Manage Money and Income Sucessfully

Exchange traded funds (ETFs) are CEFs that own a set group of stocks, often those in an index such as the S&P 500 or the Dow Jones utilities. Most ETFs are also convertible into the underlying shares such that they always trade at or near NAV. The main issue with ETFs is that they only own the overpriced, overowned stocks in the index. When the last buyer is in for overpriced stocks, returns are mediocre at best and volatility increases.

However, ETFs, unlike index funds, are traded all day long. Overconfident investors will trade them, running up commissions and spreads. Internet companies now offer, for a fee, selected groups of individual stocks. These preset stock portfolios are tailored to attract a wide range of investor whims and are designed to give the investor the illusion of control.

With a mutual fund you are taxed on gains you did not incur and can lose value because other investors panic and sell. Internet portfolios allow you to control your gains and do not subject you to the whims of fund managers and fund management companies. Unfortunately, as a group, most of these portfolios will have the same swings as the market. These portfolios are full of the same overowned, overbought stocks that fill mutual funds. When the last buyer is in, return will be mediocre and volatility high. A mutual fund panic will cause your portfolio to drop just as it would if you owned a mutual fund. Powerlessness can lead to anxiety, numbness, depression, and freefloating fears as with any stock product.

It would seem that an effective tax policy is part of the foundation on which prosperity must rest. A wise state invests in security, infrastructure, education, public health, and even basic research when they are value-adding propositions. Taxes are needed to finance these investments. But it is not only the amount of taxes extracted from the economy but how they are extracted that counts, for the tax code will play an enormous role in investment decisions, and not all tax codes favor value creation.

The state also has the potential to destroy economic value through unwise expenditures. Indeed, because economics is only one criterion in developing public policy, a state will always do some of both. Let us consider some of the issues.

Broadly speaking, governments derive taxes from consumption, income, and wealth. These taxes can be leveled on individuals or on organizations. Generally, all of these sources are taxed in some way.

One of the most fundamental tax issues is whether to rely first on consumption taxes or on income and wealth taxes. The choice is of great importance to investors, who would be motivated to invest more if taxes were lighter at the income or wealth level and primarily levied at the point of consumption. Increased funds available for investment would also reduce the cost of capital and thus the ability of projects to create value.

Typical consumption taxes include sales taxes and the valueadded tax (VAT) prevalent in Europe. Consumption taxes are, however, inherently regressive, falling relatively heavily on the poor. Hence, U.S. society in effect creates incentives to consume and relative disincentives to invest by favoring personal income taxes as its primary source of tax collection.

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