In a growing economy, equity can still be threatened. Home equity does not deserve the same confidence as FDIC insured CDs. Neighborhoods can change, hurting home values. Residential neighborhoods become commercial, family neighborhoods get drug infested, single family homes are cut up and become multifamily units eliminating all the parking and reducing values. Soon there will be a massive exodus from family neighborhoods as baby boomers retire and move to retirement communities. Interest rate changes also threaten home equity. Higher mortgage rates make homes less affordable, which hurts home values. When homeowners hear or read about the Federal Reserve, most wonder how this will affect the value of their home. Higher real estate taxes also hurt home values.
Home equity is often disappointing as a savings vehicle. It lacks the utility of other savings systems. Unmanageability is a common occurrence. Just when you need your savings the most, home equity is likely to fail you. Laid-off workers often find they cannot tap their home equity with a second mortgage or refinance because they have no income to support higher mortgage payments. Retirees are often disappointed to find that the sale of their home after Realtor commissions and expenses leaves a much smaller nest egg than hoped for. Reverse mortgages often produce insufficient income for retiree living expenses. Savers relying on home equity must be prepared for sadness and grieving if their retirement plans are unreachable.
Though there are emotional quirks with true saving instruments, the frequency of trauma is low. Saving instruments are for investors who value predictability and are not troubled by jealousy, resentment, or regret when other investments produce spectacular returns and make headlines. Longterm returns on savings instruments are lower than for other investment classes. For those who value peace of mind, the price of lost returns is more than reasonable.
Savings instruments are also good for investors who do not want to spend time on their investments. Buy and ignore is a good philosophy for savers. Someone who needs to be out of the country for five years should leave her money in savings instruments. Blind neglect is often advocated for stocks, but in fact, there are too many five-year periods when stocks lose half their value.
Picking Treasury bonds requires a few hours each year. Higher yields can be found in agency issues and older bonds. Call provisions must be evaluated. The time requirements are minimal.
Investors looking for action should look elsewhere. If you enjoy lots of research, or want to interact with people such as tenants, other investors, or money managers, savings instruments are not for you. While you can create excitement trading bonds, you cannot create profits. High-energy investors should stay clear. Disappointment will follow.
Treasury bonds are also the only insurance against deflation. Savers who worry that current Japanese deflation may be exported to the United States or that there will be a return to deflation of the 1930s will feel safe here. Savers concerned with inflation will be comfortable with TIPs and money market funds.
Competitive considerations have heavy and pervasive impacts on state policies. Concerns over non-competitive tax burdens translate into pressures to keep spending, and thus taxes, low. Concern over the effects of taxes on economically attractive, mobile taxpayers encourages states to minimize taxes on footloose firms, high-income households, and affluent retirees. Competition for economic development motivates huge outlays for industrial parks, sports stadiums, convention centers, highways, and other programs.
The Economic War Among The States: State officials are in constant economic competition with each other. Candidates for state offices campaign on platforms including promises of enhancing their state’s economic development — bringing more jobs, higher incomes, and fiscal dividends for state and local governments. They point with pride to signs of economic success such as statistics on increased employment and examples of new plants. They seek track records including not losing existing employers to the lures of other states, encouraging the growth of existing firms, and drawing new employers to their state. Their challengers leap on signs of failure such as high unemployment, plant closings, layoffs, and even losses of
professional sports teams. Business groups lobby states to eliminate signs of what they call a “poor business climate.”
The Competitive Environment: Interstate competition is based in the reality of the open economy which the U.S. Constitution guarantees to citizens of every state. It protects the rights of individuals to move to any state and enjoy the privileges of long-time residents. It permits firms from any state to sell in every state, free from tariffs and quotas, and subject to no higher taxes nor more stringent regulations than in-state firms. It permits firms to establish new plants anywhere and to abandon a state entirely for any reason — including dissatisfaction with policies of that state. Attempts by states to shelter their markets from interstate competition are consistently overturned by federal courts as violations of the Commerce Clause of the Constitution.
Changes in technology and the nation’s economy have been increasing the impact of competitive factors on state policies and are likely to continue to do so. Reductions in the weight-to-value ratio of goods, in transportation costs and speed, and in communications cost have liberated producers from the need to be in close proximity to customers. Whole industries — beer, potato chips, dairy products, hardware vendors, and banks — have been shifting from locally based businesses to national firms. Deregulation of public utilities is reducing the ability of state and local governments to continue policies which have imposed disproportionate taxes on them.
There is strong evidence that decisions of firms to locate, expand, and remain in particular states are heavily influenced by state policies including state and local tax levels. Firms planning to establish new plants or contemplating moves routinely solicit competitive offers from states. There are many examples of firms relocating or deciding to put their new plants in different states because of home-state taxes they consider too high.
Nearly all states respond to these solicitations for offers to draw new plants, often with tax concessions tailored to the soliciting firm. But offering such concessions only to firms considering relocation produces criticisms of state officials for not pursuing even-handed policies. More important, it induces all footloose firms to consider moves if for no other reason than to induce concessions from home states.
The impact of interstate competition has been apparent in tax policy perceived as affecting firms’ location decisions. In legislative sessions in 1997 and each of the two previous years, at least 20 states passed legislation to reduce business taxes in some way in order to encourage economic development. In addition, nearly all states allow local officials to offer concessions reducing or eliminating local taxes. The changes in Tennessee taxes shown in the Tennessee Department Of Revenue paper Business Taxes: Current Structure And Options For Change are typical of the kinds of changes being made by most states.
Successive moves of this type suggest that taxation of footloose firms, particularly those in manufacturing, is gradually being reduced. State policies have been moving in the direction of ending: (1) sales taxes on equipment and supplies using in constructing new facilities, (2) property taxes on manufacturers’ inventories, machinery, and equipment, (3) for limited times, property taxes on new plants and expansions, and (4) corporate profit taxes associated with out-of-state sales. In addition, states are enacting special tax concessions for particular industries such as oil and gas exploration and production, processing of agricultural commodities, aircraft maintenance, banking, and insurance.
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