Bank Assets As a Percentage of GDP

And you thought the American banks were too big to fail!

RRSPs Are a Government Trap

Tax season. Ugh. Around this time of year, you always get a lot of people chattering about how RRSPs are totally awesome.

Mises wrote that a fundamental category of human action is preferring goods now to goods later. That is why present goods cannot be traded for future goods unless they are discounted (hence the phenomenon of interest).

The government relies on present-orientation when it comes to tax-deferred retirement accounts like RRSPs. The government reduces the taxpayer’s suffering now — tax deferral — for the sake of a nebulous future benefits that may not materialize. As the saver puts more and more money into the account, the reluctance to withdraw the funds grows. Hence, RRSPs are a trap.

Everyone hopes they will be in a lower tax bracket when they withdraw from their RRSP. They always assume tax rates won’t be higher, and inflation will not push them into higher tax brackets. They assume won’t be victims of capital markets gone bad.

Think about what happens if there is an emergency while the markets are being hammered. Your assets will drop significantly in value, and yet if you are forced to sell them to raise money in a situation where you are already in a high tax bracket, you then you have to pay the taxes on your accrued capital gains/whatever at the same time. It would be pretty painful.

The government gets a sweet deal by having people siphon money into these tax-deferral (not tax-free) plans:

  • Annual reports to CRA about what you own
  • Regulatory control over what is an authorized investment
  • A massive supply of assets that can nationalized in a serious financial crisis
  • The government can change the tax code so you’ll be in a higher tax bracket than expected when you withdraw
  • Inflation will push you into higher brackets as time goes on
  • It becomes harder to escape the more money you put into it

Such accounts also drive greater levels of resources into government-approved investments. The over-investment this fosters will bring and even harsher day of reckoning: when a significant number of people decide to retire and start eating into their retirement accounts, the prices on these assets will fall quickly. There will not be enough bids to cover the offers at those high prices. Younger savers will fear long term implications and withdraw early. There will be too much risk and the entire RRSP system will be exposed as a dangerous scam.

Some will deny the possibility that the government would ever confiscate the assets in retirement accounts. But why wouldn’t they? There is ample historical precedent for confiscation. Heck, the United States nationalized its mortgage industry to “save the economy” just a few years ago. Why wouldn’t Western democracies do so with retirement accounts, under the pretense of protecting citizens’ hard-earned savings?

Of course, the confiscation would be sneaky. In a major crisis, retirement accounts would be devastated. The high (nominal) gains for long-term savers would diminish. A government would declare that the safety of people’s retirement cannot be left to the heartless whims of the market. Therefore, the government would nationalize those accounts and replace the assets with “loonie bonds” or some such thing. The bonds would have a “guaranteed” return of, say, 3%.

Those bonds would not be marketable and represent nothing more than an accounting trick by the government. Since the government would be broke, the retirement accounts would have to be covered with general revenues. It would simply be a huge transfer of wealth from younger people to older people. This completely distorts the natural state of society, where older people help the younger people, because they have more accumulated wealth.

Tax-deferral can be useful, but it is not risk-free. It is not even that favorable compared to the non-registered alternative. Your capital gains outside of the RRSP are taxed at 50% of your marginal rate. You can also offset capital gains with capital losses, which is not possible in the RRSP. You can also consider the option of selling losers at the end of the year to offset gains, and if they are still good investments, just buy them back after time frame required by the superficial loss rule.

A TFSA is a much better saving tool. You pay no tax on your returns (but you can’t offset with losses).

CONCLUSION

Do you trust the government? If so, then maybe the RRSP is right for you. If you lack such trust, then be careful about dumping piles of money into one. You’ll probably be regret it someday. Take responsibility for your after-tax income and don’t delude yourself into thinking the government is trying to do you a favor.

Harper: Free Trade is a Tax Break for China

Harper was criticized the other day for wanting to increase taxes on various imported consumer goods.

There is no defense for raising taxes ever. This is even more important when Canada will be soon in recession. So what is Harper thinking? He rightly pointed out that the Liberals had voted against budgets in which there were some tiny tax cuts. Okay, sure, the Liberals lack any principled objection to higher taxes. What was his rebuttal to their criticism on the tariff issue?

“What the Liberal Party seems to stand for, Mr. Speaker, is that somehow we should give tax breaks to emerging economies like China.”

OMG, my brain just exploded from the unbelievable stupidity of that statement. I love a good cheap shot at a Canadian political party as much as the next guy, but Harper’s statement is just dumb.

So not taxing imports is a tax break to the countries from which we are buying those imports. So a free trade policy is a tax break for our trading partners.

That is incoherent, protectionist nonsense. First of all, the importer pays the tax, not the exporter. So China is not getting the tax break, per se. It is the one importing Chinese stuff.

But then this is kind of like saying it’s a “tax break” if the government taxes anything less than 100% of your income. The meaning of “tax break” is clearly being twisted. A “tax break” is meant to be a means of reducing a tax liability that already exists. The absence of a tax is not a tax break. Adding new taxes is not the same as taking away tax breaks. The underlying philosophy revealed in Harper’s words is that the government rightfully owns everyone else’s wealth, and letting people keep anything is a tax break. The whole notion is economically utterly perverse.

The case against protectionism is logically irrefutable. Harper, like virtually all politicians, is a mercantilist who thinks protectionism is good (for his friends), meaning he is no ally of capitalism and free trade. He is a classic Canadian crony prime minister.

— Read more at CBC News. —

Ron Paul in Calgary

Last Friday, I attended the Ron Paul speech at the “Making Alberta Safe for Capitalism” summit.  This was at the Westin Ballroom in downtown Calgary. I was among approximately 300 attendees, which included financial professionals, publishers, IT nerds, engineers, students, neocons, and more.

I would like to note how this attracted virtually NO media attention. I do not think there is any “conspiracy” here — rather, it is simply due to Ralph Klein’s memorial service being held at the same time. We all know how the media loves to fill its time with the glorification dead politicians whenever the opportunity presents itself. This week, they’ve got Thatcher.

Besides, Ron Paul’s ideas make Canadians uncomfortable. Most people don’t want to talk about such things.

Ron Paul’s speech was basically what you would expect if you’ve been following him for the last few years. I’ve been watching Ron Paul’s political career since 1998, so I was very familiar with all the themes: personal responsibility, free markets, small government, anti-war, and anti-central banking. Still, it was great to pay respects to someone who is more than just an honorable statesman (a contradiction in terms when applied to anyone else), but a man whose efforts have done more for the liberty movement than anyone else in the modern era.

Having retired from politics, this was Ron Paul without any filter that might have previously been imposed by the realities of being in political office. Yet since his message has always been fundamentally radical, there was no difference with post-politics Ron Paul. The message is just as unfavorable to economic, social, and imperial intervention as ever.

At various points throughout the speech, I would look around to gauge the response to certain statements. How delightful to see various attending neocons squirm uneasily when Paul declared there should be no income tax. Some folks scowled at the suggestion to replace government welfare entirely with private charity. Otherwise, the ideas of less spending, less tax, less regulation, and more civil liberties were received favorably. Paul age and manner makes is a kind, wise grandfatherly figure — part of his great success is due to his ability to convey radical arguments in favor of liberty while making them seem completely non-controversial.

The biggest opportunity that was missed in Dr Paul’s speech was HEALTHCARE. If there is a sacred cow in Canadian politics, it’s definitely government healthcare. Without a doubt, government healthcare is a disaster, and Canadians need to learn why it will always be awful regardless of the huge piles of money thrown at it. Unfortunately, healthcare was not covered at all in Dr Paul’s remarks. Too bad. Huge missed opportunity, I think.

He is a medical doctor and an economist who can speak with authority on the failings of public healthcare. He is also old enough to speak about American healthcare system before the government became heavily involved. Before Medicaid, Medicare, the HMO Act of ’73, and so on, there was relatively little government intervention with the provision of healthcare. Basic medical services were cheap and plentiful, and a greater portion of the population had health insurance compared with now. The audience would have greatly benefited from hearing his insights on this subject. He has effectively explained the necessity of free markets in medical care — it is a message Canadians desperately need to hear from somewhere. Virtually no one will touch the issue of public healthcare in this country. We will all be worse off as long as this condition persists.

I would have also liked to hear more war-related remarks. Essentially, anything that applies to the US wasting lives and money on Afghanistan applies to Canada as well. Paul spoke about Iraq more than Afghanistan — which is fine in and of itself, but Canada was not seriously involved in Iraq. Our participation in Afghanistan is another story. Sadly, Afghanistan is an issue that people barely seem to care much about. If they do, it’s because they are dumb enough to think we have Canadian forces there “fighting for our freedom.” Yuck. The lack of interest is even more critical now, because Obama has declared he is “bringing the troops home” in 2014. This is typical government strategy: declare “victory!” and suddenly no one cares anymore. Just like Iraq, where there was never any “victory”, and as I write this the country continues tearing itself apart.

Ron Paul’s speech included a few “fanservice” parts for the Calgarian audience:

He said, “Ralph Klein sounds like a guy I might have liked.” Fair enough, given the memorial was that day, and Klein actually did cut spending at one point.  So that’s cool, whether or not Klein was a principled friend of liberty.

He also gave his support to the Keystone XL — with the important qualification that one can get the permission of property owners, the government should not stand in the way of pipeline construction. This is an rather critical proviso, because in reality pipeline construction does involve government takings/expropriations. Remember: in Canada, the Crown owns all the land as a matter of law.

Anyone who attended this event specifically for Ron Paul could be described as “cutting-edge.” Canadians are not generally ready for the radical Paulian message. For many Americans, there is the emotional connection to ideas of independence, revolution and decentralization, even these are not embraced in practice. The Paulian message can get its hooks in that. For Canadians, the state is endlessly glorified in subtle and not-so-subtle ways. There is no element within our culture that reinforces skepticism about state power. The closest thing to this is Albertans’ memories of the NEP, but that is a regional sentiment and it is being gradually overwhelmed with the pleas for more government.

I hope that the mere fact that Ron Paul has visited Canada to give pro-capitalism speeches indicates that there is a growing audience for the message of liberty in this country. Just as the 20th century demonstrated communism was a lie, the 21st century will show us that democracy is a lie. Democracy’s death throes will be earth-shattering. Liberty’s natural elite must spread and shine the light through dark times, so that a better age may yet emerge.

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