A Balanced Perspective Towards Taxes
Updated: Dec 28, 2019
Note: None of this post constitutes tax advice or advice about filing taxes. This post is for educational purposes only. If you require tax advice, please contact an appropriate tax professional in your state.
Some people hate taxes - no matter what:
During the early years of the Obama Presidency, there arose a group of people in strong opposition towards his policies and objectives. They called themselves "The TEA Party". TEA was to stand for "Taxed Enough Already". And while taxes weren't the only aspect to this group's agenda, it was certainly in the forefront.
Ayn Rand wrote a large novel titled Atlas Shrugged. This book, written in 1957, despised taxes. One of the "strikers" even swore to recapture all the taxes that one of the lead characters, Hank Rearden, ever paid.
Let's do a real comparison:
Well, let's compare a few things. In 1957, the top Federal Tax rate for income above $400,000 a year when married filing jointly... was 91%!
Now, let's do an approximate inflation adjustment to that figure: $400,000 x 3% over 60 years = $2,356,641 dollars! Yes, this was certainly a cost of doing business in America back then - designed to either "punish" those for doing extremely well, or to ensure that "the rich pay their fair share", the effect would be the same. (Did you also see all the various tax brackets leading up to that amount? And no, I don't know about all the different tax breaks and deductions as the entire tax code was redone in 1986.)
The average income in 1957 according to this U.S. Census link was only $1,200 a year.
What are today's tax rates?
Today's top tax rates for those married filing jointly, you would pay 37% for incomes above $600,000.
Now, let me ask you a question: If the top tax rate has gone from 91% to 37%... how can taxes be too high? It's a BARGAIN to live in the United States!
But should you pay any more than necessary or required than the law prescribes? NO!!
It is our duty, and quite often our Patriotic Past-time, to find EVERY legal loophole to legally lower our annual tax liability.
There is a big difference between Tax Avoidance and Tax Evasion. That difference is about 20 years. (That's a joke.)
Different professions give you different tax structures.
Robert Kiyosaki writes about the "Cash Flow Quadrants" and the various tax breaks available in each quadrant.
E = Employee
Employees have the LEAST amount of tax breaks. Why is that? Because they are hired by those who DO get the tax breaks. More on this later.
S = Self-Employed
Self-employed professionals are highly skilled and may have support staff, but the business success relies primarily on one to two individuals.
They are in business, and as a business venture, they are entitled to the tax-breaks under the law.
B = Business Owner
The difference between a 'B' Business Owner vs an 'S' Self-Employed business owner... is if the business can function without the owner present. If so, that's a business. If not, that's a self-employed person generating their own paycheck. Think about a doctor versus a franchise owner. The doctor is the self-employed specialist while the franchise owner owns (per licensing) one or multiple locations.
These larger businesses generally get tax-breaks to go to various cities (search for Amazon seeking an additional location for a second headquarters and how many cities are fawning and competing for them to build in their city or county). How can cities afford to give these tax-breaks? They are usually only for a limited time and they know their local economy would improve as new and better jobs are created. Hence the term "trickle-down" economics.
I = Investor
This is your money at work. Most investments, if you understand the tax laws, when sold at a profit would only pay capital gains taxes, instead of ordinary income taxes. That means that you could only pay a capital gains tax of 20% (if in a higher income tax bracket) instead of paying 37% (almost double). https://www.fool.com/taxes/2017/12/22/your-guide-to-capital-gains-taxes-in-2018.aspx
How did Donald Trump avoid paying taxes?
Let me first admit that I don't know everything, and this ends up being rather political. However, if one sustains business losses, those business losses can carry over to additional years. https://www.investopedia.com/terms/t/tax-loss-carryforward.asp
Of course, there was at least one year (2005) where Donald Trump paid 25.33% ($38m in taxes out of over $150m in earnings; in line with capital gains rates and some ordinary income rates as outlined above):
The rest of that interview and other critics of the president talk more about "tax rate envy", that he "got away" with only paying 25% in taxes. After understanding the Cash Flow Quadrant, and understanding the kind of profession Donald Trump is in (commercial real estate development and other projects), we can see that the tax-code will favor certain professions over others, because they create economic stimulus, growth, and jobs.
Some take-aways from this blog post:
1. It is a BARGAIN to live in the United States TODAY, compared to 60 years ago, particularly for those who earn exceptionally well.
2. Our profession and how we run our businesses determines far more about our taxes, than just the percentage rate we pay.
3. You do NOT have to volunteer to pay more to the Internal Revenue Service than you are legally required to pay.
David H. Kinder | Lifetime Tax & Wealth Educator
Dynamic Advanced Insurance, Financial, and Retirement Strategies