Welcome to the Rentvesting Podcast, the ultimate property podcast that unpacks the facts and explains what’s really going on in property.
In this week’s episode, Louis is speaking about trickle down economics. We saw a few articles about how less than 1 in 10 young Australians think they’ll be better off than their parents will be, which was a Deloitte study conducted in 2016. One of the biggest concerns of Millenials is wealth, retirement and getting a job.
Today we’re talking about:
- What’s holding back the economy and people as individuals
- What you can do to mitigate it
- The steps you can take today
- A few takeaway points
Why isn’t Australia great?
It is great, but let’s make it the greater-est!
Globally, people struggle financially due to a lack of financial education. We learn a lot of different things like poetry and algebra in school, but we don’t really learn about finance. You can do accounting and economics but it doesn’t really teach you about personal finance to a great level. When you start earning money, you’re not really prepared for it and what to do with it.
We’re never taught how to reduce tax, invest and build wealth. So it keeps you slaving away, working and paying tax then when you get to retirement you’re on the pension.
Money isn’t the be all and end all, but it’s one of the biggest stresses of all people. Mostly because they don’t understand it, it’s a bit of a worry/fear.
Taxes are a major form of government spending. They’re taken from us for government spending on anything like education, welfare, other policies etc. but you cannot tax your way into prosperity. I looked up a few stats and on the tax level in Australia, about $60 billion goes into running administration of the government (16% of total revenue that we generate goes back into the government). That’s likely going to increase out to $70bn in the next three years. It’s a big jump in how much revenue we create, and unless the economy grows by 16%, they’re going to have to take more tax from individuals.
Some interesting comparisons
Pension (For those over 65) – $45bn of taxpayers money goes into this.
Government (administration costs) – $60bn of taxpayers money goes into this.
The whole concept of taxes is a political tool used by the government getting high-income earners to pay and giving it to the ‘poor’. But really, all that happens is you tax the rich to being poor then all you have is more poor people.
To give you an idea (these facts are two years old) but the top 10% of Australian earners are paying 50% of the total tax. The bottom portion of the population pay around 2% of the total tax. So the wealthy people are paying half of the tax collected. Trying to get more out of these individuals doesn’t work so well. For example, if you’ve got $1bn and the government is going to tax you further on this, then you could just move to another country like Monaco which doesn’t charge tax – then the government loses that tax revenue.
The government itself has a lot of silver servants like the ATO has one employee for every 500 people in Australia. Compared to the IRA in America, who have one in every 2,000. In the UK it’s similar, as they have a higher tax-free threshold, so there’s less admin.
Globally, we have a high tax-free threshold. It’s mainly the mentality where individuals think the government is there to help and give them entitlements but there have been some massive changes in demographics and working population since the time it came in. Don’t get stuck in the handout mentality because there’s nothing you can actually bank on. To give you an idea, the aged pension came out in 1906 and the average life expectancy then was 63 and eligibility was 65, so the pension wasn’t relied on. Now we’re staying alive for a lot longer and the system is starting to crumble as it can’t keep up with the demand.
The biggest thing you can do is not have to rely on the pension. If you start early enough you can build your own wealth over time.
Equality – rights, status or opportunities
We’ve all got voting rights, education, health and welfare rights. By that measure, we are all relatively equal. But income rights aren’t the same. In reality, you don’t want to live in an equal society, it’s happened before and doesn’t work well. We’re lucky that we have an equal society but you, as an individual, can better yourself as much as you want to.
The whole income and equality thing, people say it’s worse than ever at the moment. But if you look back in the early 1900s, if you didn’t have anything, you had no chance of getting out of that. That’s when it was at it’s greatest in modern times.
Instead, increasingly, taxes work and subsidises non-work. That’s the mentality you don’t want to be in.
The idea of this episode is – why more ballers are better
The more wealthy individuals you have in society, the better off everyone is. Start by educating yourself and essentially the more wealth in a society, the more prosperous it is.
That term is called trickle down economics. The idea is that taxes are cut across the board along with social security and welfare payments. But overall if you think about it, where if you cut taxes – like individual or company taxes, there should be more money going around because money has a multiplier effect.
If I earn $1 and I spend it at your bakery, then you pay 30c of it in tax, you now have 70c you can spend. You then buy flour from another producer, they then pay their tax and that goes down the chain until it’s gone. That money multiplier effect gets significantly reduced when you have high taxation as there’s not as much money flowing.
If you have zero tax, then roads don’t get maintained or you have no police etc. but if you had 0% then the money multiplier effect gets redistributed.
Another point is that if your earnings go up every year, there’s a high chance your spending will go up.
The whole idea is, if everyone has more money with lower tax rates there’s more prosperity because people want to spend more. So things should generally go well. But for those who are solely relying on welfare, it doesn’t work as well.
The point is, not to dis people who are on genuine welfare, but it’s looking at those who are not employed or waiting for old age pension and trying to cut that spend.
How to fix it?
I can’t change the government, but I want to be a baller like Zuckerberg.
Getting educated on an individual level by learning how to build wealth and invest over time through compounding interest. On the individual level, getting into the right mindset – don’t have a pension mindset where you go in thinking you’re entitled to a pension because that’s being paid from the current working population.
When you retire, you’ll no longer be paying tax and someone else will be forking that bill. It’s about having a plan going forward. Think about how you’re going to protect your downside, what will happen beyond your next holiday. Start as soon as you can!
Get money working for you instead of you working for money
Start investing sooner, so you have more funds later in life. Start putting $100/week away and that will increase quickly rather than waiting until you’re a lot older.
Take away points:
- Lack of education – This can be improved.
- Taxes – Government level, nothing we can do. But individually you can reduce your tax legally like negative gearing etc.
- Mentality – Addressing it head on. Knowing that you can’t rely on the government but you can start as soon as possible. The accumulation of your savings over a 50 year period becomes a lot more than trying to begin 50 years down the track.
The Rentvesting Podcast, available on iTunes, was created by Red & Co’s Jayden Vecchio and expert financial planner Louis Strange. Together, Jayden and Louis unpack the facts behind the property market, explain what’s really going on & where the market is heading. They believe in challenging the status quo and want to get out there to educate absolutely anyone looking to enter the property market.