Actions have unintended side effects.
We're not talking about a butterfly across the ocean causing a storm just after you wash you car. The causality is hard to show and the effects are minor. Instead, think of beavers. They use renewable resources to build nice homes with swimming pools. They're happy but they flood land above their dams and send less water downstream.
GolfThe RBC Canadian Open is making golf fans happy and stimulating the Toronto economy. What's the effect on the residential neighbourhood surrounding St. George's Golf and Country Club?
We live inside the No Parking blue zone but not in the smaller Local Traffic Only zone. A portion of Islington Avenue, a major road, is closed from July 12-30. The detours are putting more traffic on other streets like The Kingsway, Kipling and Eglington.
We're still getting city services like garbage collection. Traffic isn't bad enough to require the police to direct it. Drivers aren't honking their horns in frustration. Life is fairly normal.
Here are three externalities
- cars park just outside the No Parking zone
- the MetLife blimp in the skies is more intrusive than the satellite view in Google Maps but they're probably not recording activities in our yard (aside: my first fulltime job was with MetLife)
- some neighbours are renting parking on their driveways and lawns for $20 to (gulp) $50, depending on the day and location. The official parking is at the distant Woodbine Racetrack with yellow school buses as shuttles. No air conditioning.
Win/LoseOther activities may have greater externalities. Let's look at some.
Down the street, a neighbour feeds racoons. This makes her happy but they damage and defecate on nearby lawns. Logic doesn't work well with animal lovers who ignore these consequences
Our Costco started selling gasoline last month: premium fuel is about the price that other gas stations charge for regular. The regular gas stations are probably losing business.
Drivers with radar detectors zip faster with impunity. This encourages other drivers to speed too … but they're more likely to get caught.
Some people engage in dangerous sports and endanger the lives of the rescue crews.
Addictions like drinking, smoking and gambling may give participants satisfaction (at least in the beginning) but there are huge consequences for families and society overall. Car accidents. Second-hand smoke. Bankruptcy and crime.
The tax-free underground economy helps participants but honest taxpayers make up the lost revenue. We benefit when tax auditors catch the culprits but about 50% the audits found no unreported income.
There's also the Planet of the Apes series. Depending on movie, apes are slaves to humans or vice versa. That's win/lose too.
InducementsBusinesses take steps to induce behaviour. McDonalds is selling any size of soft drink for $1. That's cheaper than water. However, those buying the largest sizes and conditioning their bodies to consume them are inflicting harm on themselves.
Governments take steps to induce taxpayers to act in ways that benefit society. Some incentives create tax savings for a few, which shifts the tax burden to the masses. To limit these side effect, governments take steps to limit the size of the benefits. That helps maintain tax revenue. Here are common tax saving tools.
- RRSPs: caps on deposits and tax on withdrawals
- TFSA (Tax-Free Savings Account): limits on deposits but tax-free withdrawals
- investment loans: limits on interest deductibility based on the investments made
Unblocking The RestrictionsHybrid technology improves fuel economy, but can boost performance instead. It's unlikely that Porsche and BMW are striving to beat the fuel efficiency of the Prius.
On the financial side, the wealthy say they most want tax advice and income tax strategy (67%). They expect frequent, proactive advice and aggressive recommendations. The right advisor can propose creative strategies and --- more important --- implement them effectively.
For instance, life insurance has unique tax advantages. Deposits are capped by the Maximum Tax Actuarial Reserve (MTAR) but you can deposit more by simply buying more insurance. Withdrawals are taxable but the savings can be accessed via tax-free loans. Tax deductions arise when the loan proceeds are invested. In some cases, a portion of the premium can be made tax deductible too.
There are probably other tools with effective tax strategies too.
When there are side effects, why not join the winners? You can. Even if you live near a golf course.
- Bonding with nongolfers (includes comedy)
- How effective are tax auditors?
- Ways you want your advisors to improve
- The original and overlooked Tax-Free Savings Account (TFSA)
- Secret 7: The best tax sheltering in Canada
- The four steps in wealth management
Podcast Episode 76 (6:09)
direct download | Internet Archive page
PS Today looks like a great day for golf