The world’s most important job, 2011

March 16, 2011

Movie director.

Teacher is near the bottom. At the bottom, for the 6000th year in a row? Mother.

And he plays a mean air accordion, too

Meet the wage-earning world’s most crucial person, James Cameron. What he does means vastly more than what any 5th-grade home room warden ever has done or ever will do. According to Variety, Cameron made $257 million last year. That dwarfs the highest salary earned by anyone on Wall Street (Hugh “Skip” McGee III*, who drew $25 million for presiding over Lehman’s destruction), the highest salary earned by an athlete (Tiger Woods, $91 million), and the highest salary earned by an athlete who doesn’t have to fork over half of it under the biggest divorce settlement in the history of the universe (Phil Mickelson, $66 million. Mickelson demonstrates the rule, as always – encase your baby’s right hand in plaster until he learns how to punch, twirl a drumstick, field a grounder, strum a guitar, throw a football, shoot a free throw, sign a death warrant, masturbate and use scissors with the left.)

Cameron produced Avatar, which your blogger would rather visit the dentist than sit through, but that’s not the point. Tens of millions of others not only have the opposite opinion, but are willing to put money behind it. Cameron has the ability to turn a substantial profit given even gigantic expenses (Avatar apparently cost $230 million to make, creating a hole that perhaps no one else had the acumen to dig out of.) Is that more important than teaching a child to spell and calculate square roots, assuming the teacher knows how to do both herself?
Yes.

It doesn’t matter that movies are mindless entertainment while literacy and numeracy are vital skills. If your profession entails doing what tens of millions of others can do – keeping juveniles occupied for 6 hours a day while their parents appreciate the break from the misery that is child-rearing – you’re never going to get rich. You’re 99.9% certain never to get rich on salary regardless of what you do for a living, but that’s neither here nor there.

If you’re a teacher, you’re welcome to complain about the injustice of the salary structure. You can even whine to your union, and buy pencils and school supplies with your own money if you like. It’s not quite the equivalent of nailing Yourself to a crucifix and dying a painful death for mankind’s sins, but it’s close.

Hopefully we don’t need to state the irrelevant, but here it is anyway: as a person, James Cameron sounds like a nightmare. His next wife will be #6. He’s not satisfied being an atheist, but has to let everyone who’s listening know that he’s evolved to the point where what’s unknowable to him is thus unknowable to the universe. He’s one of the self-righteously indignant who expressed ceremonial displeasure with the presidency of George W. Bush, which in Cameron’s case entailed rescinding his application for United States citizenship. Why he didn’t apply for naturalization under the Nixon, Ford, Carter, Reagan, Bush Sr., Clinton or Obama administrations, you’d have to ask Cameron. Despite living in Canada for his first 17 years and spending the subsequent 39 in the United States, Cameron believes that any nominal national fealty he should feel should be toward a nation that he rejected – rather than the only one in which he could earn $257 million a year.

Good luck reaching him to bring this to his attention, given that he’s too busy working. And employing dozens, many of them at extremely comfortable salaries of their own. Those dozens, by the way, need to spend that money somewhere. And do. There are far more blue-collar people engaged in the occupation of building yachts than there are white-collar yacht owners. Cameron’s latest film grossed close to $3 billion worldwide. Few investments that large offer that great a return, and few investments that offer that great a return are that large. Cameron’s talents enable 20th Century Fox to turn a profit, expand its operations and hire more people. Shareholders of the studio’s parent company, News Corporation, watch their portfolios increase in value. News Corp’s rising stock price strengthens the values of the 401(k)s and IRAs that it’s a constituent of, meaning greater wealth for the myriad non-rich people who therefore each own a modest part of the company.

This isn’t just a curious story. It applies to the real world. Your world. How? If purely psychological rewards are what motivate you professionally, then fine. But if you think your life would be easier and enable you to enjoy more freedom if you had more money, it’s your obligation to do what you can to create lasting value.

*We didn’t make that up. That’s a real name, all of it. The ridiculous “Hugh”, the comically on-the-nose “”Skip””, and the Roman numeral qualifier, which is helpful for letting the country club staff distinguish Trey from Skip Sr., Skip Jr., and Skip IV.

**This article is featured in the Carnival of Wealth #31**

Filed Under: Capitalism, Entrepreneurship, Making Smart Choices Tagged With: , , , ,

Why the Self-Employed Are STILL Smarter Than You

January 7, 2011
Self-employed, Self-determination, Incorporate, Save Taxes, Make Money

Self-employed, kind of. Also he blinked when we asked permission to use the photo

This is an updated version of a post that ran on LenPenzo.com 11 months ago. We’re thinking of doing something similar every Friday, the argument being that a) of our 3 weekly posts, you probably pay the least attention to the Friday one and b) everyone else recycles content once in a while, so why not us? As it stands you’re still getting over 2000 words of freshness weekly. More importantly, we actually edit our stuff. Those 2000+ words are polished to a keen sheen before you get to read them. Otherwise, we’d be like that one chick who cranks out 20 blog posts a week and opens them with insight like “Thanksgiving is a great time to reconnect with family.”

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Who pays a greater share of his income in taxes – Warren Buffett, or his driver? (Actually, Buffett’s so eccentric he probably drives himself. In a 1970 LTD with 8 million miles on it.) Still, posing the question implies its answer. Details below.

Politicians may tout the virtues of our “progressive” tax system, but it doesn’t really favor the poor over the rich.

Nor does it favor the rich over the poor, not when 40% of federal tax receipts come from 1% of the population. Fairly or otherwise, the tax system favors the diligent over the unprepared. (As most things in life, so maybe the system is fair.) Specifically, the system favors independent businesspeople over salaried workers.

This topic requires a book-length explanation (such as the groundbreaking and heretical Control Your Cash), but to summarize, starting your own business lets you enjoy tax advantages wage slaves only dream of. Take two people in the same field, making like incomes, living in the same city (which means their costs of living should be similar), only one owns his own business and the other works for someone else. It’s eminently possible that the latter person’s tax bill is 9 times the former’s.

Declare your independence today, if your career lets you make a horizontal shift to entrepreneurship. If you’re an anesthesiologist, you can’t rent out an office and put up a sign that reads “Mepivacaine Administered Here—Happy Hour 4–7.”  But if you’re an accountant, real estate agent, home inspector, software engineer, attorney* or in any kind of creative profession, you can take advantage of complex tax laws.

This isn’t the kind of entrepreneurship that requires you to open a physical storefront and spend years building a customer base. These are changes you can make now that will immediately impact your bottom line.

I tried to go as long as I could without using the first-person pronoun, but my story illustrates the point. 5 years ago I was working for a decently-sized advertising agency as a senior copywriter, making somewhat more than the nation’s per capita income. One day I ran the numbers and realized I could make more money going out on my own.

I collected most of my new clients, other ad agencies, via word-of-mouth. But most importantly, I took on the very agency I’d left as a client. And charged them about 30% more than they paid me as an employee. There are two components to that: 1) they were underpaying me to begin with, but had to cough up once I exercised my leverage and threatened to walk and B) the daily rate they paid me after the switch was just for the services I rendered – nothing else. It included no employee benefits, no capital expenditures for a workstation, no space reserved for me at the office Christmas party (thank God), no food/clothing/transportation allowance, no 6.2% Federal Insurance Contributions Act tax, no unemployment insurance premium. The responsibility for all that now fell on me.

Which is wonderful. It meant that instead of my former employer enjoying all the possible tax deductions from my labor, I got to take advantage of them. My taxes got a little more complicated – I now had to keep more detailed records, and file quarterly instead of annually – but the benefits grossly outweighed the costs.

It’s easy to get started, but also easy to make mistakes. You don’t want to be a single proprietor. You want to found an S Corporation, a legal entity that protects you from creditors who are forbidden from coming after certain classifications of income. An S Corporation lets you separate your money between salary and capital gains, the latter of which is taxed at a lower rate.

Find a company that specializes in entity formation. It’ll cost maybe $400-500 for them to register you with the relevant state’s Secretary of State office. You don’t have to register in your home state, either. If you live in California or New York, you don’t want to—those states’ laws don’t protect you enough from creditors. Register in Delaware or Nevada or, failing that, your home state.

Once you incorporate it starts forcing you to think like a businessman. Your income will now be tabulated on IRS 1099 forms, rather than those infamous W-2s. As a practical matter, once you incorporate you’ll pay (correction: your company will pay) you a salary. What’s a reasonable amount to cover your annual living expenses— maybe $24,000? Then that’s what Employee #1, you, will receive and pay taxes on. After deductions, your effective tax rate on the salary will be close to 0.

But what about the rest of your company’s income? Legally speaking, the rest of the revenue your S Corporation takes in is not salary, but shareholder dividends. Which are taxed at a lower rate than salaries are. And you can now deduct all sorts of business expenses before calculating the net shareholder dividends you’ll pay taxes on. Go to IRS.gov and check out Form 2106. Your employer fills one of these out every time you go on a business trip, or eat a meal on company time, or buy anything related to your job. Your employer, not you, then enjoys the tax deduction.

(As for Warren Buffett’s driver, he probably makes around $80,000 a year, which would put him in the 25% bracket. Almost all of Warren Buffett’s income is in capital gains, and the highest long-term capital gains rate in the U.S. is 5 percentage points lower than the assistant’s marginal tax rate.)

*Leeches, all of you. Thanks for making the tax code so damn complicated in the first place. If not you, then your ilk.

**This post was featured in Tax Carnival #79: Filing season begins**

Filed Under: Capitalism, Economics, Education, Entrepreneurship, Finance, Net Worth Tagged With: , , ,

I’ll Shop At Trader Joe’s When I’m Dead

October 4, 2010

Everyday low prices

 

It’s hard to imagine that trying to save money while stocking your pantry can be taken as a social statement. But for some people, politics infuses everything.

Walmart is America’s biggest retailer, a weekly staple for tens of millions of consumers. But for several thousand others with a flair for being dramatic and uninformed, Walmart’s wide air-conditioned aisles are just a coal mine with too much fluorescent lighting. Add the inevitable truth that a low-price retailer will attract working-class customers (among plenty of upper-class customers), and for many, Walmart thus becomes Exhibit A in the Everything That’s Wrong With Unbridled Profit display.

Don’t fool yourself into thinking that you’re doing your microscopic part for the Gross Domestic Product by patronizing your local Korean mom-and-pop grocery instead and paying its comically high markups.

For the most part, corporatization is the ultimate result of Adam Smith’s division of labor. Not to go Economics 101 on you, but the gist of the dead Scotsman’s argument is that the best way for an economy to thrive is that everyone do what they’re best at. In the early days of motor vehicles, there were dozens of manufacturers – some with factories not much bigger than a 4-car garage. The manufacturers who figured out how to best cut costs without impacting quality were the ones that survived and flourished. That hired the most people. And whose descendants signed suicidal union contracts that eventually rendered said manufacturers limp, but that’s another story.

Objections to Walmart range from the preposterous to the starkly so. For instance:

a) “They pay slave wages.”

Working at Walmart is voluntary.

a1) “Yes, but they should still pay more.”

Again, voluntary. The biggest economic myth of our lifetimes is that a third party (the union boss, the Department of Labor sycophant, mommy) is entitled to have an opinion on an agreement between two principals – in this case, the employee and the employer. Walmart can offer its employees 4¢/hour if it wants. No applicant has to (or will) accept it.

Besides, you think Walmart’s smaller and less-successful competitors are showering their employees with gold doubloons and rides on the company jet?

Starting cashier wage ($)
Walmart9.66
Albertson’s9.28
Safeway8.89
A&P8.25
Kroger7.70
Piggly Wiggly7.30
Food Lion7.12

Numbers courtesy of PayScale.

b) “Disgusting people shop there.”

Yes, and only neurosurgeons who run ultramarathons shop at other grocery stores. Here’s an upscale lady waiting in line in the pharmacy at Smith’s.

Yes, that’s toilet paper hanging out of her butt. No, it’s unclear that it’s clean. Yes, hopefully it is. No, this doesn’t count as taking pictures of unsuspecting women for salacious reasons. She was the retail equivalent of a green flash – a fleeting phenomenon that a camera had to be quick to catch.

c) The consensus favorite, “They prey on people who don’t know any better.” Including yours truly, apparently.

Shop wherever you want: the very point of capitalism is that you have choices. $400 Cole Haans and $5 shower flip-flops serve the same purpose, as do a new Infiniti QX and a 1985 Hyundai Pony. The richer you are, the more options you have and the greater justification and rationalization there is for spending more.

We get disdainful looks from friends when the topic of willingly shopping at Walmart comes up. We respond that while we’re not poor, we’re not so rich that we can afford to have a grocery-buying philosophy that transcends price, selection, 24-hour convenience and freshness. Not coincidentally, paying a karmic premium is something that few truly rich people do. What, the generic 10-ounce can of cooking spray at Safeway lubricates a skillet that much better than the equivalent Walmart one? Or is it just the intangible feeling of knowing that the extra 19¢ you pay for the former will help provide an Ivy League education for the Safeway employees’ kids, when divided among 197,000 of them?

If you’ve been conditioned to consider Walmart as emblematic of everything evil, a logically sound 800-word screed isn’t going to change your mind. Meanwhile, “Everyday low prices” sounds like a pretty convincing and airtight business strategy to a rational person.

Walmart shopping is a powerful barometer of what some amateur sociologists* have dubbed The Rwanda Test. Here’s how it works: you take a Rwandan, present him with a first-world moral quandary, state your position, then see if he wants to punch you in the face. Complaining that a parolee beat your daughter to death is legitimate. Complaining that the millions of dollars you make playing dress-up leave you unfulfilled is not. The next time you take a stance against America’s largest seller of breakfast cereal (of which there were 220 varieties at my neighborhood store yesterday), think about who’s listening. Then think about the billions of people on the planet for whom refrigerated milk to pour on the cereal is an untold luxury, let alone refrigerated milk that someone went to the trouble of removing the fat from (without increasing the miniscule price of the milk, no less.)

*alright, one friend, who was possibly medicated at the time

**This post is featured in the Carnival of Wealth #8**

Filed Under: Capitalism, Education, Entrepreneurship, Healthy Living Tagged With: , , ,
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