0:02 hello and welcome to people making money I'm your host Kevin bemel and we are here every Wednesday at 10: a.m. Pacific time to talk about matters relating to Business and Professional success as well as wealth building and one of those issues that impacts both sides of that equation is taxes right they say nothing in this world is sure except death and taxes and we're making a lot of progress on the the death side of things but but taxes are inevitable and so um back in I believe
0:38 it was July 24th I did I did a show called um U basically taxes effect on you and the economy and and and I I realized toward the end of that that I had only done part of the subject so that was part one and this is part two of this subject so um in um part one I talked about income taxes property taxes all right payroll taxes and property taxes those kind of things so today I'm going to be talking about capital gains
1:13 taxes and kind of mixed with that a little bit of estate taxes they're not the same thing um but um and and I talk about estate taxes much more thoroughly on my Monday show trust and Estates weekly but I am going to touch on them as part of capital gains taxes so you can understand how those two work together so that is uh excise taxes and tariffs now you may be saying tariffs wow that that that's a big political issue right now yes tariffs are a big political issue I'm going to be talking about them from the standpoint of how
1:49 they work and the impact they have on us as consumers us as employees and the impact they have on the economy uh rather than you know opining any particular uh political position on on tariffs although um most people would probably Divine where I'm coming from on that I'm not I'm not making it a secret um I won't make it a secret um but I'm I'm not going to get into a political pmic on it so let's start with capital gains taxes let's first of all um what
2:25 what are capital gains taxes so as the name States they are taxes on the gains from some kind of capital investment okay so let's say for example that you buy some stock let's say you buy ,000 worth of um I don't know AT&T okay and you hold that stock for six months and you sell it and you sell
3:01 it for $1,100 okay and for for the purposes of this discussion I'm going to leave off the issue of brokerage fees um these days depending on what platform you're using they may be little or or even zero in some cases okay so you bought it for $100 I'm sorry you bought it for $1,000 that's what's called your basis or your cost basis in that investment Okay so you bought it for $11,000 you sold it for $1,100 so you had a gain of $100
3:39 $1,100 minus your original acquisition cost of $1,000 equals $100 now you say well gain isn't that profit yes it's profit from a tax perspective it's called gain now because you receive that gain within a year of when you made the investment when you bought the stock it's what's called a shortterm capital gain okay that's a a short-term capital gain is a gain on an
4:15 investment that you recognize mean meaning you've you've sold the investment and actually received the gain okay it's it's in your checking account for for one of a better way of putting it okay so if it's a year or less it's a short-term capital gain and it's taxed just like your ordinary income okay now by the way on a stock you may also get paid dividends those dividends generally speaking are not
4:50 capital gains those Dividends are a form of investment income okay and they're taxed like generally speaking as ordinary income really no matter when you get them okay but the increase in value of that stock is a in this case a capital gain okay and it's $100 but since it's a short-term capital gain I.E it was recognized a year or less after you acquired the investment it's taxed as
5:25 ordinary income just like your salary and everything else okay let's take a slightly different example let's take a case where you bought a stock uh you bought some stock for $1,000 okay six months later you sold it for $900 in other words you sold it for less than your basis in the stock so you had a you had a loss okay not a gain okay so you had what's called a capital loss do you pay taxes no because you had no you
6:00 had no profit you had no gain now what happens with that $100 loss right you bought it for a th sold it for $900 you lost $100 what happens well that Capital loss may be deductible against your other income okay so you have a short-term capital loss of $100 you might be able to deduct that from your you know your salary or other sources of income now you're going to hear me say might a lot because all of these things
6:35 depend on your particular tax situation so I'm not giving I'm not an accountant I'm not a tax preparer not giving you specific advice for your situation I'm giving you Concepts so you can understand how these things may work for your specific situation you'll need to have your tax preparer or your accountant look at the situation and and and let you know okay well here's how this is going to play out okay so a year or less a gain is a short-term capital gain
7:11 a loss is a short-term capital loss basically treated like ordinary income okay salary and such now let's say you hold the investment for at least a year plus a day okay so now in this scenario you bought a $1,000 worth of stock and let's say 18 months later you sold the stock and this and you got $1,100 so again you have a $100 gain but now you've held the investment for 18 months I.E at least a year and a day so
7:47 you have what's what's called a long-term capital gain and long-term capital gains are um on one second I meant to look up the the rate so I knew it uh yeah so long-term capital gains are taxed at a lower rate than ordinary income or what may I should say what may be a lower rate than ordinary income okay because the the first part of a capital gain is taxed at uh well up
8:25 up to uh uh about 45,000 of capital gain as of at least as of the rates last year is is there's zero tax okay uh from about 45,000 to just under $500,000 the rate is 15% and then over that it's 20% now keep in mind for for someone who makes $500,000 they're going to be in the top ordinary income rate almost for sure right so the capital gains rate at 15 or
9:01 20% is going to be lower than that top marginal rate on ordinary income okay now why does the government offer a lower capital gains rate it's to encourage people to invest okay to take the risk of investing in the stock market or capital gains applies really to any investment it applies to real estate you could you could invest in collectibles in artwork in cars you any anything that you can
9:36 invest in oil and gas leases uh cryptocurrencies I think those also qualify for capital gains okay so any of these Investments okay the the the government the the tax code is used to encourage us to invest in them because when we make those Investments we help the economy grow okay we provide capital for businesses to start up to expand to enter new markets to do research and development all of the things that make our economy grow come from capital
10:13 investment okay so now let's let's look at the reverse situation okay let's say you buy an investment for $1,000 and 18 months later you sell it for $900 now you have a long-term capital loss okay you may be able to so if you have other capital gain long-term capital gains you can use it to offset those long-term capital gains you may be able to use it to offset your ordinary income again that'll depend on your spe
10:49 specific situation um there are there are a lot of rules and it gets it gets complex pretty quickly right so I'm I'm giving you just the the basic information about how capital gains taxes work okay so again a year plus a day or longer you hold an investment you have a long-term capital gain or a long-term capital loss now why would you take for example a long-term capital loss well let's say you you own several stocks one of which has had a huge gain okay and and um but
11:28 you're you're you you're looking at and you're thinking it's topped out it's time to sell it um because you're afraid that it's its growth is going to stop and it may and it may even decline in value okay and on the other hand you've got another stock that you that you've taken a a big loss in okay and and you know maybe you think it's not really going to increase in value in the short term so you can sell the one stock and take the big and recognize the big capital gain you can sell the other stock and recognize the capital loss and
12:06 offset the two and reduce or eliminate the capital gains tax on that transaction okay now here's the thing what some people think they can do is they sell the stock with the big gain right they lock in their gain good right they they sell the stock at a that H that's lost a lot of value they lock in their loss right they offset them and pay you know little or no taxes right and then they turn around a few days later and they buy back the stock that
12:42 they sold at a loss okay now you can do that but if you do that too quickly the IRS will treat that stock as if you never sold it and they will disallow or they may disallow the the long-term or the capital loss that you're taking and now all of a sudden you've got this big gain with nothing to shelter it and so now you owe a big capital gains tax bill okay so if you're going to use that
13:17 strategy okay just recognize that when you sell a stock there's a certain amount of time period there's a certain time period you have to wait before you you can repurchase it and it's not just the stock by the way it's also repurchase if you were to purchase options to acquire the stock and and other things like that so there are other instruments that would count as in essence repurchasing the stock okay so again the these strategies can be a little bit complex and you want to
13:52 make sure you understand the rules before you work them on your own okay otherwise make sure you have competent financial advisor who can help you understand these rules and make sure that you don't do something where you know your great tax savings strategy falls apart because you know you reacquired the the the the stock sold at a loss too quickly and now the the IRS disallows that that loss and um and and and now you have the you you know they're not going to they're not going
14:27 to let you turn around and say oh I didn't mean to sell the the C the stock at a gain then no they're going to say we want our taxes and that's that okay so that's capital gains now as I mentioned before there are there are on on pretty much any kind of capital investment you make capital gains taxation will apply now let's let's take real estate as an example let's say that you bought a property for an investment this is not your house okay this is not your house you bought let's say you bought an apartment
15:02 building and let's say you bought it 20 years ago and you paid a million dollars for it and you're looking at it today and you see you've had great rent growth you've had so so the building is worth let's say now not the building but the property today after 20 years is worth let's say $3 million okay and you realize that if you sell the pro by by the way you bought it for a million dollars okay now because it's an improved property meaning there's a building on it it qualifies for
15:37 depreciation from a tax standpoint okay I I I talk about this in in my show on uh investment real estate so the tax code allows us to depreciate the building the portion of the property that's building okay so let's say out of the million dollars that we spend for that that property let's say uh $600,000 accounts for the building and $400,000 accounts for the the land okay
16:12 so the $600,000 portion can be depreciated it's I I believe on a if it's a residential income property I think it's like 31 and a half years or something like that so what that means is you can take a deduction on your tax return of depreciation of approximately $20,000 a year now you haven't actually spent $20,000 it's a deduction you get because at least in theory the building is wearing
16:47 out that's what depreciation is okay but let's say now it's what did I say it's 20 years later if you've taken $20,000 a year in depreciation on that building 20,000 time 20 is $400,000 in depreciation expenses that you've taken over the past 20 years so the property when you bought it at a million do had a cost basis of a million dollar 20 years later the cost basis of
17:22 a million dollar has to be lowered by the depreciation that you've expensed on your taxes of $400,000 so what's called your adjusted cash cost basis is now $600,000 okay do you see that you paid a million dollars originally you've taken a total of $400,000 in depreciation expenses over the past 20 years million doll minus $400,000 is $600,000
17:59 okay now why can you only take it on the building because land doesn't depreciate just as a concept okay so of the $600,000 adjusted cost basis that that is left 20 years later $400,000 of that $400,000 of that is land $200,000 of that is building okay and now today you can sell it for $3 million so and again I'm not going to take into account brokerage fees and closing costs and all of that to keep things simple so you you sell the building for $3
18:35 million okay now you'll notice that your profit is $2 million because you originally paid a million do for it you sold it for $3 million so your profit is $2 million okay here's where it can get a little tricky your gain is what you sold the property for minus your adjusted cost basis so your gain on the property the gain that you recognize when you sell
19:10 the property is $3 million minus $6 million uh $600,000 sorry $3 million minus $600,000 or $2,400,000 that's your gain do you see that your gain is $400,000 higher than your profit why because the tax code let you take that $400,000 in depreciation deductions okay now here's what's neat about it when you deducted those when
19:47 you took those depreciation deductions each year you were reducing income from operating the building that is taxable at ordinary income rates now when you sell it and basically you recognize the gain that that equates to the depreciation deduction so the $2 million profit plus the $400,000 of of sort of the you know recognizing the depreciation deductions
20:23 so the $2.4 million assuming you've owned that bill building for at least a year and a day and therefore it's a long-term capital gain that 400,000 deduction that's now being taxed is only taxed at the capital gains rate so if your ordinary income rate was 28 uh 28% okay by taking that 20,000 those $20,000 Pere deductions you saved you saved the equivalent of 28% of $20,000
20:58 each each year or about $1,400 so you saved uh you saved uh uh $1,400 times uh 20 wait I'm GNA make sure I have my math right because I'm doing in my head so 20,000 times uh 28% sorry not not $1,400 it's uh 20,000 it's it's uh it's um five $560 so you saved
21:33 $560 um in in taxes um per year okay times 20 okay so you saved $560 times 20 is I think $112,000 in taxes over the 20-year period now when you sell the property and pay long-term capital gains taxes okay that $400,000 is taxed at only 20% or
22:10 $80,000 so you saved $112,000 initially you end up having to pay $80,000 in capital gains taxes long-term capital gains taxes on those depreciation deductions so overall you've still saved you've avoided $32,000 in taxation that's one of the benefits of buying real estate okay is it produces income that is sheltered by the depreciation deductions that then when you when the government go comes
22:45 back and and basically taxes those previous uh sheltered funds they're taxed at a lower rate okay so on $2.4 million worth of gain you're going to be paying you know roughly $470,000 in taxes something like that okay now you're saying wow but that's still a lot of taxes right 400 almost $500,000 in taxes like I'm I'm I'm losing you know a quarter of my profit
23:20 well that's true right so one of the things you can do to avoid capital long-term capital gain taxation with real estate is you can do something called a 1031 exchange what's oftentimes called a tax-free exchange but that's not a correct way of describing it it's actually a tax deferred exchange okay and the reason is because if you do a 1031 exchange it's not that you get out of paying taxes on on that sale it's just you defer the
23:57 date you put off the the date when that gain is taxable okay so I'm not going to go into the mechanics of a 1031 exchange I'll maybe I'll do another show on that but let's say that you sell the property for $3 million and you take that the two $2 million in profit that you that you got selling the property and you turn around and use that to buy a $4 million property okay now if you just bought $4 million property from the
24:32 GetGo okay your basis your cost basis would be $4 million but since since you're exchanging a previous property for a new property okay your cost basis in the new property is going to be your original adjusted cost basis which you would call A $600,000 Plus in essence the difference between the selling price of that building and the purchase price of the
25:07 new building okay so your cost basis when you buy that $4 million building is going to be $1.6 million now again there's there's adjustments I'm just using real simple figures it wouldn't actually work out quite that way but keeping the example simple notice your your basis in the new property that you bought for $4 million is $1.6 million if you turn around the next day and sell it for $4 million what's your gain $2.4 million which was
25:43 the gain in the building that you sold to exchange for the new building so do you see how the tax the capital gains taxes are deferred they're not avoided okay now why does the tax code allow us to by the way it's called a 1031 exchange because the provisions for it are in section 1031 of the Internal Revenue code that that's where the name comes from now why why does the tax code and and and why does Congress allow you know
26:19 1031 exchanges well the idea is to encourage people to reinvest their money and not you know sell a property and spend the money okay so as I was saying before one of the impacts of cap capital gains taxation on the economy at large is is it encourages investment in in in whether it's real estate businesses um you know Collectibles stocks bonds whatever it is it encourages Investments and those Investments help our economy grow they
26:55 help job the number of jobs grow all of this is good for the economy right the term capitalism comes from the idea that people take money capital and investment in and invest it in some kind of venture with the hope of making a profit okay and at the same time helping the economy grow okay that's that's fundamentally what capitalism is all about okay so when capital gains rates
27:31 increase what that does is it tends to um stop people from selling Investments okay so they leave their money in whatever investment it is in because they don't want to pay the higher capital gains taxes now you can say well well so what no big deal well maybe no big deal but there may be a more productive use for that Capital so if the tax code the higher
28:06 capital gains tax rate keeps the money locked into one investment where it would be more profitably used somewhere else what we're doing is we're reducing the ability of the economy to grow we're reducing theil the ability of the economy to add jobs okay so this is why historically the capital gains rate has been lower than the ordinary income rate it's to encourage people to invest
28:42 but also to sell their Investments and move the capital to more productive now in this case more productive is is determined in financial terms it means more profitable Investments okay and if an investment is more profitable generating more income okay that's good for the economy I I I know in some circles it seems like profit is a dirty word but from our perspective would we rather have an investment that generates a 5% return or a 10% return
29:19 okay well assuming that we're you know we're willing to take the additional risk we'd like to make 10% on our investment right and if we're willing to take that risk we don't want to leave our investment in a 5% return investment we want to move it to the higher return okay so what what happens oftentimes is when the capital gains rate goes up people they not only don't sell their Investments because they don't want to pay the higher taxes but they also don't
29:55 sell them because they start thinking well I'll wait for the rates to come back down before I sell them so Capital gets in essence Frozen it's less mobile and that is not good for the economy because people who want to start new Ventures uh new companies that that can increase employment it's harder for them to find investment Capital to do that now you may be saying to yourself well wait a minute there's like trillions of dollars available in in private Equity Funds and and in the stock market and all yes
30:31 that's true but those funds not only a fraction of them are available for investment once those funds are invested are people gonna put more are people going to take save more money in order to make more Investments if the capital gains rates are high they won't necessarily do that because the after tax return on those Investments is decreased by the by the higher capital gains tax rate and therefore it's it's
31:08 not as as uh profitable to invest it's not as interesting to invest so maybe I'll just you know take a trip to Europe or Australia or China or well maybe not China but you know Japan um and and I'll do that instead since you know I'm not going to be able to get a great return um for the risk that I have to take anyway so I might as well just spend the money consume the money in other words okay so this is how capital gains taxes infect affect not just us but the economy in general and this is why they
31:43 exist they're there one last time to incentivize us to invest in businesses and other types of Investments that will help the economy grow help with job growth all of that and and and keep Capital moving into ever more um productive I.E profitable Investments okay so that's that's capital gains taxes um and and um by the way it's not they're not charged just at the federal level many
32:18 states also charge capital gains now here in California there isn't a special capital gains rate capital gains are taxed just like ordinary income whether they're short or longterm okay which makes it makes California it's one of the things that makes California a very high tax state okay other states have separate capital gains rates so depending and and and generally speaking you'll pay the tax rate based on where the investment is not necessarily where you are so if you live
32:53 in Florida which has no income tax but you own a building here in California you're going to pay California capital gains taxes on this building right I I was having this conversation with a client the other day and and she was like wow I'm not sure it makes sense to own a building in California now see there you go this is one of the challenges of being in California as people are recognizing more and more the very very high taxes we pay in California discourage people from investing here they would rather invest in in Florida or Texas or Arizona in a
33:29 in a state that has lower taxation so they get a better after tax return and so the competition among states for capital investment Capital the capital gains rates that the states charge have an impact on where people will invest their Capital right so that's why you see so much capital investment going on in States like Florida and Texas that have no in income tax no state income tax okay because the after tax return on these Capital Investments is higher than
34:05 they are in a state like California okay so that that's capital gains taxes next on the Hit Parade are excise taxes now you may have heard the term but you may be thinking to yourself I've never filed an excise tax return you you probably never have okay that's because excise taxes are they're kind of like sales taxes in the sense that when they're typically added to the
34:40 price of something that we buy so back in July when I did my part one of this I think I also talked about sales taxes as I recall right so a sales tax is it's typically a municipal tax okay and let's say you buy something for $100 and the sales tax is 8% so when you pay for the item you're going to pay $108 okay and the $8 is going to be sent to the state um by the by the merchant um when they remit their sales tax receipts um each each month or quarter whatever the reporting period required
35:17 so excise taxes are are work in a similar way it's that they're not a sales tax generally speaking excise taxes are levied to direct consumer Behavior so for example most um um Most states and and the federal government too have an excise tax on gasoline they call it the gas tax it is a type of of of um excise tax okay um and and the reality is when
35:54 you go to the pumps here in in in Los Angeles I I was the other day I think gas was like $449 a gallon of that I think around a dollar or a dollar and a half are actually various excise taxes okay so a third a quarter or a third of the price of a gallon of gas are excise taxes now why does the government charge an excise tax on gasoline well they do it for several reasons one is because by
36:30 they they in theory at least here in California for example they use the money they collect to repair roads so people who are buying gasoline are using roads they're creating wear and tear on those roads and so they should they should pay for them and the more gasoline you buy the more you drive presumably so the more wear and tear you put on the roads and so therefore um the more excise tax you pay to repair the road so it it it it makes sense for sure
37:05 for sure it makes sense okay um however here in California one of the reasons why our gasoline taxes are so high is to make gasoline expensive so that we don't buy as much of it so you may have heard the the phrase or sytax so excise taxes are often times uh they're often um used in order to impose sin taxes so here in California I think this is true of almost all the states if
37:40 not all of them there's also an excise tax on cigarettes so the price of a pack of cigarettes today I think is like five six dollars a pack or I mean I'm not a smoker so I don't know all I know is the price of a pack of cigarettes has gone up by a tremendous amount it's not because the cigarette companies are charging more it's because the the amount of excise taxes keeps getting raised and one of the reasons again there's there's generally speaking two justifications for doing it one is to pay for programs to treat smokers who
38:17 get disease from uh smoking cigarettes the other is to make it expensive so that people will buy less cigarettes right they will commit less of a sin right that's where the name comes from sin taxes right so here's the thing about excise taxes and in particular sin taxes generally speaking because they're an ad valorum tax meaning they're charged as a percent of the price of the item they're what's called a regressive
38:54 tax meaning lower income people are are hit by it harder than higher income people okay because a larger share of their income goes to pay for gasoline for example so it makes it makes it more costly for them to have transportation okay um because everybody pays the same amount like I said here in Los Angeles about I think4 and a half dollars a gallon so if if if someone's making a million dollars a year paying
39:29 four and4 and half dollars a gallon for a gallon of gas is no big deal but if you're making $4,000 a year okay $4 half dollar a gallon for gas is a lot of money it's a lot larger percentage of your income okay and so that's that's what it means when it we say a taxes regressive sales taxes as as you may recall from part one of this series is also a regressive tax okay so now you may say well you know that that is the way it is yes it is and
40:05 that's why what's one of the reasons why for example especially here in La for you you see lower income people using public transportation because the cost to own a car including paying for gasoline is more than they can afford and so the the gasoline tax also in essence forces people to use public transport ation but there is a cost to using public transportation and that is it takes you a lot longer to get somewhere by bus than it does by car okay especially in a city like Los
40:41 Angeles that's so big and I think the most frequent bus service is like every 15 minutes okay um and and a lot of times these buses are packed if you can't get on a particular bus now you're going to have to wait another 15 or maybe it's 10 minutes but and and they they don't necessar they don't go in a straight you know path to where you want to go so you have to go the paths that the bus goes so what also happens for lower income people who are forced to take public transportation um is that the in essence
41:20 they pay a price in loss of productivity okay because they have to spend more of their time getting from point A to point B that may mean they're spending less time with their family it may mean they can't work as long hours because they've got to be home in time to you know greet their children from school or or or whatever it is okay so one way or another people you know pay for um an an an excise tax on something like gasoline now when look we look at cigarettes you
41:56 might say well you know poor people shouldn't be smoking cigarettes well the fact of the matter is it's unhealthy for anybody to smoke cigarettes um interestingly enough it is the majority of smokers at least cigarette smokers are lower income people and so because they're so addictive um you know they end up continuing to smoke even as the price of cigarettes rise they might not smoke as much but again the excise tax on cigarettes is a regressive tax it hits lower income people harder okay and and you know
42:35 again the idea is it will discourage them from smoking and it does I'm sure it works for some people but for other people for whom the addiction is so strong what it does is it means they have a lot you know less money available to buy other things now another type of excise tax or another category we'll call it not type another category of income of excise tax it's called a luxury tax so I don't know if there is still a tax on so-called Yachts like large boats right but from time to time the federal government May Levy an
43:12 excise tax on Yachts it's added into the price of the yacht okay so it it just like a just like the sales tax and the idea is someone who can afford to buy a great big fancy boat should pay higher taxes okay so in this case where the the the tax is not regressive it's Progressive meaning the more you make the more the TA more taxes you pay it's not exactly Progressive the way the income tax is but because generally
43:48 speaking only um wealth very wealthy people buy Yachts or airplanes which is sometimes again I'm not sure if right now there's an ex size tax or a luxury tax on airplanes but because it's it's you know very wealthy people who tend to own these so it's an additional tax that they pay because you know they're wealthy enough to own these luxury items okay so um excise taxes are levied by the government in again in order to achieve certain goals one is to derive
44:24 tax revenue from a source that will benefit from how the tax revenue is being used we see that with the gasoline tax at least part of the gasoline tax is is allocated to repair roads or build highways that sort of thing which you know then the people who are paying for the gasoline benefit from because they drive on them they're levied in order to discourage people buying things okay for example the cigarette tax that's an excise tax um that's that's Levi in order to discourage people from buying
45:00 cigarettes okay and then they're levied on people who are wealthy who buy these luxury items because if they're going to buy this luxury item we're gonna you know the the the taxing Authority is going to take some additional taxes from them um because they are so wealthy now here's the thing about excise taxes they can have some perverse consequences so for for example um when there was an excise tax on Yachts what happened was
45:35 the number of Yachts bought by people declined precipitously and a lot of yacht Brokers these are people who sell these large boats went out of business as well people who worked on these boats didn't get as much business because people you know they didn't want to own them so they weren't being built and so there wasn't as much maintenance business there wasn't as much storage business there wasn't as much business um in in for you know making items that Yachts need like sale covers sales um you know
46:13 compasses all these kind of things that that Yachts have there wasn't as much fuel sold for for a motor yacht okay so um luxury taxes can also negatively impact the economy by reducing the opportunity for businesses related to the particular type of item on which the luxury tax is being levied and my recollection is the the yacht tax was was repealed a while
46:48 back and one of the reason was was because so many yacht Brokers were essentially going broke no pun intended um people just were not buying yachts and and Yacht manufacturers too were they they were going broke because nobody wanted to buy these expensive boats and pay such a high uh you know such a high uh tax I mean we're not talking a sales tax level of 5% we're talking about I I think at the time it was I want to say 30% I may be wrong on that percentage but it was a large so if you're buying uh you know a $10 million yacht and on top of that you
47:24 have to pay a 30% excise tax $ million now it's going to cost you $13 million to buy something that really you're looking at and saying but it's only worth $10 million so do I want to buy that and the answer is likely to be no I'm I I I'm not going to buy that okay again same with aircraft other these luxury items so while it's tempting to say well but they're rich they can afford it that's that may be true but the question is not just can they afford it it's will they pay it it and if the answer is
48:00 no then a lot of other people who aren't fabulously wealthy and can afford can afford a yacht may be hurt by that luxury tax because now their business is is not going to um it's it's not going to prosper in fact it's it's going to deteriorate and potentially close because there's not enough work to go around okay and so now they lose their source of income and now what what do they do okay so the impact of luxury taxes on the economy it tends to depress
48:37 or lower economic activity because the people who have the money to in this case it's not really investing in a yacht necessarily although many people do look at buying a yacht as an investment where they're hoping to be able to sell it for more than they bought it but they're they're putting less of their money into um into you know buying a yacht for example and and they may just you know put it in stocks or something else okay so it changes you know who will be successful
49:13 in our economy okay so you may and you may say well you know okay so the you know the boat Builders will have to go do something else yes they may of course that can be difficult and if if you had a family yacht building business for the last you know 150 years it can be gut-wrenching to have a a high luxury tax put on on yachts and and now you're you know you're put out of business and and your your family business closes and now what do you g to do because your whole life you know you grew up in the business something like that so and look
49:48 I'm not saying I'm not trying to create a soab story but that that is the reality of how these things work okay so again in general luxury taxes so sometimes you'll hear well the government is picking winners and losers so the luxury taxes is one of the ways that that government does that in essence to to decide you know sort of which which businesses are are are you know in essence disfavored they would never describe it that way but the reality is if someone has to pay a 30% tax to buy what you're producing
50:25 essentially what the government is saying is maybe you don't want to buy that right because a lot of people are not going to want to pay like I said want a $10 million yacht another $3 million to buy it so that's that's the issue with excise taxes okay um the people the and the fact of the matter is the businesses don't pay the excise tax per se because the cost of the excise tax is passed through to the consumer right so the oil companies don't pay uh
51:00 um excise taxes the gasoline companies don't pay excise taxes we do because it's added into the price of a gallon of gas and so they're just what are called intermediaries they collect the tax turn around and give it to the government okay so it's not you know people say well you know gasoline taxes these oil companies can afford it they're not paying a penny of it okay we we pay exis taxes we consumers pay excise taxes again same with the luxury taxes you say well wealthy people can afford it that may very well be true but it's not the
51:38 boat builders that are paying the tax it's the boat buyers that are paying the tax but unfortunately the people who are most negatively affected by it tend to be the boat Builders and The Boat Boat Brokers because it reduces activity in that sector and now they have less or no work and they go out of business okay so that's that's some of the ways that excise taxes impact our economy okay finally talk about tariffs now again
52:14 tariffs are a lot in the news um you know the both presidential candidates are talking about tariffs um president Trump imposed tariffs President Biden left them in place so a tariff is essentially a tax that is paid on Goods that are imported from another country okay so you may have heard of things like steel tariffs tariffs on wine tariffs on cheese okay often times tariffs are levied in order to protect a domestic industry so let's let's just
52:51 talk about steel steel is a is a good example so there we have um a few steel companies here in the United States us steel Bethlehem Steel Etc okay the cost to produce Steel in the United States is higher than it is in other countries for example China okay so what happens so let's say that um you know I'm a business and I need raw steel for my business maybe I'm an automobile F manufacturer maybe I manufacture steel Gir
53:27 for building construction excuse me I'm going to use the example of of um excuse me of buying steel to manufacture automobiles okay so let's say I'm G to buy a thousand tons of steel to manufacture automobiles okay and let's say that thousand tons of steel if I bought it here in the United States would cost um a million dollarss or a thousand dollar a ton I I don't know what the actual price is it doesn't matter for this
54:02 example okay so if I buy it here domestically let's say it costs me uh a million dollars okay um a thousand times a thousand okay but let's say I could buy it in China for $500,000 and and it will cost me $100,000 to bring it here it's still six it's still the total cost of the Chinese steel even with the transportation costs are $600,000 in other words it's
54:39 60% of the cost to buy domestic steel steel made here in the United States right so what's GNA happen well if I'm smart right I'm gonna go buy the steel in China for for a number of reasons I mean primar it's cheaper but what what does it mean to be able to buy steel less costly well number one it means I can sell my product for a lower price number two it it gives me more money to pay higher wages okay so so the fact that um steel
55:16 costs less for me to buy in China and transport to me would would incentivize me to buy steel from a foreign steel producer but what about the US steel producers what's going to happen to them if I don't buy my steel from them well they're going to lose business right so you say well they should cut their prices well they may but maybe they can't maybe the structural costs of of their business are such that maybe they could sell the steel for $900,000
55:51 they're still at a $300,000 price disadvantage so what going to happen the amount of domestic steel bought is going to shrink and the domestic steel business is going to shrink what's going to happen Steel Workers are going to be laid off okay so the the the people who work manufacturing the steel some of them are going to get laid off in addition other businesses that provide raw materials to Steel manufacturers such as iron or miners coal miners well probably not coal miners these days but gas suppliers for
56:27 the smelters of the steel they're going to lose business as well okay because the steel bought overseas is is sending money over there there's less steel being bought here production declines and so the various parts the various materials and services that are needed to produce steel here will also decline okay now are there any winner domestically well yes there are so people who are involved in shipping and moving Goods long shoremen
57:06 railroads shipping companies ESP if they're domestically owned they all benefit from people buying steel overseas and bringing it to the United States right so here's here's so where do the tariffs come in then well the steel industry might Lobby politicians to say this is unfair they're what's they call it dumping Steel on the United States now dumping really means they're selling it for less than it costs for them to
57:42 produce it and it's it's it's oftentimes difficult to know whether another country is really dumping or not that's a it's a it's a blurry picture at best okay but what they'll say is they're dumping foreign Steel on the US market putting us steel producers out of business costing us jobs therefore put a tariff on on foreign steel so that it makes it as expensive to buy foreign steel as it does domestic steel okay so let's say again on that thousand tons of
58:19 steel coming from China they put a um let's say they put 100% tariff on it okay so now the the steel costs 500 five $500,000 there's a $500,000 tariff for a million dollars plus you still have to transport it another $100,000 so now that thousand tons of foreign steel costs $1.1 million do you see that now it's cheaper to buy the domestic
58:54 steel okay here's the thing now the domestic Steel Workers are protected and their suppliers are protected but what happens to all the people involved in trade and transportation the long shoremen the railroads the shipping companies they lose that business okay so it hurts them who does it also hurt it also hurts consumers because now consumers are going to have to pay a higher price for their cars because the car company is going to pay a million dollars for a
59:31 th000 tons of steel instead of $600,000 that is added to the price of the car so people say well it's the companies that pay the tariffs well yes that's true but just like with excise taxes the companies are really just a pass through entity they add the cost of the tariffs to the price of the goods that they sell so we as consumers pay it the companies collect the money and they send the money to in this case the federal government that the the um I forget the name of the agency that
60:06 collects tariffs but the companies themselves they're not actually paying for the tariffs it's like the corporate income tax they the corporations don't actually pay it it's an additional cost of producing whatever they're producing or providing whatever Services they provide we the consumers actually pay for it in higher prices so the pro the the thing with tariffs is that they raise the price for everyone consuming that good in this case cars while um and and while they do
60:42 protect the um steel industry they hurt the transportation and trade Industries and they also hurt the Auto industry in the sense that as as the price of car goes higher higher but um but the the the higher price is going to taxes that money is not available for among other things higher wages again just like the corporate income tax more of the price of the car is going for taxes and so it's not available to pay higher wages so Auto
61:18 Workers and in fact people investing in the automobile industry as well generally speaking also lose out so why do countries impose tariffs well one like I said one reason they do it is to protect certain domestic Industries okay now is that a good idea it depends okay so there one of part of the part of the Tariff debate going on here in the United States is a lot of our military technology um comes from not the
61:53 technology itself but the the the actual devices components of them are made in China now China is one of one of the United States's biggest geopolitical Rivals okay so do we want to have those things made in China what would happen if we got into you know God forbid really God forbid a war with China are they going to keep sending us that military hardware the answer is probably no so what are we going to do well one thing is we might put tariffs on those
62:31 items making them so expensive to buy from China that it makes more sense to produce them here because of national security reasons okay so in that case although the tariffs are imposing a cost on our economy okay we decide to bear that cost because for national security reasons because we don't want a geopolitical rival having power over whether we can properly Supply our military okay that's one reason for imposing tariffs another
63:08 reason for imposing tariffs or usually these are called sanctions although they can they're somewhat related is to punish uh an adversary for their behavior okay um aside from that and and I told I would tell you my position so in general I I I believe in in in free trade overall it's better for everybody for for the not for everybody for the largest number of people because free trade lowers the cost of goods most
63:43 broadly it it does have a tendency to affect some Industries and not others okay but the reality is for a country to have high tariffs what ends up happening is we impose High tariffs on one country generally speaking that country imposes tariffs back so if we if we were to impose High tariffs on everything coming from China almost inevitably China would impose High tariffs on you know Goods being being um exported from the US to China those would be those t a lot of agricultural goods for example a lot of
64:19 pork China eats a lot of pork a lot of it they had a big problem with um I forget what the name of the disease was but their their um their uh pig pig Supply was way down and so they were importing Port from the United States so if we impose High tariffs on Chinese Goods one of the China and China um reacts and and imposes tariffs on American Goods one of the losers typically will be uh people involved in agriculture so you might say well but agriculture is a big business you know Archer Daniel Midlands and all they
64:55 afford it again they're not really the ones paying for it it's we as consumers who end up paying for it and what happens is if if the um demand for pork in the United States goes down either because of the domestic demand goes down or the demand for exports goes down the people who actually you know grow the pigs which are a lot of small farms they end up losing out right and they they lose their Farms the same thing is true of grain all of those kind of agricultural products so and and in the
65:32 end everybody ends up paying more for agricultural Goods whether it's Meats grains whatever okay so um the reason I bring this up is so that as people politicians whatever talk about these proposals we can understand how they will affect people now I gave you my opin opinion just because I told you I would um other people are you know they have a different opinion than I do I would encourage you to talk to uh friends hopefully friends who are
66:07 knowledgeable about how these things work uh tariffs are not a free lunch okay imposing tariffs on another country it's not free to us they inevitably cost us money and jobs now there may be a good reason for accepting those those hits to our economy like National Defense um but but there may not they may not be good reasons and so people you know in our country are um experiencing a lower standard of living Andor losing their businesses for not a particularly good reason so I encourage
66:44 you to think about these these things the impact of of taxes on on on you on the economy at large today I talked about again um capital gains taxes I said I was going to talk about um estate taxes I I I didn't have time um maybe I'll do it another time or you can tune in to my Monday show to find out about that but today I talked about capital gains taxes excise taxes and uh tariffs um all of these taxes not affect us as consumers um but they also
67:20 affect how our economy Works in terms of where Investments are made um how uh successful those Investments may be and and therefore whether our economy grows whether we add jobs all of those factors get mixed in so I thank you very much for joining me today really appreciate it tomorrow this is the every other week show at 5:00 pm Thursday is my show jiggers is place it's a time for us to have a cocktail relax as we head toward the end end of
67:55 the week and talk about everything not related to business and professions so tomorrow I'm I'm going to be talking about a fabulous book that my daughter um in intro introduced me to it's called flowers for algeron a classic book from the early 1960s you may have heard of it you may have seen the movie that was made from the book um I had heard of it never read it and uh my daughter said you know Daddy you you really need to read this book and and so I I got it and um because you know my daughter wanted me
68:30 to the kind of Dad I am I guess you know I I read it I couldn't put it down it it's just an absolutely amazing book so we'll talk about that tomorrow over a cocktail if you want to get the cocktail recipes in advance please go to my website scroll down to the bottom of the homepage and sign up for my email list and the emails I I send an I send one email before each show that's that's all the emails generally speaking that you're going to get um and the email I send out for jigger's Place always has the cocktail recipe so if you want to make it along with me or if you're a you
69:06 know a good mixologist yourself and you just want the recipe you'll have it there um and and uh you'll also get notified um a couple of hours before each one of my shows uh goes live so I thank you for that and talking about subscribing if you're not if you haven't subscribed to my YouTube Channel please do consider that just you know go to youtube.com theee toow click on the subscriber button and again you'll always know when a new show goes live Andor posts on on my channel I would really appreciate your your subscription
69:41 working of course to to grow my channel so again thank you very very much for joining me today would love to hear your comments all the social media links will be in the show notes uh after the show posts on YouTube feel free to um make your comments always interested to hear what you have to say good bad um or or or indifferent and uh hope to see you tomorrow 5: PM Pacific time in at jigger's place and signing off as I always do Marie darling you are my bell courage at all times