Legal tax avoidance, is it ethical?


Tax really hurts

There are two major themes in this blog, one is how to make money with other people’s money, and the other is how to reduce tax. This is because tax really hurts, $10,000 invested for 30 years at 10% annual return would yield:

$10,000 x 1.1^30 = $174,494

while after taking 30% tax each year, the result will only be:

$10,000 x 1.07^30 = $76,122

and if you let the portfolio grow for 30 years before cashing out, the return will be:

$174,494 x 0.7 = $122,146

Therefore, for investment purposes, whenever we can avoid taxes, we should. But the government also need revenue to perform their duty, so is it ethical for us to avoid taxes whenever possible? I think the answer to this question is yes, here’s why:

The government can print money

Let’s consider how economy works. Suppose there are 4 persons. Person A produces something that person B needs, person B produces something that person C needs, and person C produces something that person A needs. There’s also person D that produces nothing that nobody needs! Although persons A-C form a closed loop that everyone needs something from someone in the group, the needs are in a single direction, they don’t have something that everyone needs to pay back in return.

Now if the government prints some money which cost next to nothing, and give out to person D for free (akin to jobless subsidies) or for some type of service that person D can provide (public servant salaries), then D can buy something from anyone of persons A-C, and then the economic circle start rolling, and everyone can get what they need.

When persons A-C can sell their products for a profit, they will also have money to reinvest and produce more of the products, the government can then print out more money to reinforce the cycle. Therefore, as long as the economy is growing, the government will have significant revenue just by printing money. If the government is frugal as we investors are, this revenue should pay for a significant chunk of their expenses.

We already pay a lot of taxes

When we buy a house, we have to pay property taxes, this is acceptable, because the tax works to improve our lives around our communities. When we buy anything else, we also have to pay sales tax, this is also acceptable, because we only pay the tax if we buy things. But for income taxes and business taxes, I think the current system is screwed. There should be a flat low tax of let’s say 10%, this will encourage hard working because you wouldn’t be penalized for making more money.

Flat tax rate without the complex tax codes for deductions and tax returns will also eliminate the need of IRS, saving the government a lot of useful resources. The reason of income disparity is because of the ability to borrow money in the capitalist country, by taking money from the rich to subsidize the poor won’t work to improve the economy, actually it just encourage businesses to invest elsewhere. And if the economy doesn’t grow fast enough, both the rich and poor will be worse off, and the poor will definitely suffer more because when businesses don’t make enough money, they will just seek savings from the payroll department.

To solve the problem, government should discourage borrowing, and encourage investment in stocks. One of the ways is to eliminate investment taxes completely, after all, the companies we invest in already paid the taxes, why should we pay tax on the same income twice?

If everyone invests their money the way I described in this blog, and no short selling or derivatives trading are allowed, the stock market will be a safe place to invest and the DCA method I described will be even safer. When everybody invests, they will have more money to spend, and this will in turn drive economy to grow further, which is good for everyone, including the government since they can print more money when economy grows faster. Therefore, when we legally avoid taxes, we may actually be helping the government to raise more revenue since we will have more money to spend and they can print more money, this is better than paying taxes.

Stock market can also be a place where the government get their revenue

As I mentioned in earlier posts, modern economic crises are mostly caused by excess products, the way to solve the problem should be to encourage spending. But when the markets are in free fall, a lot of money is locked in the market. Most people won’t sell their holdings because they anticipate the market will eventually recover, but it also mean they wouldn’t have enough money to spend. This will delay the recovery and if economy goes into deflation mode, what happened in Japan can happen anywhere.

Although market is falling, a lot of investors will still have holdings that they bought at significantly lower prices, if the government intervenes by printing money to buy stocks in a controlled fashion so the speed of the drop is slowed, it will allow time for these investors to sell some of their holdings so they will have money to spend. This way, the economy will start growing more quickly and everyone will be happy.

Since it’s a fact that the market will eventually recover, dollar cost averaging is the best way for government to intervene too. DCA works best if we have unlimited funds so there’s no margin calls, and this is exactly the government’s advantage. They can just print the money in a controlled fashion, and pour into the market bit by bit until recovery is clear. This will also ensure that they don’t print too much money as to cause uncontrolled inflation. Since the government only started buying stocks when the market has fallen significantly, their entry price will be pretty low. When the market recovers, the government will set to gain a lot of revenue they can use to do a lot of things without raising taxes.

When both the investors and the government DCA in the above style, the boom bust cycle will get a lot shorter, and the magnitude of the swing will be limited, which will also make the DCA with margin method risk free.

Government is spending too much

There’s a lot of inefficiencies in the public sector, because when your job is secure, no one want to take responsibilities. The economy will be more efficient if the government is lean and outsource as much as possible to the private sector. The most important job of the government is to ensure competition, and the economy will adjust by itself. Again, if the government is frugal and efficient, we really don’t need to pay so much taxes.

The US elections got too crazy over the years, a lot of resources are wasted in the process. Yes we do need democracy, but democracy doesn’t mean bureaucracy. We don’t need all those campaigns, election should be in the local level, where the voters can really get to know the persons they elect. All upper level positions should be filled with election by the elected lower level officials based on the contributions of the candidates. Democracy is important, but what is more important is law and order, if justice can be served, we don’t have to pay too much attention to democracy.

The government also spent too much on arms and wars. It’s true that the government should keep a strong army to defend the country, but fighting too many wars also waste too much resources. On the terrorist issue, prevention is much more efficient then revenge, so the Afghanistan war shouldn’t have started, especially since there’s nothing to be gained in Afghanistan. The Iraq war was started purely by greed of oil, I don’t believe there’s false intelligence, he who has a mind to beat his dog will easily find his stick.

The calculation was, the army has a lot of old arms that need to be get rid of, a war will be the best way to do this as the army will also gain experience and new insights to future developments. The hope was that after destruction of Iraq, the reconstruction contracts will flow through to US contractors, thereby helping the US economy, all of which will be funded by Iraqi oil.

The intention was that the war can struck two birds with one stone, but bad intentions never yield good results. While the army did get rid of excess weapons, the government also spend too much money, and unfortunately most of the reconstruction contracts went to China.

Just from the prevention of unnecessary spending by the government point of view, we should avoid paying too much tax whenever possible, so before they plan something big,  they’ll have to worry about the budget first. Therefore, legal tax evasion is even more ethical.

retire40

Thanks to the great recession, I finally made it and retired right before I turned 40.