'Free' Wi-Fi for all!

Lately, the issue of whether or not the FCC can forbid municipalities from offering 'free' Wi-Fi to their residents has been heating up. Philadelphia has been on the forefront, with plans to create a city-wide wireless network that everyone can access.

I'm going to expand on a post I made on Slashdot: These proposals are like "free fishing lures". Imagine that a city government decided to start up a program giving free fishing lures to any interested citizen. After all, the old saying says that to end poverty, you teach a man to fish, right?

The vast majority of Americans don't fish on a regular basis. This is not due to inability to afford it, but a simple lack of interest. However, there is a small group of Americans who do fish, and they can be quite enthusiastic about it. These people already know exactly what they want in the way of fishing lures, and probably already have it. If they don't have it, it's doubtful that the People's Ministry of Fishing Lures would be able to provide it.

Not only that, but a fishing lure is useless if you don't have a fishing pole, and the knowledge of how to fish. A 'free fishing lures' program wouldn't provide either of these things -- at best, it would provide a marginal benefit to people who are already interested in fishing, at the expense of everyone else who isn't. (Ironically enough, many of whom would be poorer than the fishing lure beneficiaries...)

Responding to IraqNow

Jason over at IraqNow makes a thoughtful response to my call to abolish the Roth IRA, pointing out a few things I didn't think of and giving a few other comments.

I think I can accurately summarize his criticisms thus:

• It's very hard to get the same growth (g) in a non-tax-deferred account as you can get in a tax-deferred account.
• There are some very important differences between retirement accounts in how they are treated at death. I am unmarried and childless, so estate-planning concerns didn't occur to me. While I only considered "withdrawable balance" to mean "How much cash can I turn it into?", there should also be a consideration of "how much would my spouse/kids get if I kicked off tomorrow?"
• You can rebalance a tax-deferred account much more easily.
  

His first point is very valid. I had a comment about it in an earlier draft of the posts, but it slipped out. All that's left of it is a quick gloss about how Neal should keep his money in a growing non-dividend paying stock. Capital gains and dividends, which make up the bulk of non-growth income in an investment account, are currently taxed at 15%.

This means that if your IRA is growing at x%, then your non-deferred account will grow at somewhere between (x * .85%) and x%, depending on what percentage of your growth is taxable. If your growth doesn't fall into these categories, your growth can be as low as x * 65% if you are in the 35% tax bracket.

Jason mentions that the S&P 500 issues a dividend of around 1.87%. If you put $1000 into a S&P fund, you'll get $18.70 in dividends, which will mean that you will owe an additional $2.81 in federal taxes, reducing your growth by almost 0.3%. Compound that over 30 years, and your non-deferred account will have about 9% less money in it than your Roth IRA does. However, if you're not yet 59.5 years old, that slightly smaller balance can be withdrawn at a far lower tax rate than the Roth IRA can be. As I said initially, the Roth IRA will (assuming identical growth and g > 1) always have a higher withdrawable balance after age 59.5 than before.

However, there are lots of other problems with the Roth IRA:

• They create an entire class of people who consciously don't care what happens to tax rates, and (I believe) subconsciously want them to rise.
• They result in significantly smaller initial investments in the economy when people decide to save for retirement.
  
• They take away the government's ability to Borrow a Trillion Dollars. While I'm mostly libertarian, I'm all for the US using its collective "riskless" credit rating to earn tens of billions of dollars per year.
• Unless tax rates change, they will still always have the same withdrawable balance as a traditional IRA / 401(k) at retirement (but maybe not death)
• Their ability to make investment choices without considerations of tax consequences is also available in traditional IRAs / 401(k)s.