(Many apologies to the great Peter King, my favorite football writer, for the title of this article.)

Just this morning, I finished up my income taxes for 2007 (along with my estimated taxes for the first quarter of 2008), wrote a small mountain of tear-stained checks, and dropped them in the mailbox. This was my first year filing taxes with significant income earned from independent work and it was a real eye-opener.

Here are some of my collected thoughts on the income tax process.

1. TurboTax is a miracle worker. In 2007, The Simple Dollar really took off. In 2007, we bought our first house. In 2007, I sold mutual funds for the first time (to help buy the house). As a result, this year was loaded with new experiences when it comes to income taxes. Add into that the fact that my wife and I worked together on our taxes this weekend, working in shifts with the other one of us focusing on child care.

The end result is that TurboTax bailed us out. We’ve been using the bare bones version for years, so it pulled in the stuff we needed for last year, and then it walked us step by step through all of the new stuff. In the end, after several hours of typing away at the keyboard and shuffling through a mountain of papers, we ended up with a neatly filled-out tax return with all of the numbers in the right places. Even better, it got me on the right track with estimating for the future, meaning we actually had a little bit left over after a year’s worth of tax savings even after being hit with a penalty for a low estimate last year. That leftover amount’s going straight towards a student loan, as is our “economic stimulus package.”

2. Children are a splendid tax break. We have two children. Just by existing and by going to day care, they netted us $2,950 in tax credit. That’s right - almost $3,000 of our tax bill went poof because of our two children.

That obviously does not make up for their expense, but it does pay for about a third of their child care over the last year, which softened the burden. To put it simply, if you have a child, the tax system does help you out with those extra costs of parenting - and that’s nice.

3. If you’re making any sort of serious side income, pay the estimated taxes. Not only is paying it all the way along a great way to make sure you aren’t nailed with a giant tax bill at year’s end, but it also ensures you aren’t hit with a nice big fat penalty either. We were hit with a penalty for estimating way too low last year about how The Simple Dollar would grow - one year ago, I honestly had no idea how “big” The Simple Dollar would become.

The second you start getting enough income that you’re getting pretty excited about it, look into form 1040 ES and the equivalent form for your state. Don’t let it slip or else tax day will be very painful.

4. We printed out almost fifty sheets worth of paper just to mail in. That’s just plain silly, especially when most of this could be filed electronically. Even better would be a drastic simplification of the tax code - a true flat tax of some kind. The simple fact that we had to burn a good chunk of a weekend and print out fifty pages of rather confusing documentation just to meet requirements tells me there’s something wrong in the system.

So, yes, I just admitted to being in favor of a flat tax. After burning most of a weekend of lost productivity, printing out fifty sheets of paper, mailing in a bunch of documents, and paying what feels like a pretty arbitrary number in the end, I definitely can see the reasoning behind just writing down your income, taking a handful of very basic deductions, and then paying a certain percentage tax on what’s left. That sounds awful good to me.

5. Signing those checks was painful. I just watched a sizable amount of cash leave my pocket earlier today. It was painful to watch all of those check being written - all of that hard-earned money simply leave my pocket, never to return.

6. But even after all of that, I don’t really mind. When I was writing those checks, I grumbled a lot, but now that they’re in the mail and I’ve had some time to reflect on what that money really means, I don’t mind. It means public education for every child. It means streets and sidewalks and fire departments. It means local parks for my child to play in and national parks for me to look at in awed beauty. It means support for the arts, support for science, and support for people who really do need it, even if the systems aren’t perfect.

Regardless of your feelings about the things that are wrong in this country, our government does a lot that is right and it gives everyone an opportunity to work on fixing what’s wrong through voting and directly participating in the system. Much of the good that I identified does come from local government, but a lot of their funding and protection comes from up the food chain. If writing that check means my son can run down the sidewalk to the park and that some poor child is able to attend school, that’s a check I’m quite happy to write, in the end.

A reader wrote in wanting a simple explanation of a very hairy topic: capital gains and capital gains tax. I’m going to take a crack at explaining it in very simple terms, leaving out some of the specific vagaries of the United States tax code.

Whenever you buy something, then sell it for a higher value, you incur capital gains. For example, let’s say you buy a Wii at a store for $250, then sell it on eBay for $300. You’ve just incurred $50 of capital gains.

Under the United States tax code, you are required to pay taxes on capital gains. If you have held the item or asset for less than one year, it is considered a short term capital gain and you pay taxes on it equal to your normal tax rate. However, if you hold it for longer than a year, you are charged 15% tax on that amount (it’s 5% if you’re in the 10% or 15% income tax bracket).

So, let’s say that you’re making enough money so that you’re in the 28% tax bracket. If you bought the Wii and sold it a month later, you are charged short term capital gains tax on that Wii, you have to pay $14 in capital gains tax when you file your taxes. However, if you wait a year and a half after the purchase to sell the Wii, you pay only $7.50 in taxes, a savings of $6.50 on your tax bill.

It is this difference that is one of the big encouragements for long term investment. Let’s say you buy $5,000 worth of a particular stock and within six months it doubles in value. If you sell immediately (and are in the 28% tax bracket), you’re going to pay $1,400 in capital gains tax. But if you hold onto it for another six months (and it doesn’t go down), you can then sell it and incur long term capital gains tax, paying only $750. That’s $650 in savings in your tax bill.

Another note: before you figure up your final tax bill at the end of the year, you can subtract your capital losses from your capital gains. So, let’s say you bought $5,000 worth of stock and then sold it later for $4,000 - that $1,000 is considered a capital loss and is subtracted from the gain (short term losses are subtracted from short term gains and long term losses are subtracted from long term gains). This is why many people time the selling of their bad stocks to maximize their tax benefit - they may want to sell it in a particular calendar year, or hold onto it for a full year until it becomes a long-term capital loss.

What’s the story here? Uncle Sam tries to make it worthwhile for people to invest for the long term by giving people better tax rates if they do so. For investors, the “buy and hold” strategy has significant tax benefits over rapid trading of stocks.

I try very hard to avoid political discussions on The Simple Dollar because it often winds up in partisan bickering, but I feel that a discussion about the future of taxes and their impact on your personal finance decisions today is vital.

First of all, why is it important to think about future tax rates? Yesterday’s discussion about Roth 401(k)s was a very clear illustration of this. In an effort to keep the post from turning into a political discourse, I tried to avoid any discussion about tax rates and their future by making up arbitrary ones for the present and for the post-retirement era. The result? Comments like this from Eugene:

The difference happens when you have enough money to max out the 15.5K 401K limit. If you can’t hit this limit, that means taking a tax hit on the contributions means you can put less in a Roth 401K. If your tax is 25%, the choice is between 10% in a 401K or 7.5% in a Roth IRA. Not 10% versus 10%. And yes, because multiplication is commutative, applying the 25% reduction before contribution/before growth or at widthdrawal/after growth gives you the same result.

Now you also have to consider the impact of tax bands and how money is used during retirement. While working, 401K contribution money sits ontop of your income minus deductions. During retirement, the 401K withdrawals sits ontop of social security minus deductions. I suspect for 99% of people, social security will be a much smaller amount so you end up paying less overall effective taxes during retirement.

And this valid criticism from MossySF:

Trent, you are letting the tax tail wag the dog’s body. The specific tax amount now or later is irrelvant — it’s how much you have after taxes. Paying $2800 now versus $14K later? I have no idea what is better without knowing all the details. If I have to pay more tax because I earned more, hell yes I’d pay more tax. Do not report the tax bill as the final result — report the after-tax gains.

After reading a lot of this, Luke cries out for help:

Is here not ONE example that can be used to make this scenario bullet proof? My head is spinning, but not nearly as much as the arguments that say taxes will change in the future. It’s like hitting a moving target. If someone brings to the table a discussion about Roth IRA’s and 401k’s and someone starts to tear it down because what will happen in 2043 with taxes, how can everyone get on the right page if everything is a variable?

So, is there just a simple example that spells out which one is better without getting into taxology 40-years from now and a ton of what-if scenarios?

Thankfully, Erika came to the rescue with this stellar comment:

Two things:

1. Legally, choosing between a Roth and normal 401k is not an all or nothing decision. If your employer lets you, you can contribute a bit to both (combined contributions still cannot exceed the maximum for any given year).

2. Tax rates are not terribly stable (see the graph at the bottom of the Top US Marginal Income Tax Rates, 1913–2003 page). Your tax rate, regardless of your bracket, may be much higher than it is now or it may be lower.

Combining these two points, deciding which 401k plan to contribute too depends on how you want to manage risk. If you contribute to a normal 401k, you are banking on the belief that you will pay less in taxes when you retire. If you contribute to a Roth 401k, you are banking on the belief that you will pay higher taxes when you retire.

Trying to minimize your total payed taxes is a risky business that involves predicting the future. My opinion is that you should diversify. If you contribute to both types of 401k, you will not end up paying the minimal amount of taxes, but, by paying some now and some later, you will amortize your tax burden across both your working years and your retirement years, and you will reduce the risk of your prediction of the future being wrong.

What can we learn from these comments? Future tax rates are incredibly important in determining which investment is right for you.

The problem is - we can’t predict the future. Or can we? Take a look at the data on historical income tax rates and then look at national debt as a percentage of GDP. Compare the two. Notice that income taxes are high when the national debt as a percentage of GDP is going down, and income taxes are low when the national debt as a percentage of GDP is going up. Notice also that current levels are trending upward and are also at their highest point since income taxes began (excepting World War II). This is expected given that taxes are so low, but at some point, that direction must change - it’s no different than getting your credit card in the bill each month and noticing that the debt is slowly getting closer to your salary.

Eventually, we will have the money to change the trend there, whether through smaller government or more taxes. Since both parties continue to propose plans that revolve around big government to solve our problems right now, it’s inevitable that taxes are going to head back up at some point in the next two decades. That’s the conclusion I draw, anyway.

What does that mean for my wallet? If you believe that taxes are going to eventually have to go up from where we’re at right now, then Roth IRAs and Roth 401(k)s are a very good deal, because you’ll effectively pay the low tax rate now and avoid paying the higher taxes that your future self would have to pay in a normal 401(k) plan.

What if I don’t agree with your conclusion? Many people believe that taxes will remain at the same level in perpetuity, and there’s some reasonable validity to that argument, though I don’t believe it. If that’s the case, then your taxes will probably be lower in retirement than they are right now and Roth IRAs and 401(k)s aren’t that good of a deal.

In general, when describing scenarios on The Simple Dollar, I’ll lean towards believing that I’ll be paying more taxes in the future than now, all other things being equal.

As always, I welcome comments, but please keep partisan political posturing out of it. You can state your view on the direction of America in the future, but kindly refrain from name-calling and other such hallmarks of online political discourse (I’ve read far too much of it over the last few years).

I had a lengthy and interesting discussion with my wife this morning about the interest rate on our home loan. We are locked in at 5.875%, and I told her that at that rate, we were better off not paying extra on the loan and instead putting it away in an HSBC Direct account at 5.05%. At first, she said I was batty, but after I drew it all out for her, she came around to my way of thinking. Here’s why.

Let’s say that we have a $200,000 loan that’s fixed at that 5.875% rate over thirty years. Using the calculator over at BankRate, if we make no extra payments at all, we’ll pay a total of $226,137.30 in interest over the life of the loan. However, we’re also in the 28% tax bracket, so that means we’ll have $226,137.30 in deductions, which will save us $63,318.44 over the life of the loan, meaning we will effectively pay $162,818.90 in interest and taxes over that period.

So what happens if we pay $500 extra in principal each month? For starters, we pay off the loan much, much earlier, in just under 15 years. Nice! Over the life of the loan, we only pay $100,499.55 in interest. With that as a tax deduction in the 28% bracket, we will effectively pay $72,359.68 in interest and taxes over that period. In short, investing $500 extra a month into our mortgage will net us $90,459.22. Right now, you should realize where this is going, because you’re putting in $90,000 ($500 times twelve months times fifteen years) to only get $90,459.22 - and it’s even worse if the income tax is higher than that.

On the other hand, what happens if we put $500 a month into a 5.05% APY savings account for 15 years? I used Excel to crunch the numbers here and discovered that doing this will give me $133,912 at the end of those fifteen years. By putting that $500 a month into just an ordinary savings account, you blow away the return of putting it into your home mortgage.

The more astute folks out there will look carefully at that mortgage calculator and observe that after fifteen years without paying extra principal and instead putting that $500 into a savings account, you won’t be able to take that balance and pay off your home loan, while the other way you would have your home loan paid off. The difference is the income tax savings each year.

If you put the extra $500 into a savings account instead of against your principal, your income tax bill at the end of the year will be significantly lower than prepaying your mortgage. If you take that money you saved on income tax each year by putting the $500 a month into the savings account instead of the mortgage and put it into that savings account each year, you’ll have an extra $63,139.55 in the account at the end of the mortgage. That leaves you with a final account balance in that account of $197,051.50. You’ll only owe $142,249.76 at the end of fifteen years, so you can just write a check to pay the whole thing off and still have more than $50,000 in the bank. In fact, if you so wish, you could actually pay off the home at the end of year thirteen and still have several thousand in the account.

In short, if your interest rate is below 7% - and especially if it is below 6% - and you have willpower, you’re much better off putting mortgage prepayments in a high interest savings account or other investment than putting it in the principal of the mortgage.

After figuring things this way, our current plan is to just put our planned mortgage prepayment into Vanguard index funds (instead of HSBC Direct because we’re pretty sure we can get better than 5.05% APY over twelve or so years in index funds). We’re currently planning on double payments, so we would effectively put a payment into the mutual fund each month and then just let it grow. We never intend to prepay on our home loan; instead, we’ll just let it ride until we move on to our dream home, then sell it off at our own pace.

Although I usually avoid politics like the plague, I felt this was an important issue to address.

Yesterday, one of my fellow personal finance bloggers wrote a piece entitled What Is The War In Iraq Costing You? In it, the author makes the following statement:

According to this report of the National Priorities Project, the median income family in the United States paid $3,736 in federal income taxes in 2006. Out of this, $1,354 is spent on military expenditure and to pay the interest for debt related to military. In other words, around 36% or a little over one-thirds of the total tax paid is used for military purposes. Now, check how much your tax payment was this year and check what one third of it comes up to.

The author also points out this tool, where you can enter the amount of federal income tax you paid in 2006 and see the exact dollar amount that you’re contributing to various branches of the federal government. For example, I entered a rough number into the tool to see what kind of results I would get:

Of the $10800.00 you paid in taxes:
$2937.60 goes to the military
$2019.60 goes to pay the interest on the debt
$2257.20 goes to health care
$648.00 goes to income security
$486.00 goes to education
$367.20 goes to benefits for veterans
$280.80 goes to nutrition spending
$205.20 goes to housing
$162.00 goes to environmental protection
$32.40 goes to job training
$1339.20 goes to all other expenses

To me, the pieces of the pie do not reflect my values. From my eyes, we vastly overspend on the military and vastly underspend on paying off the national debt and erasing many of the mistakes of the last thirty years. If we made a serious commitment to pay off the national debt like the one that was in place at the end of the Clinton administration, we could support every single program that we currently support and also drastically lower taxes. It would put an extra $2,000 or so a year in my pocket, for example, or we could use some of that money to build a better health care program.

I challenge you to look at this information and decide for yourself where you think your money should go. Which of these areas is important to you and should have more money invested? Which of these areas is not as important to you and could have some fat trimmed? Remember, you’re looking at the real dollars that you are spending. This money is the money that Uncle Sam is taking out of your pocket.

Once you’ve really figured that out, support those candidates that match your views, even if they’re not popular. Don’t worry about opinion polls or what everyone else thinks or which candidates the media covers or doesn’t cover: look at all of the candidates, even those not in the Democrat or Republican Party, and find a candidate that feels the same way that you do, and then support that candidate. For me, at least, I often have tons of political buttons and materials for various candidates from parties large and small and from various political races - I don’t worry too much about their party, I worry about what they stand for and whether it matches what I believe - and more importantly, what I’m willing to stand for with my wallet.

Remember, it’s not just politics at stake, it’s your hard-earned money. If you sit back and choose not to worry about it, you’re essentially giving them permission to take thousands of dollars out of your pocket and spend it on things you don’t like. Would you let a stranger on the street do that? Then why would you let the government do that?

One of my readers, Annie, writes:

I am up for a promotion at work, but a coworker says that I shouldn’t try to get the job because it will put me in a higher tax bracket. Is this something I should worry about? Would I actually make less money after getting a raise?

Don’t sweat the small stuff, Annie, and go for the promotion. You will bring home more money after getting promoted, even if it does bump you into another tax bracket. Your coworker is either misinformed or is trying to convince you not to go for the promotion. Here’s why.

A Quick Primer on Tax Brackets

At the end of the year, when you do your taxes, you’re actually calculating a number called your taxable income. This is the amount of income you brought in that the government actually takes income tax out of. The higher that number, the higher tax bracket you find yourself in.

For example, let’s say you’re a single person. In 2006, the United States federal tax brackets were:
10%: from $0 to $7,550
15%: from $7,551 to $30,650
25%: from $30,651 to $74,200
28%: from $74,201 to $154,800
33%: from $154,801 to $336,550
35%: $336,551 and above

If you make $50,000 in taxable income, then $7,550 is taxed at 10%, $23,100 is taxed at 15%, and the rest, $19,350, is taxed at 25%. That means you pay a total of $9,057.50 in income tax. $40,942.50 is yours to keep.

Now, if you got a raise and made $60,000 in taxable income, then $7,550 is taxed at 10%, $23,100 is taxed at 15%, and the rest, $29,350, is taxed at 25%. Notice that there’s only one difference here: that extra $10,000 is taxed at the 25% rate, but nothing else changes. You pay a total of $11,557.50 in income tax, and $48,442.50 is yours to keep. Your raise, after taxes, is $7,500.

Understanding tax brackets can explain a few things:

Tax deductions are more lucrative for high income people than low income people. If you only have $30,000 in taxable income, you’re only paying 15% at most on your income, so sweating it out for a $2,000 deduction saves you only $300. However, if you’re in the 35% bracket, that same $2,000 deduction saves you $700. That’s a $400 difference, so the higher income people generally get more benefit from deductions.

Tax withholdings from your paycheck are based on your pay rates and the tax brackets. This information is usually supplied by the IRS and is based on your salary and the number of dependents you claim (which are deductions). This gives a thumbnail of what you’ll be taxed on so your employer can keep out an appropriate amount of money. Altering your number of deductions changes the size of the withholdings because if you claim fewer dependents, your taxable income appears to go up, and if you claim more dependents, your taxable income appears to go down.

“Extra” income is always taxed at the highest rate. Let’s say you’re in the 28% tax bracket and you happen to make an extra thousand dollars doing some consulting work. That money is taxed at 28%, so you’d better be saving 28% of it for tax day. This is often why people end up paying more on their taxes come April - they earned some extra income.

To summarize, Annie, don’t fear the tax bracket - more earnings are always better.

Tax season is finally over, and millions of Americans will receive checks in the mail in the coming weeks from the IRS. Although I do some consulting and other independent work (which means that I don’t typically receive a tax return at all), my parents often received a very nice return (having a low income and a lot of dependents does that for you).

In short, I learned from my parents five things not to do with your tax return:

1. Buy lots of little frivolous things. Quite often, after getting a return, my parents would take the entire family out to dinner a few times. One year, they bought a Nintendo; another year, we got a giant new television when the old one was fine.

2. Get a new car. Income tax returns often meant automobile upgrades, even if the old one was still running fine.

3. Put the check directly into a checking account “for safekeeping.” This idea was heading in the right direction, except by putting it in the checking account, it didn’t earn anything, and over time it slowly was spent on all kinds of unnecessary things until it was gone.

4. Loan it to family members. Twice, the entire return was “loaned” to a family member who just simply never repaid the “loan.”

5. Have a giant party. At least one year, my parents had a giant spring party with tons of food and drink that ate almost all of their return.

Even as a child, I knew that this probably wasn’t the best way to handle your tax return, and now as an adult, I can see even more clearly what you should be doing with a tax return. Here are ten much better options for you to use your tax return on.

1. Start (or supplement) an emergency fund. Very few Americans have an adequate emergency fund - that is, a savings account somewhere that contains money that could be used for living expenses for several months in the event of a major crisis, like job loss. Sock the return away in a high interest savings account (like the one from ING Direct) and let it just sit there until disaster strikes. This way, the disaster won’t wreck your finances - you can just go withdraw the money and it’s taken care of.

2. Invest it in a mutual fund. We have a mutual fund going so we can have our dream house at some point in the future. This is a big part of our current reasoning in our house hunt - if we buy a less expensive home now, one we can easily make the 20% down payment on, we can continue to build this fund and eventually buy a much nicer home. This is a perfect option if you have a big long term goal, like a home, that’s far down the road.

3. Start (or supplement) a Roth IRA. If you need to kick retirement saving into high gear, look into starting a Roth IRA. It’s a great way to save money for retirement without any tax issues at all.

4. Seed your own business. Roll the money into things you could use to start a side business. Not only will you be able to deduct that money next year, but you’ll also lay the foundation for another income stream.

5. Put it in a 529 for your children. Use that money to lay the financial groundwork for your child’s college education. A 529 plan allows you to easily invest money with tax-free growth for educational expenses down the road.

6. Start (or supplement) a car fund. This doesn’t mean that you should go replace your car, but merely that you’re respecting the inevitable need to replace your current automobile.

7. Do a home improvement project. Roll that money right into new kitchen cabinets, a freshened-up bathroom, repainting some rooms, or a new carpet. Home improvement projects can increase the value of your home, which is especially important if you foresee a move in the coming years.

8. Make your living space more energy efficient. Replace all of your lightbulbs with CFLs, put in programmable thermostats, air seal your home, get a blanket for your water heater (if it needs one), and so forth. Doing these things all together can significantly reduce your monthly energy bill, meaning that in the long run the money you spent will become a tremendous investment with monthly dividends on your electric bill.

9. Buy an appliance that encourages eating at home. Similar to the energy efficiency idea, purchasing an appliance (like a deep freezer or a stand mixer) that can encourage you to eat at home more often will gradually reap rewards over time, as you begin to prepare food at home. A deep freezer is one of the first investments we plan on making when we have our own home, because we can prepare many meals well in advance and merely pull them out and toss them in the oven in the evening.

10. Buy individual stocks. You could even take the money and start an individual stock investment account. This is a good way to get very familiar with the stock market and individual stock investing, though it is not something I actively pursue at this point. Remember, though, that individual stock investing carries substantial risk - but has the potential for substantial reward.

The moral of the story? There are a lot of things you can do with your tax return that can set you on a strong financial path. Don’t let this little financial boon convince you to do something unwise with your hard-earned money.

Hopefully that title got your attention. In fact, it’s a variation on the subtitle of an article posted to Slate.com yesterday, Spend Every Dime!, which says that you’ll actually lose money by saving and investing it, so why not spend now? Normally I would ignore such tripe, but this article has been making the rounds on several popular sites and multiple readers have asked me about my perspective on the article, so here goes. It won’t be pretty.

Unsurprisingly, this article was written by Henry Blodget who, along with Mary Meeker, was one of the investment analysts heavily behind the dot-com boom - and he paid dearly when it went belly-up. The end result? He lost his job at Merrill Lynch in 2001 and in 2003 was was charged with securities fraud by the SEC. He’s currently banned from the securities industry for life, which leads us to his career as a writer at Slate, where he basically spends his time slamming the securities industry.

Now that we know who is writing this stuff, let’s take a closer look at it. Here’s the key paragraph, in which he “explains” why saving is a fool’s game:

How does the math work? Let’s say your T-bills return 3.7 percent. If you stash $10,000, you’ll make $370 before taxes and inflation in the first year. Taxes are assessed on the nominal gain (before adjusting for inflation) instead of the real gain, so if you’re in the 15 percent tax bracket, you’ll then pay $56 to the government—and lose about $310 of value to inflation. In other words, you’ll eke out about a $5 real gain on a $10,000 investment (an 0.05 percent return). If you’re in higher brackets, meanwhile, you’ll actually lose about 0.5 percent of value every year. The only time you’ll generate real gains is when “real” rates of return are significantly higher than 0.6 percent (as they are now). But when real rates are negative, as they were a few years ago, you’ll be losing a lot more than 0.5 percent per year.

In other words, his argument is that if you put money into a 3.7% T-bill right now (here’s my earlier article explaining what a T-bill is and how it works), you’ll basically break even in “real value” over a long period, because inflation plus taxes will eat your gains.

Problem number one is that your other options are far, far worse. Let’s say you instead stuff the cash into your mattress. With inflation at roughly 3%, if you leave that one dollar in your mattress for ten years, it will only have the purchasing power of 74 cents while if you leave it in the T-bill, that dollar will keep its real value over the ten years. Even worse is when you spend that money now. Almost every consumer purchase you make starts depreciating immediately as soon as you buy it, making the actual spending of the money quite terrible.

In other words, Blodget is using a debate technique: argument by selective observation, also known as “cherry picking.” He’s applying a set of facts to the T-bill, but not applying it to the default state, cash.

Problem number two is the way he treats the stock market:

Unlike T-bills or bank accounts, stocks compound tax free, so you won’t owe tax until you sell them (except, again, on the dividends). Yet even stocks aren’t ideal for savings. For one thing, there are those annoying bear markets: The S&P 500 is still below where it was seven years ago, even before adjusting for inflation. Then there are dividend taxes: In the 20th century, nearly half of the average 10 percent annual return on U.S. stocks came from dividends, not price appreciation, and you pay taxes on dividends every year. Lastly, there’s the absurd way that the IRS accounts for “realized gains.” Once you’re in the black on a stock or fund, current tax policy forces you to stick with it—or get socked with a capital-gains tax bill. In other words, even if your stock’s best gains are behind it, if you switch to a better stock, it might be years after paying your tax bill before you get back to even.

This is utter madness. Capital gains tax on dividends does occur, but it’s capped at 15%. In essence, you collect a dividend of $100 - money paid out to you directly by a company without you having to get rid of any of your assets - and you only have to pay $15 on it. That’s significantly lower than the income tax that you have to pay on money you earn from working; if this dividend were treated that way, you’d likely have to pay $28 of it to Uncle Sam. In short, compared to actually working for a living, stock dividends are a very tax-effective way of generating income.

Here, Blodget uses argument by generalization: income that is taxed is bad. Dividends are taxed. Thus, dividends are bad. That’s a terrific fallacy.

Problem number three is that he spends most of the article blaming the tax man for this when the real enemy of any investment is inflation. Inflation eats the majority of your gains on most investments, but it’s an invisible monster: you don’t directly see it on the balance sheet. You only see it when you go to the store and realize that your money doesn’t buy as much as it used to.

This time, Blodget uses my favorite debate fallacy, the fallacy of the general rule. “Uncle Sam takes our money via taxes. Why would he leave us broke like that? Let’s spend instead!” and thus preys upon irrational mistrust of the government in a case where the government actually does a really good job of looking out for individual investors. The truth is that Uncle Sam only takes a small portion of the pie: the real monster in the room is that of inflation, and via the Federal Reserve, Uncle Sam is doing a very good job of battling that monster. In short, Blodget has an axe to grind, and he’s using bad debate techniques to push his viewpoint.

Here’s the truth: over the long run, saving beats spending any way you look at it. You can construct situations where saving doesn’t earn huge returns, but if you use those same glasses to look at spending the money (or even stowing it away in a mattress), those other options are far, far worse. Don’t let some fool with an axe to grind convince you to spend your money irrationally.