What Grandad taught me about progressive taxes


(The photo above is of one of the machines my grandfather ran in his machine shop.)

Advice from a one-eyed, eighth-grade educated Entrepreneur

In 1976 my grandfather decided to retire at age 55.  He was at the top of his game and had a couple of good business ventures rolling along and quite a few employees.  I remember the day he made this decision, because he agonized over it.  He sat at his office desk for a while (which was in the kitchen).  Then he went into the downstairs bathroom for a while longer.  This is usually where he took/made most of his phone calls, because it was the only semi-quiet, private place in the house.

When he emerged, he announced that he was done working.  He made this decision based on taxes (at the advice of his lawyer and accountant).

Me, my Grandfather and my sister, right around the time my grandfather decided to retire.

Me, my Grandfather and my sister, right around the time my grandfather decided to retire.

This was at the end of the Gerald Ford Presidency and we were heading into the Jimmy Carter years.  To understand his decision, you need to understand the tax structure of the time.  I've attached a quick snapshot of tax rates at various levels of income showing rates in both 1976 and in 2013 below for your convenience.

Income tax rates

CHART NOTES: This tax chart doesn't start showing the rates for 2013 until an income of $17K is achieved. That is because there is no rate below that level. To adjust for inflation, a 1976 dollar is worth $4.23 dollars today, or more simply put, 423% inflation since those days. So my Grandfather would have been considering quitting at a income rate of around $80K annually, by today's numbers.

As you can see, the rates are much higher in 1976, than they are today.  And at that time, with Carter about to enter office, they were predicted to go higher.  Does this seem like a situation that we might be presently re-entering?

My Grandfather told me, that when he looked at his businesses, and compared them to the progressive tax rates of the day, he would have had to make SUBSTANCIAL REINVESTMENT into his business, in order to just stay at the same level of income, or even to grow a little bit.

Taking the route of reinvestment, substancially increased his risks.  More payroll.  More expenses.  More logistics. etc.  So instead, he decided to cut his risks, and take advantage of the opportunity that the present political climate was anticipated to produce: high interest rates.

So he chose to - instead of reinvest and increase his risk - "cash out" and invested the money in far less risky investments (like utilities) and just let the interest rates, produce for him a very livable wage, without the risk.

Here is a graph of the historical prime rate, so you can see, that he played it right, and realized the returns he anticipated without the risks.

Historical Prime Rate - The Carter into Reagan years produced historically high rates.

So good for him, right?  He made out.  Big deal.

Well, I only wrote this because my grandfather had an 8th grade education, and was a jack of all trades, that used a very good work ethic (and kind of a tyrant personality) to work his way into a small business that could have gone on for years, had the politics of the day, not convinced him that a better path for his family, was to quit working (and quit being an employer).

You see, even this very simple, uneducated, one-eyed man, could see the writing on the wall.  Why risk it all, and bust your ass, if your politicians are basically making a situation where they will paracitically increase their take and suck off your extra work?  And if the interest rates are going to grow at insane rates, why not just sit back and let them work for you?

So translate this to today.

Americans are presently considering electing people to office in 2016 that have VERY PROGRESSIVE tax structures in mind.  They need these taxes to support an ever more socialistic nation.  

Presently the Prime rate is as close to zero as it can possibly be (without actually being zero).  This means that the upside potential is exclusive.  So what does that mean?  Can you see where this is heading?

To me, it means that any monkey with a business should be considering doing what my Grandfather did.

  • Cut jobs

  • Liquidate

  • Cash out - and just relax

And if they do: what does the future of employment look like it the United States?

Do you think minimum wage will INCREASE, while jobs decrease?

Do you think wages in general will increase, while jobs decrease?

Do you want to work in an ecomomy where only giant corporations, or government jobs are your only choice?

I think this is a dangerous road we are travelling.  One that other countries have tried (and failed).  I hope that others will consider the route my grandfather took, when deciding on our future leaders and economic model for the future.

To me, it's as clear as the vision from my grandfathers one good eye.

 

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