tenets of the Ten Commandments (especially the last five) are ones that most of us intuitively agree with. We know it’s wrong to steal, lie, cheat, murder and covet.

If the prevailing cultural norm defended its citizens from theft, murder, adultery, false witness and coveting – and the government provided enforcement – I’m pretty sure most citizens would refrain from evil. But beyond instilling a solid moral ethic in society (and hoping that some people become “true believers” instead of simply avoiding prosecution), I think there’s another element that must be present in order to keep evil from proliferating. I think it’s necessary to allow citizens personal and economic liberty.

Granting personal and economic liberty provides strong incentives for cooperative and peaceful behavior. The observance and execution of a strong moral code provides restraints and punishments for evil behavior, but personal and economic liberty offers rewards for productive “good” behaviors. When it is possible for individuals to lawfully become what they want, earn what they want, and live the way they want, they are less likely to resort to evil means.

History generally supports this observation. Dictators start wars and seize the resources of others. Free societies form economic and political alliances, and exchange resources in open trade. Oppressive governments literally imprison their citizens; not only do they restrict their travel, but many actively prevent them from leaving (think of the Berlin Wall). In contrast, free countries allow citizens great latitude in where they live, inside or outside their country of origin. Personal and economic liberty is a powerful agent for cultural stability and good behavior.

This is not to say that a strong moral code and individual liberty eradicates evil. Even in free societies there are plenty of incidences of evil. There are senseless acts of cruelty and violence. But in almost every instance, there are also individuals, groups or governing bodies that step in and say “stop it! You’ve gone too far, and you must be reined in or removed.” In both Germany and Russia, no one dared to say “stop it.”

In light of this idea that a strong moral code and individual liberty prevent the spread of maximum evil, it’s sobering to consider how the United States government has systematically restricted personal and economic freedom over the past century. Today’s US citizens enjoy far fewer liberties than an American at the beginning of the twentieth century. We are more taxed, more regulated, more compelled to be politically correct – supposedly for our own good.

In response to this diminished personal freedom, more and more citizens seek to use government as their “power tool” to get what they want; special legislation, favored status, tax breaks, grants, etc. Instead of cooperation, there is legislation.

And as our society becomes progressively less free, the power of the government assumes the mantle of the moral code as well. The determiner of right and wrong is what the government allows or disallows. As a result, there are already instances in our society when what most people would consider atrocities (such as partial-birth abortions) have become “legal,” and accepted. The United States may be freer than many societies and mightier than any, but the path we are traveling is still very much the “Road to Serfdom” articulated by Frederich Hayek 60 years ago.

When I look down the road, I don’t want my children and grandchildren to be either the victims or participants in genocide. Individually, I cannot change my government or my culture. But I can articulate the solution. All concerned individuals should constantly argue, vote and contend for strong individual and cultural morality, as well as personal and economic freedom. These are the only proven antidotes to evil.

The Road To Serfdom

Why I Read The Wall Street Journal

I didn’t start reading it religously until I was about 40, but I love the Wall Street Journal. I’m sure many people who read the Journal see it primarily as a newspaper with a strong financial emphasis, which is true. But the thing I like most about the Journal is the way its editorials and columns connect financial and economic news to a social and cultural context. I like that the Journal allows space for long articles include explanations as well as statements. Explicitly and implicitly, the Journal presents coherent world-views along with its news. You might not agree with every point of view, but I find the perspectives are much more on display and under debate in comparison to most newspapers or magazines. The Journal does more than inform; it gives you some insight into the thoughts of the people who present the information.

It’s because of the unique connection of news and ideas that unread Journals pile up around my office. Even if I’m not using the Journal as a source of current news and information, there are still great pearls of knowledge waiting to be discovered. That’s why I try to give every issue a once-over, regardless of the date, because I know there’s probably something worthwhile in every issue. It might be in the letters to the editor, a piece on the Opinion page, a book review, or a comment in the Houses of Worship feature that appears every Friday. I don’t know what, but usually I find something.

 The other day, I pulled up a stack of Journals still wrapped in the protective newspaper baggies (that’s how they come delivered to my mailbox). They were more than a year old. “Aww, maybe I should just pitch ‘em,” I thought. “After all, if I hadn’t read them in the past year, any thing I’ve missed hasn’t made a difference.” But I’m one of those people who’s a compulsive reader. If it’s printed, I’m reading it – back of the cereal box, nutritional label, junk mail, fine print on the menu, anything. So, of course, I sat down to read. A half hour later, I still have three issues left to scan, but I’ve also found a couple of new ideas for my newsletter, plus an article to show my wife. In addition, skimming old news gives me the chance to see whether the financial and political prognostications were accurate (the sub-prime crisis was on the radar, but the magnitude of the problem wasn’t seen, Obama and Hillary yes, McCain no, and boy did Mitt Romney implode).

 I know some of my older peers, particularly those who have more money and grew up on the East Coast, prefer Investor’s Business Daily or the New York Times, but for my money the Wall Street Journal is best newspaper in America – although it took me almost 20 years to arrive at that conclusion.

 My introduction to the Journal came in my sophomore year in college. I took an economics class taught by a distinguished older professor who had been a frequent economic policy advisor for the Johnson, Nixon and Carter administrations. One of the requirements for his class was every student had to subscribe to the Journal for the entire semester – and learn how to read the paper. This meant scanning the “What’s News” section (at that time it was once column on the front page), checking the editorials, and reading articles from the business and investment section. I shared a subscription with another student in my dorm, and made half-hearted efforts to read it according to the professor’s instructions, but never really got it. There wasn’t anything that resembled a sports page, no comics, and I just didn’t have the educational background or life experience to tackle some of the editorial perspectives.

 It wasn’t until I was about five years into my career in the financial services field that the Wall Street Journal became relevant. And it wasn’t just the financial stuff that grabbed me. It was the human interest stories of business, the political commentaries, the historical perspectives, the sophisticated entertainment reviews. It seemed like every section had something I wanted to read.

 I know the non-reading, give-me-streaming-video younger demographic probably doesn’t have the same affinity I have for newspapers. I know USA Today has its niche as “McPaper,” something that’s quick to read and easy to digest. But I appreciate the Journal’s depth, and the time it takes to read it. I think the best way I can describe it is that the Wall Street Journal is a newspaper for adults. From my experience, reading the Wall Street Journal is one of the ways you know you’ve become an adult. I was 35 when the Journal started making sense to me, and that’s about the time I finally “crossed the line” into adulthood.

 I hear stories about the decline of newspapers and other print media. A lot of the blame for this demise is placed on television, the Internet, and the fast pace of life. On one hand, I can see the connection. Most local daily papers aren’t much more than print versions of national wire stories and local TV news reports – received a day later. It’s more convenient (and more current) to click on the news scroll running across the top of my computer screen when I’m online.

On the other hand, when newspapers like the Wall Street Journal suffer circulation declines, I’m more inclined to think the problem isn’t competition from the Internet and Action News. The reason fewer people read the Wall Street Journal is because they simply aren’t as many adults in America as there used to be. There’s a lot of people over the age of 18, but not many adults.

 

 

Why You Need To Meet Murray Rothbard

Question #1. Ever heard of fractional banking?Question  #2.Did you know a bank can legally lend up to 10 times more money than it has in deposits?Question  #3. Did you receive a government-sponsored “public” education?(Best guess: If you answered “no” for Questions 1 and 2, you answered “yes” for 3. If you answered “no” to 1, 2 and 3, you probably over-paid for your private education.)

The ignorance of the general public about the negative economic impact of fractional reserve banking is enough to make one seriously consider whether public education isn’t some form of mind-control conspiracy. When what would be considered theft or fraud in any other business transaction is completely ignored simply because it bears the stamp of government approval, you have to wonder if the absence of outrage isn’t due in part to a deliberate campaign to obscure or hide the truth.

Which is why I love Murray Rothbard and his book The Case Against the Fed (Click here to purchase it). In 150 pages, Rothbard takes a subject (banking) that is almost unintelligible to the average American and makes the essential elements crystal clear. And when the scales drop from your eyes, two items stand out:

1. Fractional banking isn’t much different than counterfeiting. The government gives one institution (the central bank) the authority to print paper money – out of thin air – and then requires that it serve as “legal tender” for all financial transactions.

1. Governments cannot help but love fractional banking because it gives them economic power over the citizenry. The first party to obtain the use of counterfeit money is the government, and the government is the only party that benefits from the introduction of it into the economy. After that, all others suffer because the excess paper money creates an imbalance between the cost of goods and services and money that can be used to purchase them. This inflates prices. Real people, working for real money, must now pay more for the same loaf of bread or automobile.

 According to the bio on the back of his book, “Rothbard (1926-1995) was dean of the Austrian School of economics and America’s foremost scholar of central banking.”

America’s foremost scholar of central banking. There’s an obscure distinction. (Who would want to put “scholar of central banking” on their resume? The fact that we would ask that question is indicative of how little we know or understand about how central banking distorts every economic action in the United States.)

But read this brief comment from Rothbard:

“…if the public knew what was going on, if it was able to rip open the curtain covering the inscrutable Wizard of Oz, it would soon discover that the Fed (i.e., the Federal Reserve Bank, the central bank of the United States), far from being the indispensable solution to the problem of inflation, is itself the heart and cause of the problem.”

Got that? The Fed, now led by Ben Bernancke, formerly under the direction of Alan Greenspan, is the cause of inflation. And because the Fed is the cause of inflation – which progressively diminishes the purchasing power of our hard-earned dollars – it can never be the solution.

The irony is that 170 years ago, the citizens of the United States understood the impact of a central bank – and they voted to close it. The first “Fed” was called the First Bank of the United States (catchy title). It was authorized by Congress in 1791 and “retired” 20 years later when Congress declined to renew its authorization. A Second Bank of the United States was chartered in 1816, but 20 years later, its charter was not renewed either. From 1836 to 1913 the United States did not have a central bank.

A major plank of Andrew Jackson’s presidential campaign in 1832 was his opposition to the re-chartering of the Second Bank of the United States. Can you imagine a sound byte today from McCain or Obama or Hillary that promised to “rid us of the scourge of central banking?” (Hmmm…that sort of sounds like Ron Paul, doesn’t it?)

Two final comments:

Every citizen who cares about their financial future should understand fractional reserve banking and the role of the Federal Reserve in the economy. Rothbard’s book is a good place to start, but any education would be helpful.

The opposition to central banking and the economic abuses that result is not new. As far back as Biblical times, Solomon warned that “dishonest scales are an abomination to the Lord, but a just weight is His delight.” (Prov. 11:1). Government-authorized counterfeiting might be legal, but it is dishonest – every new piece of paper distorts the value of our work and our assets.

Getting To Known The IRS – Part 3

A week after my interview with the IRS criminal investigators, I had the chance to meet with an Enrolled Agent who was an IRS collection officer for 38 years. An Enrolled Agent (EA) is a “federally-authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of the Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service for audits, collections, and appeals.” (from the National Association of Enrolled Agents web site, www.naea.org)

Enrolled Agents, attorneys, and CPAs may represent taxpayers before the IRS. Unlike attorneys or CPAs, Enrolled Agents are licensed specifically by the government. EAs either pass a comprehensive examination which covers all aspects of the tax code, or qualify by having worked at the IRS “for five years in a position which regularly interpreted and applied the tax code and its regulations.” (Many ex-IRS personnel become EAs.)

This Enrolled Agent had been helping several other taxpayers whose returns had been audited as a result of their association with the tax preparer under investigation by the criminal division (see Getting to Know the IRS – Parts I and II). From what I had been told by other taxpayers, this Enrolled Agent was a sympathetic advocate, and had been quite helpful with several individuals who, on the advice of the tax preparer, had chosen to respond belligerently to the IRS.

After two years of sparring via correspondence, the IRS had asserted its muscle, garnishing wages, and seizing bank accounts. Apparently, the Enrolled Agent had been able to undo the damage, stop the liens, and get people back in good standing with the IRS. In one case, the taxpayer was even getting a refund of most of their taxes paid. For the others, additional taxes were still due, but he was helping negotiate reasonable terms of settlement. (When he was a collection agent, one of the EA’s areas of expertise was offers in compromise. When a taxpayer gets in too deep, there may be the realization that the IRS has no reasonable hope of collecting all of the tax due. At that point, offers in compromise can result in a settlement.)

I was eager to meet this man, partly because of his knowledge and background, but also to assess his perspective. How do you work for an employer like the IRS for 38 years, then become an advocate for the taxpayer? It seems like the two positions are not compatible, so was there a change in heart about the IRS that led this individual to retire and work for the “other side?”

Turns out that what I might see as a moral paradox didn’t register with the EA. He admitted being a bit disillusioned by changes in the offers in compromise programs, but by itself that issue wasn’t enough to make him quit. It was simply a pragmatic financial decision. He had just done his retirement calculations, and decided that the time was right to get out. Furthermore, between his experience and connections, he could have a nice retirement career. In short, he knew the system, and had no qualms about working it, either from the IRS’ or the taxpayer’s side of the table. (I should add that although his attitude toward taxation and the IRS was pragmatic, the EA impressed me as someone of high integrity. While at the IRS, I’ll bet he was an exemplary employee, and now operates in the same manner as an EA.)

For openers, we talked a little about the Fair Tax initiative, and while he understood the concept, remained unconvinced because of enforcement logistics. “Someone’s always going to cheat,” he said. “That’s why there’s always going to be an IRS in some form.” This veered off into a discussion about whether it was necessary for the government to provide so many services, and tax so much. Again, his view was pragmatic: Government provides services people want, and there’s got to be a way to collect the revenue to cover the costs. When I countered that most people don’t have any say in what their government provides or what it costs, he agreed, but noted that most people probably couldn’t determine if the government was delivering good value for the taxes received. “How do you know if you’re overpaying for police protection or national defense?” he asked.

Several things he said surprised me. In his entire time at the IRS, he never carried a gun, even though most people thought he did. “The government doesn’t like the idea of collecting taxes at the point of a gun,” he said. For the most part, he lived where he worked. His home phone number was listed in the local directory, but only once in his 38 years with the IRS had he been physically threatened.

He said that even though the IRS had lots of regulatory authority and enforcement power, most situations were best resolved with a little human finesse. The goal is not in most cases to break the taxpayer over past issues, but to exact a payment that encourages him to stay in line for the future. That was one of the benefits of the offer in compromise program; it not only secured revenue to satisfy taxes owed, but made it worthwhile for people to stop fighting the system.

I asked him about some of the high-profile incidents where celebrities (Willie Nelson, Mike Tyson, etc.) end up owing a huge amount of taxes, yet continue working, touring, and living large. He said that often in those situations, the government settles by taking a flat percentage of all future earnings, say 30 percent. The government may not ever recover all that was owed, but their getting a sizable guaranteed cut of future earnings. And the taxpayer has reasons to stay in compliance, because if they ever miss a future tax payment, the offer in compromise can be voided.

I asked him how he viewed the people he pursued in collections. Did he think they were tax evaders or hapless people caught in the system? He said in his experience, he thought 45% of the taxpayers were people who just got stuck – health problems or a failing business upset their world, and they just never recovered. Another 45% were probably playing fast and loose with the tax code and got caught. And 10% were just plain bad apples – avoiding taxes wasn’t their only criminal activity.

I told him I imagined he had some pretty good stories after 38 years with the IRS. He nodded and said, “Every retired IRS guy thinks he ought to write a book.”

The conversation veered to specific examples of how an EA’s knowledge might save the taxpayer money:

Any time a taxpayer owes more than $25,000, the IRS can demand a complete financial statement, listing all assets. The information the IRS can glean from an audit is limited to what you report relating to income in that particular year. Now, because you owe and can’t pay immediately, the IRS gets to look at everything you’ve accumulated over your lifetime as well – the equity in your home, your investment portfolio, the size of your 401(k), the savings accounts you have for your kids, the vacation home, all of it.

After they see it all, IRS collection agents can make a determination of what, if any, assets they would like the taxpayer to sell or re-finance in order to meet their tax obligation. In a sense, the IRS becomes your “financial advisor” for the purpose of recommending what should be liquidated to meet the tax obligation.

Although the IRS does not have absolute authority over how you settle your tax bill, the agency will use the information to push for resolution, implying they are there to help you resolve your problem.

In some situations, the easy answer is to sell some stocks or bonds and pay the debt. But if you don’t have assets that can be quickly liquidated, the IRS can propose other solutions. If you don’t have an equity line of credit against your home, the IRS might suggest establishing an account and borrowing from it (after all, the interest might be deductible). If there’s a loan provision in your 401(k), they might push for taking a loan.

One of the typical recommendations a collection agent might make is to liquidate an IRA account, if one exists. Of course, the liquidation may result in additional taxes for the current year, as well as a penalty for early withdrawal, so paying a $25,000 tax bill could cost something like $40,000.

As this point in his example, the EA digressed to tell a story. “Ever hear of the tortoise and the scorpion?” he asked.

The Tortoise and the Scorpion

One day a scorpion was on the bank of the River Jordan, wanting to get across to the other side. But of course scorpions can’t swim. Luckily it spotted a tortoise that was about to swim across the river.

‘Please, tortoise,’ said the scorpion, “I need to get across the river, but I can’t swim – let me ride on your back.”

“What sort of a fool do you take me for?” said the tortoise. “If I let you near me you’ll sting me to death.”

“Of course I won’t,” said the scorpion. “I’m trying to get across the river. What possible good would it do me to sting you? I’d drown!”

The tortoise thought it over, and could see the logic of the scorpion’s argument. So he let the scorpion jump onto his back, and set off swimming across the Jordan. But half-way across the river, where the river was at its deepest, the tortoise felt the scorpion’s sting stab deep into his flesh. As both animals began to drown, the scorpion apologized: “I’m a scorpion – I couldn’t help myself. That’s what I do.”

“The IRS is the scorpion,” said the EA. “They collect taxes. It’s what they do. No matter how much an IRS agent says he’s trying to help you, his first and only assignment is to collect revenue. And what happens to you after they get the money doesn’t matter.”

To finish his example, the EA noted that if the taxpayer reduced his outstanding tax liability below $25,000, he most likely would have several less intrusive and burdensome options for resolving the rest of the tax owed. So…

If the taxpayer took a partial liquidation to reduce the outstanding tax bill to less than $25,000, he/she might be eligible for a streamlined installment agreement in which monthly payments are made over the next five years. This agreement can usually be completed by phone – without submitting to a detailed financial examination.

Would a collections agent help the taxpayer by explaining the above regulations and mentioning a partial liquidation as a possible solution? In the experience of this particular EA, “No. If they can get it all now, that’s what they do.”

From the EA’s perspective, it’s foolish to mess with the IRS. But that doesn’t mean you should just capitulate when you receive correspondence or an audit notice. Maybe it was nothing more than an advertisement for his services, but his statement was compelling. “Never deal with the IRS alone. People who go it alone are usually the ones that end up having the most problems.”

Getting To Known The IRS – Part 2

The IRS office isn’t exactly customer-friendly. The agency occupies the entire upper floor, but when you get off the elevator, there’s no reception desk or anything else that says “welcome.” Instead, there’s a table in the hallway with a phone on it. If you have an appointment, you pick up the phone, and someone behind the doors steps out to usher you in. In my situation, one of the agents said he would be watching for me. He was. As soon as I stepped out of the elevator, he was opening the door.

It’s also awkward to exchange introductory pleasantries. These guys are criminal investigators and you are a taxpayer – I don’t imagine either side has a particularly good opinion of the other.

The two investigators on this case seemed a little mismatched. The one who led most of the conversation was the younger of the two, and as my friend observed was an “FBI-wanna-be” with sort of a quasi-military demeanor. The other guy was older, probably in his fifties. From other experiences with IRS personnel, I’d bet he was an IRS lifer. Again, my friend had the luxury of observing more while I was answering questions, and came up with another assessment that I thought was dead-on: The older agent was “a little guy trying to be important.”

After once again clarifying that I was not the subject of any criminal investigation, the questions began. They wanted to know where and why I had come to know the tax preparer. They wanted to know if the preparer had made promises of lower tax payments or no tax payments. They wanted to know if he said or did anything that could be construed as recommending that I lie or fabricate information on the returns, etc.

They wanted to know my connection to other people who apparently had been links in the chain of their investigation and prosecution. Two were taxpayers that had been sent to prison. One I knew, the other I didn’t.

Occasionally during their questions, I asked for details on their investigation. They would not tell me specifics, although they acknowledged they had met with the suspect. I stated that on reflection I found the tax preparer to be an enigma. Much of what he told me seemed accurate, but other issues had been off-putting, and I just couldn’t reconcile the inconsistencies; that was the reason for my terminating contact with him more than five years ago. I asked the investigators what their impression was of the tax preparer, and while the younger agent just stonewalled, the older one rolled his eyes and sort of snorted.

The older agent pressed the point of wanting to know why I would work with a guy like this. I told the agents that the primary reason I chose this man for assistance with my taxes was because his philosophical and religious convictions seemed genuine. The older agent rolled his eyes again.

Near the end of the interview (it lasted about an hour), the old guy sort of went on a little rant about tax protestors, indicating people like myself should know better than to get hooked up with guys like this. I shrugged and said something about every taxpayer having the right to structure his affairs to pay the least tax possible, and the old guy got a little testy. He gave a mini-lecture on the tax protestors, tax avoidance and tax evasion. I reminded the investigators that my last contact with the tax preparer was five years ago, and that I wasn’t attempting to defend or explain the preparer’s behavior.

At the end of the interview, I asked the younger agent if I could have a copy of the list of questions they had for me. He seemed a little reluctant. I told him I had received copies of the examiner’s notes and questions from my audit, so why couldn’t I have these? He relented, and gave me his typed list of questions.

As we left, the younger agent thanked me for my time, and said they would contact me if only they needed more information. I told them it would be fine with me if this was the last time I had to discuss my relationship with the tax preparer.

On the way home, I replayed the events with my friend. My focus was mostly on the questions and the content, but my friend had another astute observation. Of the two agents, he noted, the younger one seemed quite matter of fact – he had a list of questions, he wanted answers, and anything that veered off topic was an irrelevant distraction. On the other hand, the older agent was more animated, took more notes, and was almost combative. Getting information was one thing, but it felt like the older agent also wanted to convince us that he was right and we were wrong for even considering the tax preparer as credible. It was like he wanted to say “how could you be so stupid?” and he wanted me to agree and apologize.

I have not had extensive contact with IRS personnel, but my contact is probably more than the average citizen. One thing I have observed: IRS people are pretty zealous about their work. The ones I have met aren’t just in it for the paycheck; they believe they are doing the country a great service by making “everyone pay their fair share.” I imagine it’s necessary to have pretty high internal belief in your work, because an IRS employee sure isn’t going to get much positive reinforcement from the American public.

On the other hand, I also sense in some IRS personnel a disdain or disgust for the taxpayer. For IRS personnel, the only reason someone resists or defies tax law is because they are criminal or ignorant. While some might forgive ignorance, they still can’t fathom why any taxpayer would step out of line, even inadvertently. When you try to present the idea that some people might have moral or philosophical objections to the current tax system, it doesn’t register. “Given the legal authority and enforcement power of the IRS, why would anyone even think of getting on our bad side?” is the essence of the responses I’ve received.

This disconnect was best illustrated by an exchange I had with the examiner of my 2002 and 2003 returns. At the beginning of the process, I told him I faced a dilemma regarding the audit: After all my experiences with the tax protestor people – the arguments that the 13^th Amendment had never been properly ratified, that wages and income weren’t the same thing, that the Internal Revenue Code didn’t apply to sovereign individuals, etc. – I was convinced that the IRS was legally empowered to enforce the collection of taxes. But agreeing with the legality of the IRS didn’t satisfy the moral questions.

I made an analogy to the Jim Crow laws in the South. The laws were “legal,” but also immoral in the denial of civil rights to certain groups of citizens based on their pigmentation or ancestry. So, I asked, when moral conviction conflicts with legality, what do you do?

The auditor didn’t miss a beat. “You know what happened to the people who protested the Jim Crow laws, don’t you?” he asked.

“Some of them went to jail,” I said.

“Yep. That’s right,” he said. End of conversation.

Getting To Known The IRS – Part 1

About 15 years ago, I was exposed to some thought-provoking information on the economic impact and moral implications of governmental taxation. One day, my business partner handed me several books about the United States income tax system he thought I would find interesting. Thus began a decade-long, twisting journey through the world of federal income tax protesters, tax avoiders and ultimately, con men. As a result of my travels, I have also had the dubious opportunity of engaging the IRS far more than I would prefer. But the experience has been instructive.

Eleven years ago, I met an individual who represented himself as an income tax expert. Because of his philosophical and religious convictions, his approach to taxes appealed to me; essentially, his message (at the time) was to “render unto Caesar the things that were Caesar’s” but no more. For several years, he prepared my tax returns.

However, this individual gradually become more militant in his stance toward the government, and more erratic in his delivery of business services. In 2002, I terminated my business relationship with him.

In 2005, I received notice that the IRS was auditing my returns from 2002 and 2003. Upon further discussion (which took awhile) the IRS disclosed the reason for the audit was because of my connection to this tax preparer – guilt (or suspicion) by association.

The aggravation and psychological stress of an audit is bad enough. But even worse, the LLC I had established under this individual’s guidance was improperly structured for tax purposes. The audited changes resulted in a $40,000 additional assessment, including tax, interest and penalty. Ouch, definitely ouch.

Having finally paid this obligation in full in the fall of 2007, I was hoping my encounter with this “tax expert” was finally behind me. Then two men from the IRS’ Criminal Investigation unit came to my door in January 2008. Having assured me I was not the target of any criminal investigation, they informed me the IRS was pursuing criminal charges against my former tax preparer. They asked me if I could meet with them sometime and answer a few questions. I scheduled an appointment for three weeks later, giving me some time to consider the ramifications of meeting with the investigators.

After some discussion with a couple of attorneys, I decided to attend the meeting. But rather than bring official legal representation, I just brought along a good friend as a witness. The reasoning was as follows:

Assuming I was nothing more than an individual who had received tax preparation services from the person under investigation, bringing an attorney might suggest something more duplicitous on my part. To my knowledge, I had been nothing more than a bystander – there was no attempt to do anything other than legally lowering my tax bill.

Since two agents showed up at the door, I figured they would probably both be part of the interview process. If I went by myself, I’d be out-numbered, but having a witness in the room would even the sides, and might blunt any good-cop/bad-cop interrogations.

Finally, there’s nothing like having a third party in the room to make sure everyone attempts to be on their best behavior. Since my friend is also a fellow church member, there was also some positive pressure on me to stay under control. And if the IRS guys got a little belligerent, well, at least I’d have a witness.

I know this line of reasoning doesn’t sit well with strict legal advocates. As far as they are concerned, any meeting with the IRS, criminal or civil, should have representation. I can see their point, but I guess I was relying my innocence. And, since I figured I wasn’t in harm’s way, I was curious about the process – I had questions I wanted to ask as well.