GOVERNMENT OUT OF CONTROL

STATE OF THE U.S. FINANCES


We have very recently passed a law raising the amount of debt that the government can acquire. In exchange, the government has agreed to cut future spending over the next ten years. This means that the government can spend money now but may or may not cut future spending because no Congress can dictate how a future Congress will handle the country’s finances.

Sure enough, our government has just announced that they plan to spend another $447 billion or so to create jobs. The last time they did that, one can argue that the temporary jobs they created cost us about $250,000 per job. Instead of hiring more teachers and public workers, the money was diverted to shore up public union pension funds. And it appears that they plan to do this again.

Poor Taxpayer

Here is where we stand right now. The budget deficit is at 10% of Gross Domestic Product, the Federal Debt is 67% of GDP and Federal spending is 25% of GDP. Keep in mind that we are not talking about the income the Federal government collects in one form or another. We are talking about the Gross Income of all producers in the United States.

A business normally shoots for a net profit margin of 5% of gross sales. So if sales are $100,000 per year, a $5,000 net profit would be ideal. Using the figures above, the government, if it were a business, is spending $110,000, or, $10,000 more than its gross sales. This also means that the business has credit card debt of $67,000 and must also pay $25,000 in taxes to support the government.

Only 58.1% of the population is working and of those 9.1 % unemployed, 45.9% are considered long-term unemployed. The home ownership rate has dropped to 59.7%, even though the foreclosures have been delayed by force of law for the past few years.

Only 49% of taxpayers pay income tax. Most of the 51% who don’t pay are actually receiving refunds called “refundable tax credits” like earned income credits, child care credits, etc. We have made our citizens into slaves because 47% of the population are receiving one or more federal benefit payments. We are punishing those who are productive and rewarding those who do not work.

And we have given our government this power. You hand our politicians a baseball bat and everything looks like a baseball and they’ll swing away just for the fun of it.

The ones who are being hurt the most are the very elderly. Most live on a fixed income and see the prices at the grocery stores rise every week. Dining at fast food restaurants is not something that they can afford anymore. Even plate lunches from lunch wagons are no longer affordable for them.

Does it make sense that the government proposes to spend more? I am of the belief that the elite schools that our elected officials attended no longer teach common sense.

How will the government obtain the $447 billion it intends to spend? From you, of course. The government is a parasite. It has no money of its own. It feeds off of productive people.

They propose to tax the wealthy and the corporations. Most citizens are covered by pension plans and those plans invest in stocks. If the corporations are taxed more, then the corporation earn less and your plans’ investments will decline in value.

Or, the corporation could raise their prices on its goods and services and you pay more when you consume their products and services. It is likely that you will be subjected to both. Stated another way, if you're financially responsible, you pay two ways. Once when your corporations that you invest in pay taxes and again when you consume their goods and services.

A corporation is in business to produce a profit. It has no other purpose for existence. It is not there to provide employment, pay taxes, pay unemployment insurance benefits, provide medical insurance or any of those silly things we’ve forced them to do. If it cannot produce a profit, it goes out of business. Or move to a climate that is friendlier to businesses.

The politicians have taken away our rights under the 10th Amendment. AMENDMENT X: "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people."

We cannot change the politicians. They have demonstrated that they will say one thing and do another. They plan to increase their voter base… those who do not pay taxes so that the politician can be rewarded by getting re-elected.

We can change our behavior. Investing in the short term can produce good returns. As long as the market’s moving one can make money. If you believed that the market will drop as predicted early this summer, you would’ve sold short (sold stocks you do not own) and then buy when the market actually dropped to cover your shorts. If you believe that the market will go up, you would buy when it’s down and sell when it eventually rises.

http://malamakupuna.blogspot.com/2011/06/hawaiis-elected-officials-play-kick-can.html

Nothing will save us in the long term if the politicians continue on the path they’re heading. The currency will collapse. Imagine a society where there is no currency. No public safety, no food at stores, unsafe water because no public workers and no utilities. There will be chaos because those who prepare themselves and plan for this new way of life will be attacked by those who do not.

Hopefully, we can come together as a society and a community to help each other without governmental interference. There will be no care homes and our kupunas have no chance of survival unless we all pitch in.

CAN THE U.S. BE BANKRUPT?

THE SOON TO BE BANKRUPT UNITED STATES

We all know that when we spend $1.20 for each dollar of income, we are headed for financial trouble. Some of us even believe that cash from a loan is income. So to make up the twenty cent shortage, we borrow or make purchases using a credit card. And with this abundance of ignorance, we are happy.

Let’s go over some basic rules that highly trained financial folks like me look at to determine whether a person can pay his bills. Sometimes, what is laid out in the first paragraph simply goes over people’s heads.

If the dollar collapses, at least it can be used for decorative purposes

One of the first things I look for is to see if a person (or a business) has a current ratio equal to 2 : 1. In other words, to be able to pay one’s bills, one must have $2 of current assets for each $1 of current liabilities.

Current assets are cash, assets convertible to cash in 30 days, receivables and inventory. Current liabilities are short-term liabilities that are payable within a short period of time, like credit cards and portions of long-term liabilities that are due and payable in 30 days.

The more critical ratio is the quick or acid test ratio, which is the relationship of current assets minus inventory as it relates to current liabilities. If this ratio is less than 1 : 1, then the person or business is considered to be insolvent and cannot pay his bills. If that person approaches you for a loan, you will be giving such a loan at your own great peril because I can assure you that he won’t be able to pay you back.

If  we use this tool to determine financial stability, the Federal, State and County governments can be determined to be insolvent. If they were individuals, their credit rating would likely be below 400. The only thing they have going for them is their power to confiscate from the citizens using their taxing powers.

Standard and Poor did not downgrade the credit rating of the Federal Government because the politicians did not compromise, but did so because they did compromise.

Here’s what happened. It was already determined that the Federal government could not meet its obligations. Rather than get these ratios in line with responsible financial management, they raised the debt ceiling, meaning that they could borrow more, thereby increasing the current liabilities.

There was an agreement to cut future spending in exchange for the ability to borrow more and to spend more today. In other words, they opened up another credit card so that they can spend more today in exchange for the promise to cut future spending within the next ten years.

Not a responsible move. No Congress can dictate what future Congresses can or cannot spend. Each Congress has the Constitutional power to set its own budget.

Contrary to what politicians would like to have you believe, compromising was a bad thing.

Let us assume that one has a child who is 5 years old and that child is a borderline diabetic. It is one hour before dinner and there are five pieces of cake that the child wants to eat. The child whines and throws a tantrum.

In the interest of being deemed to be reasonable, the parent compromises and allows the child to have two pieces of the cake and the child happily stops whining. The child is overloaded with sugar and goes into shock. Not very  responsible on the part of both the child and the parent.

This is what our politicians did. One side announced that they planned to spend more in order to get our economy going and the other side compromised and allowed for the debt ceiling to be raised in exchange for FUTURE spending cuts. S & P rightfully deemed this to weaken the government’s ability to pay and lowered the credit rating.

Politicians, do what they do best and immediately began trashing S & P for lowering the rating.

Our economy is based upon monetarist economics, or Keynesian economics. It measures growth or productivity using phony money. The government hires and pays a person $100 to dig a ditch. The next day, that person is paid another $100 to fill in the ditch he dug the day before. The government then announces that productivity was $200, but in reality, nothing of value was created.

http://www.investopedia.com/terms/k/keynesianeconomics.asp#axzz1W0n78MVC

Raising more revenue by increasing the tax rates for the rich is one solution that those who advocate more spending offered. They consider  the individuals and corporations that make more than $250,000 a year are rich. If you are covered by a pension plan or have a 401 K plan, you are likely owners of these “rich” companies because you own these companies through your plan. A raise in tax rates would diminish your return on your investments.

You further end up paying more when you buy the products and services you consume because these businesses will have to raise their prices to pay the additional taxes. Companies that are profitable are left with fewer dollars and would be unable to expand or hire more employees. Unemployment will remain high or will go higher.

The dollar will erode further and those on fixed income like our Kupunas, will have to pay more for goods and services or do without. Those who feel entitled to government funds could riot. They’ll even trash those who drive luxury cars or live in expensive homes. What they’ve done in Europe is what could happen here.

Kupunas won’t be able to defend themselves and their property. Flash riots are hard to prepare for and to defend against.

Right now, there is no safe place to invest your money other than into hard assets. We need to wait and see what the markets are going to do when the investors come back into the market after Labor Day. More importantly, we need to see if we can get past September 11 safely and without a major terrorist attack. An attack will cause a market crash, putting further downward pressure on an already vulnerable dollar.

Using our Kupunas for political gain

WILL WE THROW OUR KUPUNAS UNDER THE BUS?

Only if our politicians believe that it will hurt the other party.

The Federal Government receives over $200 billion each month in tax payments. That is enough to pay the interest on the bonds they’ve issued, pay Social Security obligations and make good on the paychecks for those serving in our military.

Social Security is a program that required citizens to pay in to under force of law. In exchange, the government promised to pay benefits when the citizen retired. That’s an obligation and our government shouldn’t be so chicken sh arrogant as to threaten to withhold payments on it.

Those who serve in our military should not be second guessing as to whether they’ll get paid. They risk their lives so we can enjoy our Constitutional freedoms. When a person is deployed, he shouldn’t have to worry if his family has enough to pay for food, clothing and shelter. He has enough to worry about. For our country to threaten to withhold that is pilau despicable.

Paying the interest on the bonds that our government issued also must be done. And we have enough coming in that these obligations can be met each month. There is no threat of default if the interest is paid.

If an individual has loans on credit cards amounting to 70% of his income, we can all agree that he’s in serious trouble. He can’t go to the bank and demand that they lend him more money so he can spend more. Unless, of course, he went to private school or to an elite university. All our top dumbbell  much respected government officials went to Punahou and  Ivy League schools.

Our government does exactly that. They pass a law increasing the amount that they can borrow because they can’t control their spending habits.

Where can they cut? As a proud graduate of the prestigious Farrington High School, I'll explain it to you.

1. Suspend all payroll payments to all elected officials and their staffs until the budget is balanced.

2. Suspend all EPA regulations and funding for the agency indefinitely. You will immediately see investors build more refineries and energy prices will go down. You may even see ferries operating in Hawaii, transporting goods and people between the islands.

3. Suspend all regulations and funding that is required by the Americans with Disabilities Act.

4. Suspend all programs and tax credits used for social engineering, like subsidizing farmers to produce ethanol. Tax credits for installing energy efficient systems should also be suspended indefinitely. Make everyone pay some income tax and suspend all tax credits which amount to welfare payments. If everyone pays something, they take pride in, and ownership of the country.

5. We can save an additional $20.2 billion if we suspend the Department of Education budget. They pay for 10% of each school’s budget but make up 100% of the rules. When the Federal Government collects $1 for anything, only 27 cents actually is distributed to the recipient. The rest is used for bureaucratic payroll and for administering their rules and regulations. Very inefficient.

6. HUD is also another department that we can do without. The sole function of HUD is to enrich community organizers who redistribute wealth. That’s $6.7 billion each month.

If we need to cut more, then the Justice Department could be trimmed some.

“We, the People of the united States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.”

Any department that doesn’t fit in with the above Preamble should be shut down. That includes Social Security, by the way, but the United States Government forced this contract upon the people so that obligation must be fulfilled. Bernie Madoff tried the exact Ponzi scheme and was quickly sent to prison. http://en.wikipedia.org/wiki/Ponzi_scheme Something only our dedicated government officials can get away with.
　

Elder Abuse by Family Members

ELDER ABUSE BY FAMILY MEMBERS


In my past life as a financial Guru, I’ve had many encounters with unscrupulous CPAs, lawyers, trust officers and bankers who advise elderly clients to transfer assets to their children so that they may be able to qualify for Medicare and other welfare benefits provided by the government.

Many of these “suggestions” are often instigated by the children or other family members who would be the beneficiaries of such transfers. When a person is a financial advisor to others, whether they’re family members or not, he has to remove himself as a potential beneficiary as a result of any advice put forth.

http://malamakupuna.blogspot.com/2010/11/why-kupunas-live-in-fear.html

One case that I’m intimately familiar with involved an older couple with substantial assets, including a house in an exclusive part of Honolulu. The elderly couple had two sons and one daughter.

About 30 years ago, all assets, including the house that the couple owned were transferred to the oldest son as is the custom in a lot of oriental households. Over the years, the elderly couple became restricted to their room. They were able to get their food from the kitchen but had to go back to their room to eat.

The husband passed on a few years ago and the elderly widow became more of a prisoner in her own home. The daughter lived on the mainland and the other son came by once a week to take his mother shopping. That was the only time she was able to enjoy the outside world and to see and talk to real people.

As her health deteriorated, the oldest son placed her in a nursing home. Her younger son visited her weekly and the older son visited sporadically. It was rare that her daughter-in-law visited. Even her grandchildren, who were raised and grew up in her house rarely visited her.

But, she was happy at the nursing home because there were other people that she could socialize with. All costs were paid by welfare or Medicaid.

Another situation I was involved in was where the oldest son was given a “Remainder” interest in the house and the elderly couple retained the “life estate”. The remainder interest means that the house passes to the son only when the elderly couple both pass away. The elderly couple retains all ownership rights to the house while they‘re alive with their life estate.

The elderly father passes on and asked the younger son to protect the mother from the eldest son. In the two months it took to transfer the mother to the younger son’s home, the elder son had already made arrangements to break the life estate by putting himself on title for 50% of the property so he could obtain a loan for a substantial amount.

When the mother passed away, the house didn’t pass to the older son by deed because the life and remainder interests were broken when the son put himself on title. Thus, the mother’s 50% was passed by her will, which gave the younger son everything.

The older son wanted the entire house because he believed he was entitled to it so he ended up suing his younger brother to gain the mother‘s 50%. Once the life estate is broken, the Will controlled how the mother’s half would pass. Needless to say, the brothers are estranged.

The abuse came about because the mother was frail and the elder son bullied her into signing over half the house to him in order to obtain a loan. What’s worse, is that she lived for the rest of her life with the fear that the younger son would find out about the bullying and the transfer.

In many of these cases, the children believe that their parent’s assets are theirs and do whatever they can to keep the assets intact. By transferring the assets, then the government pays for all long term care costs.

Many parents are also of the same mindset. They transfer their assets because they want their children and grandchildren to remember them in a positive way. In my observations, once the assets are transferred, the children and grandchildren will ignore the elderly parents. The elderly become paupers and must live with whatever bone is tossed their way by their children or the government.

These abuses are very commonplace in our society. There are lawyers and estate planners advertising that they can show people how to save your assets and get taxpayers to pay for elder and nursing care.

And we wonder why our government is bankrupt

HAWAII'S ELECTED OFFICIALS PLAY "KICK THE CAN DOWN THE ROAD"

HAWAII LEADERS KICK THE CAN DOWN THE ROAD... AGAIN


After observing our elected officials this past session, one can confirm that people should stop being taxpayers in Hawaii. A good example of "kicking the can down the road" for future government officials to solve.

http://malamakupuna.blogspot.com/2011/03/stop-being-hwaii-taxpayer.html

At any social gathering, you're sure to find someone who is receiving a State or County Retirement System pension and obtaining free Part B medical reimbursement as well as Part D benefits. Ask them what they think the solution to the state's insolvency problem is. In my experience, every one of those who were asked the question went into a tirade about how they were underpaid and took government jobs because these benefits were a part of the package promised.

When asked how, since the pension fund and the medical fund are both bankrupt, do they think the government will come up with the money, the reply is always to tax the rich and the businesses. Therefore, if your replies are the same as mine, then they plan to go after your money if you invest it here in Hawaii. They will further get your money if you remain a Hawaii taxpayer.

Hawaii's excise tax is unique in that it taxes an investor's or business' cash flow. It is not a tax on profits. So if you lose money in your investment or business, but have cash flow, you still must pay this tax. If you have rental property in Hawaii, then you must pay excise taxes on the gross rental income.

We have examined the different types of investments that people would consider and if real estate is your choice because you want to hedge against inflation, then you ought to invest in property outside of Hawaii because the excise tax will drive your investment into insolvency. Better yet, you may want to buy into a Real Estate Investment Trust, which is a mutual fund that invests in real estate. The fund itself pays excise taxes if they're dumb enough to invest in Hawaii property, but in general, you would be free of the excise tax.

If you owned the out-of-state rental properties directly and lived in Hawaii, the Hawaii tax collectors will still go after you for this excise tax. They get you if the property is located in Hawaii and if it's not, they will tax you on the cash flow if you're a Hawaii taxpayer.

The U.S. is in the second phase of printing vast amounts of currency. It's called QE2. For those of you who went to private school, the following link explains everything.

http://www.youtube.com/watch?v=PTUY16CkS-k&feature=player_embedded

http://malamakupuna.blogspot.com/2011/04/high-energy-costs-hurt-our-kupunas.html

If you believe that your currency will go down in value, then you could invest in energy mutual funds. Or, perhaps into International Funds that invest in companies operating in foreign countries. When doing so, you're investing in both the profitability of the company and the movement of the U.S. currency.

Kupunas need to be more conservative because they're past their productive life. Most invest their funds in investment grade 10 year bonds. When interest rates go down, bond prices go up. Similarly, when interest rates go up, bond prices come down. If inflation looms, then the government has to raise interest rates to stifle inflation. Well, inflation is here, but the government has chosen to redefined what is taken into account when they calculate the inflation rate. Thus, they've determined that we have no inflation even though food, housing and consumer prices keep going up and they're able to do it by simply redefining what inflation is. Their reason is that if interest rates go up, they too, must pay higher interests to those who bought government bonds. On $14 trillion of debt, the interest costs will exceed the operating cost of the government.

For the short term, those who own intermediate term bond funds can cover themselves by buying more shares with each monthly interest payment when bond prices go down. When bond prices rise, they'll buy fewer shares, but, they can sell the shares at a higher price.

Each summer, stock prices generally go down until after Labor Day. Most investors take the summer off. It's generally a good opportunity to reallocate one's portfolio at this time because if one plans to buy more stocks, you'll do so when prices are low.

Too complicated? O.K. For those who went to Punahou or Iolani, here's a simple way to lower your risks and increase your returns. If you have a mortgage where the interest rate is at 5% and you have a bank account where they pay you 1/4 of 1%, you would increase your returns by 2000% by paying down your mortgage. So if you put $500 a month into your bank account, use that money to pay an extra $500 towards your mortgage instead, and you'll be saving the 5% interest on that $500.

I've had lots of people upset with me for recommending that investors take their investments out of Hawaii. Words like "traitor" are used frequently when I go further and suggest that investors think about investments in foreign companies.

We all agree, though, that taking investment money out of Hawaii will further spiral the State into insolvency. But if investing in Hawaii is a losing proposition, then unless your goal is to lose your investment capital, then you'd better invest elsewhere.

We cannot control what our government does. We know that they are not truthful. What we can control is how we react to them and their policies.

My money loves Hawaii and this country. Hawaii and the country doesn't love my money.

Uh, oh! I stole that somewhere.

STOP BEING A HAWAII TAXPAYER

WHEN POLITICIANS FIND EVERYONE IN A HOLE, THEY DIG SOME MORE

I am more convinced than ever that our elected officials have no interest in solving the financial problems we're in. Or, they're just incompetent. Or they lie. Maybe all three.

On the national stage, (one of many examples) we find that the "savings" promised under Obamacare is really spending money twice. They've promised to cut Medicare by $500,000 in order to pay for the millions of uninsured people. Then, in another Bill, they've provided $500,000 to support those cuts that they've made in Medicare. I suppose they had to pass the law so we can find out what's in it.

Another thing that was just discovered under the healthcare law is that they quietly snuck in $100+ billion in funding to administer Obamacare. No debate was done on the funding even though it was a spending issue which required debate. That $100 billion funding was only discovered in the past couple of weeks.

http://malamakupuna.blogspot.com/2010/10/patient-protection-and-affordable-care.html

Locally, our elected officials are wrestling with the $700 million operational budget for the next two years. Yet, we have an unfunded Employee Retirement System liability of between $6.2 to $7 billion and another estimated $10 billion unfunded liability for the retirees' medical insurance reserves. That's $16 - $17 billion, which, when amortized over 10 years amounts to $1.6 - $1.7 billion a year. Adding in one year of the budget shortfall, we're talking about a shortage of $2 billion a year. And states can't print money the way the Federal Government does.
http://malamakupuna.blogspot.com/2010/10/retirees-under-hawaii-employee.html


Will the government employees agree to give up their benefits? I don't think they will.  Wisconsin's budget shortage is only about $3.6 billion and they have a much larger population than we do. How are we going to pay off a $17 billion liability?

Politicians often pass laws and don't score the cost of such laws, so we don't know how much each law will cost. Laws must have staffing to administer and to enforce them. It takes manpower, record keeping as well as staffing to enforce noncompliance of such laws. So the government gets bigger and bigger. That traditionally suits the elected official because it feeds the public sector employees/unions who in turn funds and votes for certain politicians.

If the union assesses $20 a month to each public sector employee and there are 65,000 of them, they have $1.3 million a month to elect or defeat any elected official. So everyone plays along. If, however, the government is not allowed to collect the $20 from the employees' paycheck and pass it on to the union, then membership and the service fees would drop substantially because many would not voluntarily mail in their $20 to the union. So, it'll be business as usual even though we hope for a different outcome.

We've suggested that in order to plan for a possible chaotic situtaion, people should consider growing their own food. And consider becoming a taxpayer in another state.
http://malamakupuna.blogspot.com/2010/11/government-stealing-our-kupunas-wealth.html


Hawaii has a general excise tax that punishes all investors and entrepreneurs because it is a tax on gross income and is assessed at all levels of transactions a product or service goes through. That includes rental income. If the situation presents itself, selling your rental property and buying (or doing a 1031 tax-free exchange) in another state ought to be considered. If possible, also consider a move to a state that doesn't have a tax on personal income. These states are Alaska, Nevada, S. Dakota, Texas, Washington, Florida and Wyoming. Two states don't have a tax on earned income but do tax your dividends and interest. These states are Tennessee and New Hampshire.

One might consider incorporating in a state that doesn't tax corporate income. These states are Texas, Nevada and Wyoming. Your holdings in rental property (non-Hawaii real estate) can be put into these corporate structures. See your CPA or tax/financial advisor. Not taking action may cost you dearly.

Hawaii's elected officials show no propensity for cutting down the size of the government and in fact, have already indicated that they will be looking to those who are productive for additional taxes. I suspect they'll try to increase the general excise tax.

Government does not create a product. The services that government provides are limited to compliance and administration of laws and regulations that they create. Like in transfering wealth. Whatever the cost of the administration of rules and regulations is, they must consfiscate from the private sector which produces products and services. The government has no source of wealth.

The public sector employees will not give up their benefits. Street violence, in my mind, is a possibility. They can also readily shut down our ports if they don't get their way. Thus, being able to grow your own food is essential to your survival.

Meanwhile, if things get chaotic, our kupunas would be left to fend for themselves. Says a lot about our society.

WHERE WE LIVE, THERE ARE RAINBOWS

THERE ARE ANGELS IN THIS WORLD ALL AROUND US


As most of you know, I volunteer to do tax returns every year about this time. Yesterday was my first day for the season. One of the taxpayers that came in had a way about him that I couldn't figure out.

During the interview process, I found that he was paying for his parents' entire mortgage payment and, taking care of them. His mother had some health issues which limited her mobility. His father was also frail and wasn't able to lift her when she needed help. He also bought their medicine and paid for their hospital bills.

Yet, he was filing a simple return as a single person. I asked if his parents filed a return and he indicated in the affirmative. That means that the taxpayer had to file as a single person rather than as "Head of Household" with much more favorable rates. I suggested that he bring his receipts in for the medicine, the hospital bills and the mortgage statement (he indicated that he was on the mortgage with his parents) and his parents' social security numbers and dates of birth. Perhaps if his parents don't need to file a tax return, he would be able to claim them as dependents and gain "Head of Household" status.

He further would obtain tax credits like earned income credit and dependent care credits. I explained all of this to him and suggested that he come back after gathering these records. He was abrupt and said that he didn't have any of the paperwork. So he was O.K. with filing as a single person even though he could get back thousands of dollars by filing as a "Head of household". He wasn't upset with me (I don't think) but he appeared to be distraught. This happens when a person is stressed out.

He prepares everything for his parents every morning, including meals and whatever they need and then goes to work. When he comes home, he needs to clean them up, prepare their meal and do the household chores. He has no respite other than going to work every day. There are many in our society who do these things, quietly and without fanfare.

Since he insisted that we prepare his tax return as a single person, I did so. He didn't want to come back and felt that getting the documentation was a hassle. I gave him a list of things he needs to keep as records and proof of support he gives his parents so that he may be able to files his tax returns properly next year. The thousands he would get as a refund could be used to help pay for medication and perhaps hire someone to come in to give him a day off from caregiving.

I went to the grocery store early this morning to buy refreshments for the work crew who would be finishing up the installation of my new kitchen. The taxpayer was behind me at the checkout counter and told the cashier that I do tax returns as a volunteer. He appeared to be less stressed and let me know he truly appreciated the guidance I gave him.

Made my day.

Our Government Stuck it To Us Again

EXTENDING THE TAX RATES FOR EVERYONE


Our government likes to pull the wool over our eyes. We have what they call a "lame duck" Congress and they went ahead anyway to pass legislation that the incoming Congress would likely not agree with. Arrogance is the best word to describe those who are in charge of our government.

The country is divided into two groups. One group believes in Old English Law. They believe that everything came from the Crown and everything therefore is owned by the Crown except for that which the Crown decides to allow the subjects to keep. We derived much of our laws based on this concept.

The other group, as expected, believes in the exact opposite, mainly those things that are guaranteed to the citizens of the United States by the Constitution. For those of you who attended private school, let me lay out the two relevant provisions: Amendment IV and Amendment X.

Amendment IV (of the Bill of Rights) assured that we are all secured in our "persons, houses, papers, and effects, against unreasonable searches and seizures...." by the government.  Amendment X reserves all powers "not delegated to the United States by the Constitution... for the States and the people". In other words, the people have all powers and only those powers granted to the Federal Government by the Constitution can be exercised by the Federal Government.

Over the years, Congress slowly changed things by passing legislation granting them powers over the people which are not authorized by the Constitution. The EPA (Environmental Protection Agency) needs to give approval for everything anyone does and can make things so prohibitively expensive that projects cannot be economically viable. A good example is the Superferry. The ADA (Americans with Disabilities Act) can also be used by activists to shut down projects by making things so expensive that projects cannot turn a profit.

I could go on and on, but other than those who went to private school, most of you get the picture.

Before we examine the legislation extending the current tax rates, let's lay some facts on the table.

1. The top 1% of wage earners pay 41% of the income taxes.

2. The bottom 50% of wage earners pay 3% of the nation's income taxes and many don't pay anything at all.

3. The top 1% of wage earners make only 19% of the nation's income.

4. Many who pay no income tax actually get back money from the State and Federal Governments in what is called "refundable credits".

Let me further elaborate on #4 above. A single person with two young toddlers makes $20,000 in income. With various tax credits, low income rental credits, child care tax credits, etc., this person gets $4,500 from the State of Hawaii and another whopping $4,000 from the Federal Government. In addition, this person can qualify for Section 8 rental assistance, food stamps and other welfare programs costing thousands of additional dollars. This could be the equivalence of a $40,000 salary.

Let me state it another way. The tax credits are in addition to welfare benefits and is a direct payment to the recipient through their tax returns, bypassing the Social Services agencies. So the taxpayer pays for Social Services with higher taxes and for the direct tax credits through the person's tax returns. No wonder our governments are in a state of insolvency. We give a vote to those who not only pay no income tax, but get whopping refunds called "tax credits".

Thomas Jefferson once said, "Democracy will cease to exist when you take away from people who are willing to work and give to those who do not".

Now, let's look at the major provisions of the recently passed law that was signed by our President.

Dumb thing # 1. The tax rates were extended for only two years. It should've been made permanent. This is because most businesses plan for things in five and ten year projected increments. Two years will not motivate businesses and investors to expand if the rug is pulled from under them in two years.

Dumb thing #2. A credit was given to employees that is equal to 2% of their payroll. This is a reduction of the FICA (Social Security tax). Now, unless you went to private school, you would know that Social Security will soon be insolvent and there won't be money to pay future benefits. When they cut the "deposits" that were to fund Social Security, how will that increase the funds required to pay benefits? They have to make up for that shortage somewhere and I suspect it'll come from future tax increases, reduction in Social Security benefits or they will again print more money. Either way, our kupunas fall further behind.

Dumb thing # 3. The law also extended unemployment benefits for another 13 months. Stated another way, they are going to reward more people for not working. The cost of the benefits are passed on to the various states who in turn will pass that on to the various businesses in the form of unemployment taxes. Businesses are already faced with increased health care premiums for future employees and now they face even higher unemployment taxes. I don't see it as an incentive for businesses to hire more people. Better to buy goods produced by foreign workers and distribute those goods in the United States.

Dumb thing # 4. The Federal Estate tax was raised. Essentially, you get the first $5 million free in the form of a Unified Credit. But all assets over $5 million is taxed at 35%. This is a tax on your right to pass on assets (acquire with previously taxed dollars) to your heirs.

Let me assume that a business is worth $7 million. The owner suddenly dies. The IRS declares that the business is worth $10 million using the "capitalization of earnings method". The owner is not around to argue otherwise. Further, the value is based upon what the business was worth as a "going concern" with the owner still available to guide the company through profitability. The tax needs to be paid with cash within 9 months from the date of death.

The estate must sell assets in order to pay the IRS. The tax bill is $1.75 million. To raise that cash immediately, a forced sale of $3 million in assets is made. In all likelihood, the business would need to be liquidated and perhaps $5 million in assets needs to be sold at liquidation prices to acquire the $1.75 million in cash to pay the tax. Every employee is left without a job.

Note that I did not differentiate between Democrats and Republicans. Both Parties have members who believe that they're the elites of society and want a bigger government in order to use taxpayers' money to wield power. Essentially, it is the government against the people. I fear my government.

The Bankrupt Euro

EUROPE LEADS THE WAY ON BANKRUPT COUNTRIES


Previously, we have opined about Hawaii's bankrupt Employee Retirement System and the equally bankrupt Healthcare System that Hawaii's civil service retirees are covered under. These are problems that have been created 45 years ago by the political philosophies we've adopted.

Europe is where Hawaii will be in 5 years or so. You see riots in Greece, Germany, France, and all the other countries with very liberal public pensions offered to the public sector employees. There is no money to pay the promised entitlements. They are also raising the cost of higher education. So people riot.

In the U.S., California, New York and all of the very liberal union-controlled states will be facing what Europe is now experiencing. It's no secret as to why these States have re-elected the very liberal politicians who got us into this mess. States cannot print money. The Federal government can. So these states expect the rest of the fiscally responsible states to bail them out. Based upon the recent election results where the Taxed Enough Already group taking over Congress, that's not likely to happen.

So the Fed tried another tactic. Cheapen the dollar by issuing $600 billion (printing) in debt so that companies in the U.S. can sell goods abroad. Har! The dollar got stronger. The Euro practically melted down and may crash in the next few months if something isn't done to stabilize the currency. Remember, a currency only has value if people trust the government issuing that currency. And right now, they trust the Euro less than they do the American dollar.

I received some very vile and angry emails when I opined that since Hawaii won't face their pension problems in a responsible way, taxes will go up. To shelter yourself, you must choose not to be a Hawaii taxpayer. People called me selfish, traitor and many things I cannot print. I invited those people to voluntarily pay more taxes to show how much they care for the people of Hawaii. We must choose to control our individual destinies. Giving the government control over your life is foolish.
http://malamakupuna.blogspot.com/2010/10/retirees-under-hawaii-employee.html

I'll give two illustrations of my point. When the government passed laws about fuel standards and required gas to have a 15% ethanol mix, prices went up. Creating ethanol uses more fuel to plant, grow, harvest and convert the corn into fuel. Further, the corn is taken out of consumption so the cost of corn as well as beef and pork goes up because it costs more to feed these animals. The ones who gain are the government employees who are added to the payroll to oversee the program.

The second thing the government does is they lie to the citizens. When they declare that all federal pay will be frozen for two years, it doesn't mean that Federal employees won't get pay raises. It is the pay scale that is frozen. Employees will still be able to move up in pay by moving up in the GS pay system.

For those who don't understand how serious this problem is, consider that if the Hawaii ERS has $6.2 billion in unfunded pension liability, then the taxpayer must not only deposit the yearly normal cost of ongoing pension funding, but somehow amortize this $6.2 billion. If an acceptable amortization schedule is 10 years, then the taxpayer must cough up $620 million each year for 10 years just to retire this shortage. Let me repeat that. $620 million additional taxes that the State of Hawaii must collect each year to retire that liability. Add the $10 billion of unfunded healthcare liability and we're talking an additional $1 billion a year to that $620 million.

This is a huge problem. And it was never debated during the past election cycle. Not to find fault, but to find solutions. It's also noteworthy that the unions in California are pressuring their elected officials to continue paying the entitlements that they're legally entitled to. Like the people of Hawaii, they want benefits but don't want to pay for them.

Our kupunas end up as the big losers. Most will not move to another state so they have to continue to pay Hawaii taxes. The government will be pressured to increase social services, financial aid and it appears that our elected officials will readily comply. Private investments will leave Hawaii and businesses will be called upon to pay more in taxes. When unemployment insurance costs go from $65 to $1,000, companies would be less inclined to hire more people. When health insurance costs go from $900 a month to $1,300 a month per employee, companies not only will curtail hiring, but may lay off employees.

Theoretically, this means there will be more people who have free time to volunteer. Hopefully it'll be in the area of assisting our kupunas. Thus far, this has not happened. Volunteering presents the volunteer with opportunities to show others his/her work ethics, discipline, talent and abilities. This could convert into fulltime employment.

Government Stealing our Kupuna's wealth

GOVERNMENT MANIPULATION OF OUR WEALTH


Our government has the ability to steal from each citizen without the usual technique of taxing goods and services. They simply manipulate the currency. And they have been doing this for decades when they created the Federal Reserve and de-coupled the dollar from gold. If you look at your currency, it no longer says "SILVER CERTIFICATE" which means they have to pay you in silver upon demand. Instead, it says, "Federal Reserve Note" which means it's an IOU issued by the government.

Money has certain functions. First, is that it stores value. If you have a car, but have no use for it, you can sell it, thus converting it into cash which stores the value of the car you no longer own. The second function is that it is a medium of exchange. If you have watermelons and want oranges, but the person who has oranges doesn't want watermelons, then you can sell your goods (convert into money) and you can exchange your money for the desired oranges. The third function is that it serves as a measurement or unit of account or value. If you have something that's worth $10 and someone else has something that's worth $20, the monetary value can measure who has more wealth.

When the government issues more money to pay for its debt, they have increased the supply of money in the system. This means that the dollar is no longer as valuable as it was because the measuring tool has changed. Like a yardstick that is no longer 3 feet in length. That's why interest rates go down when the government floods the system with money. Money is no longer as desirable so the cost (interest rates) of the money goes down. It's not your real estate that goes up in value, it's the dollar that has been manipulated downward.

Here are the rules of investing. If you expect inflation (more money into system), you invest in real estate, commodities and oil. Because the dollar is plentiful, it is worth less than these items. Some would argue that the hard assets liked commodities, rare coins, art, etc. represent real wealth against an unstable currency that's manipulated by politicians. One can transfer $2 million in value in a rolled up painting from one country to another, which can't be done with real estate.

If you expect deflation (falling prices) then you invest your money in monetary vehicles like bonds. This allows you to loan your money to someone who has to repay you with dollars that will be worth more than the dollars you loan them, even at 0% interest rates.

If, on the other hand, you have a healthy economy with growth, then equities (stocks) would be where your money would earn the most.

The problem is that our government has manipulated our money supply and debt and that no one trusts the dollar. When that happens, the currency will collapse. The Roman Empire was faced with such a large government bureaucracy that they had to punch holes in their gold coins to be able to make and circulate more coins. Once that bubble burst, the Empire fell.

Right now, Congress is contemplating extending the Bush tax cuts. If they don't extend it for everyone, then people with unrealized gains will sell their stocks, properties, etc. to realize their gains in 2010 at a lower tax rate. This may cause the market to crash. Further, because they've extended unemployment compensation and installed a huge healthcare plan, businesses won't be hiring new employees, thus stunting economic growth. A further extension of unemployment benefits increases the unemployment taxes businesses have to pay for future employees.

Investors need to find places for their wealth. Many have stored their wealth in gold. If you believe that the Hawaii retirement system and health plans for the public employees are heading for bankruptcy, you need to anticipate rising taxes because the voters overwhelmingly voted for the very politicians who caused this problem. You need to stop becoming a Hawaii taxpayer. If you have investments in Hawaii real estate, the government will raise the excise taxes and the property taxes to try to make up for the shortfalls in the public employee retirement and healthcare system.
http://malamakupuna.blogspot.com/2010/10/retirees-under-hawaii-employee.html

If you have business income from other states, incorporate your company in a state like Nevada where there are no income taxes. And develop and place as many employees there as you reasonably can. Stay away from states with a confiscatory attitude towards the private sector. You may even wish to explore stable countries like Australia where capitalism is still revered.

Where does this leave our kupunas? Most kupunas are on fixed income like Social Security and a fixed pension from their employment. With the issuance of another $600 billion of debt the other week, that fixed dollar income will be worth less. It will buy fewer goods and services. Prices of food and drugs will go up. And they will have to get by with less. They cannot go back to work to make up for the shortages.

While the politicians and the political operatives manipulate us and our economy, we, the people at the ground level have to step up our volunteering to help these kupunas live their final days with some dignity.

REVERSE MORTGAGES FOR KUPUNAS

REVERSE MORTGAGES FOR KUPUNAS?


I don't have a financial practice anymore, but since I am closer to the grave than most folks, I often get calls and inquiries from people asking about reverse mortgages. This is a financial tool that can be very helpful to an elderly person under certain circumstances. Note that I am not offering financial advice or consultation but am merely offering some insight on what a reverse mortgage is.

Many mortgage brokers offer reverse mortgages without knowing the circumstances of the individual. As do many movie stars, T.V. stars and the cousins and well-meaning relatives who offer unsolicited advice.
A reverse mortgage is a method where a homeowner uses some of the equity in the home and makes no payments for the cash received from the mortgage. Let's say the house is worth $550,000 and there is a $200,000 mortgage on the property and the homeowner is 70 years old. Roughly, $144,000 is available to the homeowner after paying off the $200,000 mortgage balance.

The homeowner has about 3 options on the $144,000. He may take it as a lump sum, as a monthly payment for life for as long as he lives in the home or keep it as a line of credit in case of emergencies. No monthly payments are required, however, the amounts the homeowner receives, plus annual interest is added to the loan balance. This balance is paid after the homeowner dies or sells the home. The homeowner or heirs will never owe more than what the home is worth no matter how many payments are received or how high the interest rates go. This means that any amount owed above the market value of the home is "non-recourse" and the lender doesn't have any legal recourse to anything other than the house.

The reason this can be done is because in the example provided, they're only lending $344,000 ($144,000 plus the $200,000 mortgage to be paid off) on a house worth $550,000. As interest and fees are added each year, it'll take a while before the market value of $550,000 is reached. They also believe that the property will appreciate in value over the years.

Reverse mortgages generally have higher closing costs than regular mortgages. The loan origination fees are higher, mortgage insurance is required and the interest rates are adjustable although some lenders are offering fixed-rate interest. Currently, they use the interest rate of the 1 year T-Bill, LIBOR index or 1 year CMT. Other costs for the FHA- Insured Home Equity Conversion Mortgage are Title Insurance costs, Title Attorney and Recording fees, Property Appraisal and survey costs. There is also a monthly service charge (about $30) added to the balance of the loan. If the senior depends on welfare and Medicaid, the reverse mortgage payment may be factored in when eligibility tests are made for welfare qualification.

Qualifying is generally easy since credit scores and income are not part of the equation. The senior must be 62 years old, own the home and be living in the home as a primary residence. The amounts available depends on the age, interest rates and the value of the home. Currently, the maximum value of the home is capped at $625,000 until the end of 2010. In other words, calculations on how much one can borrow is based on the lesser of the market value of the home or $625,000.

If you use a reverse mortgage to increase your standard of living, you would be wasting a tool that is intended for emergency situations, such as needing resources for medical care as you age. If you use the cash to give money to your children or grandchildren, you will not have this tool left to take care of yourself. My experience with elders is that once the younger generation gets the elderly person's assets, the elderly is left to fend for himself. Harsh, but true in 50% of the situations I've dealt with.

Many seniors are going into reverse mortgages so they can take trips to Las Vegas or around the world. Again, this is, in my opinion, not what reverse mortgages ought to be used for. Further, as is noted in the example I provided, one only gets to use a small portion of one's equity with a reverse mortgage. It may be better to move to a smaller place and get the full equity out of one's property. Because the interest is not paid, it is compounded annually so the longer the kupuna lives, the more likely that the entire home equity will be depleted.

Fortunately, the kupuna is required to attend counseling sessions by an independent HUD (Housing and Urban Development) counselor prior to receiving a reverse mortgage. Many of these counselors only know the details of the reverse mortgage so I would recommend that the kupuna also seek the advice of a financial planner who does not deal with reverse mortgages so there is no conflict of interest or ethical violation. Such a planner can determine whether the program fits the kupuna's financial situation.