Little Old Les writes in on my post about Tax Efficient Investments:
What does the phrase "a whole lot of scarcity-based thinking" mean?
In its most basic form, scarcity thinking means if someone else wins, I lose. And vice versa.
Considering it in the context of last week's post, it would mean believing, inaccurately, that investing in a dividend paying stock "cheats" the government out of taxes because the rate on dividends is lower than the rate on other forms of income.
In other words, scarcity thinking is a framework where you approach a problem or a challenge using a fixed-pie or zero-sum mindset. And with regard to money and investing, it means presuming if I get an extra dollar, by definition somebody else loses a dollar.
Now, to normal people (in contrast to abnormal people like me *cough* who spend their free time thinking about economics and investing), this framework for thinking about money can seem quite reasonable. Logical even.
But here's the thing: the economy doesn't work that way.
The supply of money and wealth in an economy isn't fixed. Not even close. In reality, if you earn an extra dollar it generates more wealth for everyone else--the government included. This is why entrepreneurial bloggers like Mark Cuban say the most patriotic thing you can do for your country is to get rich. He's right.
So, let's look at investing and taxation using the opposite of a scarcity mindset: an abundance mindset. Using abundance thinking, you'd work through last week's post and conclude that tax revenues and investment income may not be zero sum. In fact, our investment in a dividend paying stock not only provides the government with additional tax revenues, it also provides you with added income that you can use as you see fit. Which, intriguingly, can generate still more wealth and tax revenues.
Here's the important part: You can decide which framework to use. You can pick up the scarcity lens or the abundance lens to look at any problem, issue or challenge in life. But here's the problem: if you choose a scarcity mindset, you'll arrive at conclusions that on their face seem reasonable, but in reality, those conclusions will likely be both wildly incorrect and deeply disempowering.
Why? Because when you follow scarcity-based logic all the way to its conclusion, everybody loses. You won't make the dividend-paying stock investment because you've pre-emptively concluded that you'd be "cheating" the government. Which means you won't earn any incremental investment income. Worse, the government doesn't get any incremental tax revenues because you decided not to take action. You've caused yourself, the economy and our government to lose out.
And the end result is the most disempowering of all: you won't bring yourself any closer to financial independence. In other words, everybody loses--or wins--because of the framework you selected to look at the problem.
Readers, share your thoughts!
For Further Reading:
1) The Seven Habits of Highly Effective People by Stephen Covey. Covey is widely credited for coining the phrases "scarcity mentality" and "abundance mentality."
2) Cooking Up Advantages Out of Disadvantages at Casual Kitchen. A zero-sum mentality doesn't just mess up your thinking in the domains of money and investing. It leads you to disempowering conclusions about food and health too. See also: Uninstalling Limiting Beliefs With Healthy Food.
3) The Most Patriotic Thing You Can Do at Blog Maverick. This post is an exceptional example of abundance thinking in action.
4) The Abundance Mindset via Steve Pavlina. A useful summary of the concept of abundance. Also worth reading for Steve's discussion of what he calls the "outrage script."
5) Overcoming Jealousy via Steve Pavlina. Jealousy is a side-effect of a mindset rooted in scarcity.
6) Sufficiency at The Art of Non-Conformity. A good essay from Chris Guillebeau on how, for most of us, a scarcity mindset is the default mode.
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Posted by Daniel at 3:11 AM on Sunday, October 21, 2012