Taxes, and Tails and Wagging of Dogs

Had a great conversation with a new friend last night. It is a relatively common conversation in my world. I know about XYZ and want to start a business, but don’t know anything about business. So what do I do?


I love these conversations because it is always at this beginning stage that all the best ideas, passion and creativity happen. It is so much FUN to be invited to be a small part of the process.


They always come with varying levels of being overwhelmed. They may have read about the difference between corporations and LLCs. They know someone who has done payroll and talked with that guy about how to do that. They know they don’t want to get screwed on taxes, but don’t know what they might owe or when or how.


This is my other favorite part of this stage. Because I get to take all that worry off of them. Not because I do it all for them (which I can do), but because 9 times out of 10, I tell them:


“Have you started making any money yet?”


“Then don’t worry about”


We way too often let the tax tail wag the dog. At this stage of a business, focus on refining your offering. Focus on getting that offering in front of people and getting them to buy. Focus on refining the offering as you gather intelligence on what people like and don’t like.


Because here is a secret: If you don’t make any money, taxes wont be a problem.


So many people get so focused on not paying any taxes, they make dumb decisions. I constantly have to remind people: Tax rates are marginal. This means that, even at a 45% tax rate, in many cases you can end up with more money if you just pay the taxes and keep what is left. Never spend money to avoid taxes. Because spending isn’t marginal. You loose 100% of the dollars you spend. You will likely only lose 30% to 40% on taxes.


So, don’t let the tax tail wag the dog!


LIBOR and a Reality Check

A friend asked me what I thought about the LIBOR scandal and specifically, the Tim Geithner quote saying that he had sent “a detailed memo to regulators expressing his concern” some time before the actual scandal came to light. I thought the rest of the world might enjoy hearing my response:


I have a couple of thoughts:

On this article specifically, yes this makes perfect sense. Everyone knew that the system was corrupted, or at least corruptible (everyone meaning regulators and governmenty people in the know) but so much was based on it that no one wanted to do anything. In that situation, they likely believed that shaking confidence in the number would likely do as much or more damage than the actual manipulation. So they send “memos” to each other that they can point to when it blows up, which “proves” they were the good guy.

That being said, LIBOR was never designed to be a metric that we base almost all fixed income things on. What the hell does a mortgage in Argentina have to do with what rate London Bankers are offering each other? It is an old system that created decades ago and the designers never dreamed it would be used this way.

No one thought far enough ahead. It seemed like as good a thing as any to use at the time, so they did. And then one day, they woke up and realized they had built a house of cards ¬†and said “well shit, no one sneeze”.


Well, someone sneezed.


But it illustrates what is something that I tell clients all the time. There are powers that be out there that wield WAY more influence than us mere mortals could ever understand, let alone control. I do not mean in a conspiracy theory kind of way. I just mean that our world is very, very large. And very, very, complex. And the wealth that any one individual (the 1% aside) is basically worth nothing overall. So thinking that you are “in the know” and have the scoop, and aren’t going to get taken for a ride is crap. If George Soros or Warren Buffet want to flatten the price of gold, they can do that. You, however, simply don’t wield that kind of influence. And this is probably good. Our world has built so much wealth by getting very specialized in what we do. So much so, that it is unreasonable to think that you can understand all the ins and outs of everything. If every banker could fix their own car, mechanics wouldn’t be worth much. If every mechanic can do their own investment analysis, bankers wouldn’t be worth much. But they both agree to specialize and understand that, by relying on the other person, they can both produce more value (which means become wealthier).

So all you can do is invest smart, diversify, work hard, and you have a little faith. Trust that there are experts out there who know what they are doing. And that you cannot do everything yourself.

Also, at the end of the day, manipulating LIBOR is still just a shell game. Those who have capital are making money on it. Those that can create value will be compensated for that value. Those that consume less value than they produce will become wealthier. And those rules NEVER change. So blame the capitalists pigs if you want, but at the end of the day, if you are in the same lousy place as you were yesterday, it is (99% of the time) NOT anyone elses’ fault but yours.