Saturday, August 31, 2013

QE Tapering and the Federal Banks effect on the stock market

Finance is full of buzzwords. Some of them are specific to a certain era, like “junk bond” and “sub-prime”. The latest buzzword being thrown about stock exchanges and brokerage houses is “QE tapering”, “QE” being short for “Quantitative Easing”.

Never heard of it? Well, take a look at the drastic falls made by the S&P 500 and the Dow Jones Industrial Average (DJI) that started on May 31, 2013 – they look pretty much identical, and they are both being blamed on QE tapering.

What is 
Quantitative Easing, and why does it affect stock prices?
Quantitative Easing QE Tapering 
QE is the governmental practice of increasing the amount of money in circulation through the purchase of financial assets. In this case, the U.S. Federal Reserve bank (the Fed) has been buying $85 billion of bonds and mortgage-backed securities every month since December 2012. With $85 billion added to the banking system every month, money is in greater supply so borrowing rates go down.
Companies can borrow more easily, and invest that money in building their business (or paying more dividends / buying back shares). This makes stocks more valuable.

The U.S. is currently in its third round of QE. The first round started in Q4 2008 as a way of addressing the 2008 financial crisis. By the end of Q1 2009, both the S&P 500 and the DJI had started a climb which peaked in mid May of 2013, with the assistance of two more QE rounds. Both indices roughly doubled in value over that time.

But nothing good lasts forever. The Fed cannot simply print money and shove it into the economy because the effect on inflation would be disastrous. That is why the word “tapering” is now being used.

The Fed recently announced that it wants to taper (or slow down) the amount spent on QE and is looking at recent economic data to signal that the U.S. economy no longer needs this level of support.

And so, when surprisingly strong performance was noticed in U.S. housing and consumer sectors last week, both the DJI and the S&P 500 started to topple. Just the suspicion that the Fed would lower its QE spending – certainly before any official announcement has occurred – is causing many investors to start a selling spree. It is predicted that continued good news or an actual policy change from the Fed will initiate a major sell-off.

Fortunately, the artificially high prices that will disappear under QE tapering will not wholly ruin the value of good companies. Companies that have borrowed under low interest rates and which are using the cash to invest in productive assets and exploit opportunities will maintain good value. It is time to look at the Earnings per Share growth of various companies and see if it has resulted from actual earnings, or from measures such as share buybacks and dividend increases.

About the writer:
John Fletcher has served as a consultant in the Corporate Finance departments of Ernst & Young and PricewaterhouseCoopers. He has an MBA in Finance and Marketing from the Schulich School of Business in Toronto, and currently runs his own business consulting firm.
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Thursday, August 29, 2013

The Situation in Syria and Gold Prices

One of the main factors in determining the price of gold is global stability. In times of peace and prosperity people invest in stocks. However, in times of war and global uncertainty people look for safe investments. Precious metals, gold in particular, are considered the safest of investments. The current rise in gold prices correlates with the rising tension in Syria.

War Is Bad For The Stock Market

War is bad for business. There are exceptions, but the majority of global corporations suffer when there is armed conflict. Investors react to war by placing their money into bonds, oil futures, and precious metals. These are traditionally considered the safest places for holding money.

One of the hardest hits areas is going to be the emerging markets sector. Investors will not want to have their money in funds that have a substantial holding in any of the countries likely to be involved in the conflict.

Unfortunately there are many countries besides Syria that are going to be involved. These areas include the entire Middle East, as well as Russia, Pakistan as well as potentially India. Not only will investors not purchase stock in funds that do business in these areas, they will also likely look to exit the market as soon as possible. That could very well lead to a runoff panic and a market free-fall.

This article from TheIndependent discusses the recent events and their ramifications on global gold prices.

The stock markets in Saudi Arabia are already seeing dramatic losses. Saudi Arabia is considered to be a barometer for the entire Middle East. The financial markets of Kuwait have also seen sharp downturns, all on the impending violence.

Is the Situation in Syria Likely to get Worse

Most of the talking heads think it will. Russia has already entered into the fray. John Kerry has come out and spoken about the use of chemical weapons. Statements from the United States, Great Britain and Australia have made it clear that this will not be tolerated and there will be a response. Russia, meanwhile, has said that they believe there should be no response.

Warplanes have already been moved into strategic spots in the region. This article from TheGuardian describes the United Nations activities in and around Cyprus. This would be a launching pad for the attack.

Is it Too Late to Invest in Gold?

No. Not only is it not too late, it is the perfect time. Gold prices rise on the speculation of war, and they don’t tend to drastically fall if the war doesn’t come. The tension in the area is enough to cause economic instability for quite some time. This has repercussions that will last far beyond the conflict.

Gold is a fantastic investment for the long term. The current crisis should be a reminder of why gold is such an important part of any portfolio. You cannot predict the future state of global affairs. Every week there seems to be a new flare up in some part of the world. Any one of these can completely cripple a sector of the stock market. This is why responsible investors always allocate a portion of their investments for gold. 

Now is the Time for a Gold IRA Rollover                      

If you don’t have any gold in your retirement portfolio, then now is a great opportunity to rollover your IRA to gold. There are many IRA custodians out there that specialize in Gold IRA rollovers. Call a few of them to determine which one works best for you. Gold prices have been low for the last two years. What we are seeing now is a return to the steady upward climb that gold was on since 2005. Now is a great time to load up on more gold before the price skyrockets. 
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Wednesday, August 28, 2013

The Most Important Rule of Investing

There is one golden rule of investing that you should always follow: Never invest money you cannot afford to lose. Investing is not saving. The difference between saving and investing has been explained before but the short version is that saving is money you put aside that is kept in cash that you can access in a few days or less for emergency needs. In contrast, investing be it in stocks or Options Trading or in forex is the process of putting your money to work making even more money for you.

If you always remember this and never violate it, you shouldn't have to worry about eating cat food during your retirement. But there is a natural human tendency to want to overreach, to put more money in than you can afford, and go for a huge payout. In fact, this trait tends to be magnified the more desperate someone is for money because they hope that hitting the jackpot will make all of their problems go away (you see a lot of people below the poverty line playing the lottery but not very many executives).

You cannot just view your "portfolio" as the stocks you own. It encompasses so much more - your emergency cash reserves, your insurance coverage, your fully funded retirement accounts, your real estate holdings, and even your professional skills that determine the income you earn in the job market. 

It never fails to amaze me that the same folks who spend weeks studying Consumer Reports ratings for a new stove or washer and dryer would put all of their savings into a stock or other investment they don't understand. It just doesn't make any sense. Your first goal is to avoid major losses. Don't get greedy. Be patient. Seek the advice of qualified, well-regarded advisers. Keep your costs low. The recipe may not seem exciting, but it has proven to work for generations.
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Sunday, August 25, 2013

How to Determine a Company’s Fundamental Rating

The Fundamental Rating Score is an aggregate of the star-ratings for different sections of the Fundamental Analysis for a company. There are 11 filters and each filter is given a rating of Excellent, Very Good, Good, Marginal or Bad.

Here are the filters:

1.   If Return On Equity (ROE) is greater than or equal to 30% then rate Excellent; If ROE is greater than 20% and less than or equal to 30% then rate Very Good; If ROE greater than 15% and less than or equal to 20% then rate Good; If ROE is greater than 12% and less than or equal to 15% then rate Marginal. Otherwise, rate Bad.

2.   The more times Net Income has grown in the past 5 years, the better. Rate Excellent if it has grown 4 times, Very Good if it has grown 3 times, Good if it has grown 2 times, Marginal if has grown 1 time or bad if it has not grown at all in the past 5 years.

3.   The more times Cash Flow has grown in the past 5 years, the better. Determine the rating in the same manner as for Net Income.

4.    If EPS / Long-term AAA Bond Yield is greater than the stock’s current share price, then rate Excellent; otherwise rate Bad.

5.   If the company’s current Profit Margin is greater than the company’s average industry Profit Margin, then rate Excellent; if it’s equal, rate Good. Otherwise rate Bad.

6.   If the company’s current Profit Margin is greater than its 5-year average, then rate Excellent.

7.   If the company’s current Long-term Debt / Net Income is less than 5 then rate Excellent; if it’s between 5 and 16 then rate Good. Otherwise rate Bad.

8.   If the company’s Gross Profit Margin is greater than or equal to 40% then rate Excellent; if it’s between 20% and 40% then rate Good; otherwise rate Bad.

9.   The more times Net Earnings has grown in the past 5 years, the better. Determine the rating in the same manner as for Net Income.

10. If the company’s Net Earnings Margin is greater than 20% then rate Excellent; if it’s between 10% and 20% then rate Good; otherwise rate Bad.

11. If the company has been buying back its shares in each of the past 5 years (Issuance (Retirement) of Stock, Net) and it has increased these buybacks in each of the past 5 years, then rate Excellent. If it has been buying back its shares, but not increasing the amount in each of the past 5 years, then rate Good. Otherwise rate Bad.

Once you have a rating for each filter, then assign a score to each rating as follows:
Excellent = 4Very Good = 3Good = 2Marginal = 1 and Bad = 0.
Then add up the scores and divide by 11. This will give you the average overall rating for the company.
For example, if the stock we are evaluating rates Excellent for filter (1), Good for (2), Very Good for (3), Bad for (4), Good for (5), Good for (6), Excellent for (7), Good for (8), Marginal for (9), Good for (10) and Bad for (11), then our total score would be:
4 + 2 + 3 + 0 + 2 + 2 + 4 + 2 + 1 + 2 + 0 = 22

You would then divide the total score by 11 (i.e. 22 / 11) to get a rating of 2. Going back to our ratings scale, we see that a rating of 2 equates to Good. So from a fundamentals perspective, our stock would be rated as Good. You should generally only consider stocks that are rated Very Good or Excellent.
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Thursday, August 22, 2013

Warren Buffet Way of Valuing Stock

Warren Buffet valuing stockValuing a stock correctly is the key success to value investing. Everybody knows the share price but little aware of its true value. In some cases, investors just don't bother the stock valuation. They buy stocks at any price but regret paying too much. And that should not be the case for value investor.

In fact, Benjamin Graham who used to be Warren Buffet's guru wrote in detail on how to value stocks with his partner, David Dodd in their famous value investing bible, Security Analysis. The thing is, reading the book might take you years to finish.

The good news is, I'd simplify the stock valuation model for you to start straightaway!

How to Value Stock Using Discounted Cash Flow (DCF) Model

I bet you've heard this more than anything else. It gained popularity as a way to value stock following the stock market crash in 1929.

Anyway, this stock valuation model was about projecting the stock's future cash flow and discounting it back to present value using Weighted Average Cost of Capital (WACC). Be warned though that the term "cash flow" is not about cash the company has in balance sheet, but the operating profits (after deducting capital expenditure) the stock is making.

Though it can be the best stock valuation model so far, I find it tough for beginners to deal with the details. If you'd decided to use this method, you have to take into consideration the revenue growth and the increasing cost synchronously. Fail to do so results to wrong intrinsic value.

How to Value Stock Using Dividend Discount Model (DD)

This stock valuation model is perfect for high dividend yield stocks. The idea is to estimate future dividends based on the historical dividend payout and discount it back to current value.

Though it looks so simple, it works best for income type of investors.
However, the key ingredient for this stock valuation model to works is that the company must be strong, tough, and has proven track record of consistently paying dividend to shareholders. Otherwise, it is a waste of time.

How to Value Stock Using Earnings Growth Model (EG)

Earnings growth model is much easier than DCF model, but may not be as simple as DD model. And it works! It is so practical in stock market investing as nothing can beat earnings!

So how to value stock using this stock valuation model?

First of all, I did some forecast on the stock's future earnings using both constant and variable growth rate, depending on what I expect to happen along the way.

Stock market crash and economic boom are something I'll consider.
Later on, I discount the price to present value using both price to earnings ratio and expected annual return to calculate the intrinsic value of the stocks.

Spend time understanding all stock valuation models and you'll be ahead of anybody else in value investing.

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Monday, August 19, 2013

What Legal Requirements Exist When Selling a Structured Settlement?

Structured settlements are designed to help offset the financial cost of injuries you may have sustained through an accident, as well as in other situations. The settlement amount is held for you, and you receive monthly payments from it for a specified amount of time. However, while all of that money is technically yours, there are some legal requirements that have to be satisfied if you decide selling your structured settlement is in your best interest. You’re not free to do with it as you wish. Here’s what you should know.

When you decide to sell your structured settlement to a buyer, the law requires that buyer to provide you with “full disclosure” regarding the particulars of the sale. The buyer should clearly explain all the financial terms of the sale so that you understand them. This is vital for making a wise decision regarding your financial future.

Cool Down
You might think that once you sign the documents authorizing the sale of your structured settlement, things would progress quickly. That’s not necessarily the case. The law requires a cool down period during which you have the opportunity to reassess your situation and change your mind. If you change your mind during this period, you can cancel the sale with no financial obligations to the buyer. This is important protection, and is designed to ensure that you’re actually making the best decision for your needs, rather than a hurried one. 

Legal Advice
State law requires the buyer to advise you that you should seek out professional legal advice about selling your structured settlement. While it’s not mandatory to get legal advice in all states, it is highly recommended, as it can help you make a better decision regarding your financial future. An experienced lawyer can point out things that you might not notice with the deal, ensuring that you’re well-armed if you decide to pursue the sale with this particular buyer.

The Legal Process
In addition to the legal requirements above, you will have to go back to court. The sale of your structured settlement must be approved by a judge. There are several factors that will weigh on the judge’s decision, including the reason you want the money, your current financial situation, and whether the judge thinks that the sale is truly in your best interest or not. The sale cannot move forward until the judge issues a court order approving it. After that point, you’ll be able to receive the lump sum payment for your structured settlement.

A considerable amount of stress and hassle in the requirements above can be eliminated by working with a structured settlement company. These firms offer more than just a helping hand. They provide you with the means to get your sale in front of many different qualified buyers and then accept bids on the sale, ensuring that you’re able to get top dollar for your structured settlement. It’s simpler and easier, and those are definitely things that benefit you.
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Saturday, August 17, 2013

What is Market Efficiency Theory?

The concept of market efficiency was proposed by Eugene Fama in 1965, when his article “Random Walks in Stock Prices” was published in Financial Analyst Journal.

Market efficiency means that the price which investor is paying for financial asset (stock, bond, other security) fully reflects fair or true information about the intrinsic value of this specific asset or fairly describes the value of the company – the issuer of this security. The key term in the concept of the market efficiency is the information available for investors trading in the market. It is stated that the market price of stock reflects:

 1. All known information, including:
Ø   Past information, e.g., last year’s or last quarter’s, month’s earnings;
Ø   Current information as well as events, that have been announced but are still forthcoming, e.g. shareholders’ meeting.

 2. Information that can reasonably be inferred, for example, if many investors believe that ECB will increase interest rate in the nearest future or the government deficit increases, prices will reflect this belief before the actual event occurs.

Capital market is efficient, if the prices of securities which are traded in the market, react to the changes of situation immediately, fully and credibly reflect all the important information about the security’s future income and risk related with generating this income.

What is the important information for the investor? From economic point of view the important information is defined as such information which has direct influence to the investor’s decisions seeking for his defined financial goals. Example, the essential events in the joint stock company, published in the newspaper, etc.
Market efficiency requires that the adjustment to new information occurs very quickly as the information becomes known. Obvious, that Internet has made the markets more efficient in the sense of how widely and quickly information is disseminated.

There are 3 forms of market efficiency under efficient market hypothesis:
• Weak form of efficiency;
• Semi- strong form of efficiency;
• Strong form of the efficiency. 

Under the weak form of efficiency stock prices are assumed to reflect any information that may be contained in the past history of the stock prices. So, if the market is characterized by weak form of efficiency, no one investor or any group of investors should be able to earn over the defined period of time abnormal rates of return by using information about historical prices available for them and by using technical analysis. Prices will respond to news, but if this news is random then price changes will also be random.

Under the semi-strong form of efficiency all publicly available information is presumed to be reflected in stocks’ prices. This information includes information in the stock price series as well as information in the firm’s financial reports, the reports of competing firms, announced information relating to the state of the economy and any other publicly available information, relevant to the valuation of the firm. Note that the market with a semi strong form of efficiency encompasses the weak form of the hypothesis because the historical market data are part of the larger set of all publicly available information. If the market is characterized by semi-strong form of efficiency, no one investor or any group of investors should be able to earn over the defined period of time abnormal rates of return by using information about historical prices and publicly available fundamental information(such as financial statements) and fundamental analysis.

The strong form of efficiency which asserts that stock prices fully reflect all information, including private or inside information, as well as that which is publicly available. This form takes the notion of market efficiency to the ultimate extreme. Under this form of market efficiency securities’ prices quickly adjust to reflect both the inside and public information. If the market is characterized by strong form of efficiency, no one investor or any group of investors should be able to earn over the defined period of time abnormal rates of return by using all information available for them.

The validity of the market efficiency hypothesis whichever form is of great importance to the investors because it determines whether anyone can outperform the market, or whether the successful investing is all about luck. Efficient market hypothesis does not require to behave rationally, only that in response to information there will be a sufficiently large random reaction that an excess profit cannot be made. 
The concept of the market efficiency now is criticized by some market analysts and participants by stating that no one market can be fully efficient as some irrational behavior of investors in the market occurs which is more based on their emotions and other psychological factors than on the information available But, at the same time, it can be shown that the efficient market can exist, if in the real markets following events occur:

Ø   A large number of rational, profit maximizing investors exist who are actively and continuously analyzing valuing and trading securities;

Ø   Information is widely available to market participants at the same time and without or very small cost;

Ø   Information is generated in a random walk manner and can be treated as independent;

Ø   Investors react to the new information quickly and fully, though causing market prices to adjust accordingly.

By Kristina Levišauskait

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Sunday, August 11, 2013

US Federal Reserve System

us federal reserve systemThe Federal Reserve System is simply the central bank of the United States of America, which has the special purpose of administering and formulating monetary and credit policies respectively. However, this institution was established by the congress thus making it an independent body. This was because of various reasons among them, for instance in 1913,the general economy of US had grown successfully at home, as well as abroad. Because of this, it unconditionally required an effective, well-managed and flexible system of banking. In this manner, it led to an establishment of the Federal Reserve act of 1913, which conceptualize the institution as the central banking authority of United States of America.

Nevertheless, this institution is playing a vital role in the economy, and it performs a number of functions such as; it has the maiden mandate to control, and conduct the monetary policy of the country, it works all round the clock to ensure that the financial system of America is stable. Nonetheless, it plays the role of checks and balances in the overall financial system. This normally happens when the central bank regulates the lending of cash by other banks across the country. Additionally, Federal Reserve System literally supervises as well as regulates the banks and ensures the credit rights are well protected. Particularly, it regulates and determines the interest rates; as such, it makes sure that the citizens are not exploited, more so this happens because the banking industry is not a monopoly version of business.

Furthermore, the US Federal Reserve offers financial services to the general public, financial institutions such as the banks, micro finance institutions, foreign financial institutions, and lastly the US government enjoys financial services from the Federal Reserve. The government can borrow loans from the Federal Reserve whenever they have projects that require a lot of money. In addition, this institution has the mandate to issue federal bank notes; as such, it also supplies the American citizens with the paper money.

Nevertheless, the system has a special way to deal with the monetary policy as such, they have a certain committee, which seeks to reduce the deviations of inflation in the economy. Moreover, the reserve system plays a greater role in determining the employment levels in the country. In conclusion, it is important to acknowledge that the Federal Reserve is a vital entity in the US economy and needs a proper management in order to have an effective economy.
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Saturday, August 10, 2013

Advice for Stock Market Trading

Advice or Tips for Trading Stocks in Stock Market-- If you are brand new to trading shares, you likely want to learn a bit about how it all works before you begin. The stock market can be somewhat confusing at times, but it is not that difficult to figure out once you learn the ropes. The following advice will help you get started on the right foot so that you can begin making those trades as soon as possible. 

Find a Broker that You Can Trust
The first step is to find a good broker that you know you can trust. You want to be confident that he will do everything in his power to help you succeed. This means being available any time that you need him, as long as the market is open. There is nothing worse than wanting to make a trade, not being able to get in touch with your broker, and watching your opportunity slip away. He or she needs to be very trustworthy and dependable. 

Limit Your Risks
Anyone with a time machine would love to go back and put all of their money into the stock of a company that has now exploded in popularity, but that is unrealistic. In the real world, traders make money by limiting their risks, not by taking a chance on a company and hoping to get rich. You need to diversify your stocks and work hard to always make sure that you are earning a little, rather than trying to earn it all at one time. 

Know Your Limits
When you see a stock price falling, you might be tempted to buy more of that stock, hoping it will go back up so that you can make even more. This is sort of like hedging your bets. The risk, though, is that you could be wrong. The more money you sink into a failing stock, the more you stand to lose. You need to know your limits so that you can know when to cut your losses and move on. 

Remember that Trading Takes Work
Some people think of the stock market as an easy way to get rich while not really doing anything at all, but this is far from true. It takes dedication and work to trade for a living. Always remember that you have to be willing to put in the work if you want to make this into your new career.
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Friday, August 9, 2013

The Housing Market Rebounds in Arizona

 Back in the dark and dismal days of the financial crisis, Arizona was one of the first and hardest-hit housing markets. House prices declined over 30% in one year, wiping billions of dollars off of the residential property market. There were massive layoffs in the construction industry, contributing to the further slowdown of the state economy and leading to a downward spiral.

Housing Market
However it appears that the doom and gloom may finally be over, providing significant new opportunities for investors – as well as those who are looking to move into a new family home. For instance, the price of housing in Phoenix has risen slightly over 30% since Q1 2012, far outstripping the national average rise of 11.3%. That sort of growth is worth a second look for anyone who is serious about increasing the returns on their investment portfolio.

Based on data fromMichael Orr, the director of the Center for Real Estate Theory and Practice at the W.P. Carey School of Business at Arizona State University, it appears that the fundamentals of the Arizona housing market are becoming strong, indicating that the recent dramatic rise in prices is not just a repeat of the previous bubble in 2007. For example, sales of single-family homes have been on the rise, and more of them are being purchased by homeowners rather than investors – which indicates that end-user demand is strong and prices are not being artificially inflated by speculation. Furthermore, while the housing inventory (the number of houses for sale) has been rising, it is still at historic lows, which supports continued price increases.

One of the barriers to further expansion of the housing supply in Arizona is a lack of skilled construction workers. Many of these workers retrained for other industries or moved out of state when the financial crisis struck, so that employment in the sector remains at levels not previously seen since the mid-1990s. While this does limit investment opportunities, it also means that supply is unlikely to outstrip demand in the short term – boding well for continued price growth. It also means that real-estate projects that already have new homes built, such as Eagles Nest Living near Scottsdale, are particularly interesting investments.

Another encouraging sign is that, despite the recent rises, property prices remain below the long-term trend. Looking over the 10 year period from 1989 to 1999, prior to the housing bubble, the annual growth rate was 3.1%. If you project that through to the current day, it suggests that the market is undervalued still by 15% to 20%. That is plenty of headroom for a canny investor, especially when you consider that financing remains extraordinarily cheap – vastly increasing the investment leverage.

Housing Market Arizona
There are a number of other factors that suggest the Arizona housing market is on its way to recovery. Foreclosures are down 60% in the last year, and bank sales of distressed properties are down by 53%. House purchases by rental firms are also low, indicating that the demand is real and not another bubble. All of this is encouraging for anyone who is considering investing in the Arizona real estate market.
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Sunday, August 4, 2013

Why We Pay Taxes

Why Are Taxes Necessary?
Taxes steal a big chunk of our annual income, but there’s a good reason why we need to pay them.

The only sure thing in life is death and taxes – at least that’s what they say. And that age old maxim wouldn’t be too off the mark if taxpayers have anything to say about it.  
In fact, most people feel like dying come tax season, so it wouldn’t be surprising if you (like billions of citizens around the world) feel like the two were interchangeable.

It’s hard to imagine what isn’t taxed these days. From income to land, to even your miraculous lottery winnings; each possible source of revenue gets a cut that goes to the government.
But as surprising as it may sound, there’s actually a good reason why we need to pay taxes. And while it may sound like a great benefit for the government, it’s actually designed to be a benefit for taxpayers as well.
Here are just a handful of reasons why taxes are necessary:
  • Paying your taxes means more improvements to the country or your city – Taxes are categorized in different ways depending on the kind of tax and the country you’re from. But all in all, taxes are designed to be able to fund the different improvements in either your country or your city. These improvements can come in the form of roads, public parks, national infrastructure, garbage disposal, public transit and even low cost housing.
  • Your taxes come back to you eventually. – Taxes can be viewed somewhat like an insurance policy. You pay your government taxes to fund different services afforded by the government. Some of these services can cover everything from health care to financial or food aid. And while these may not be relevant to you right now, as a taxpayer you can benefit from them in the future should anything happen to you.
  • Taxes prove you are citizen worthy of certain benefits. – While all citizens are created equal, some citizens are granted a bit more leverage just by being taxpayers. Income tax returns are used to prove that you’re a citizen that not only pays taxes but also receives a certain monthly/quarterly/annual income. These documents are important when applying for a loan, or when paying for a something sizable on installment.
  • You work and earn a salary, and your government should too. – Practically speaking, taxes are a way of paying the government for doing its job. But unlike a real salary, the government tells its citizens what it should earn. If you think this is simply incentive to tax its citizens to high heaven, you have to understand that different amounts of taxation have various effects on a country. Too high and your citizens won’t have any money left to spend. Too low and your government won’t have any money to spend. It’s the government’s job to find the right balance between the two.
In a way, taxation is like the price of citizenship. That hardly sounds like a compelling reason to cough up more cash to the government, but there’s a truth in that statement. As citizens, we should be able to enjoy the various benefits and services provided by our government, but these services can only be rendered if there are funds to render them with.

Casio Wiser manages a tax forum for the website Federal Tax

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