When America was founded, there were no income taxes – just taxes on goods and on trade. It wasn’t until about 150 years after the country’s founding, there was no income tax. And there is a good reason for it.
Have you ever really thought about income taxes, and what a country is doing by imposing an income tax? Most other taxes involve doing something. You want to buy something, so you pay a tax when you make the purchase. The tax helps fund the protections that allowed that marketplace to function. You want to travel somewhere, so you pay a tax when you make the trip. The taxes help cover the cost of the roads and protections along the route. In both cases you want something that involves help from the government and use of government services.
With an income tax, you really aren’t doing anything or asking anything from anyone. All you are doing is producing things. And you have not even necessarily gotten anything for the items you produced yet – you just have a bunch of IOU’s that will allow you to purchase things later. People just come to your home (symbolically, unless you don’t pay your taxes), see that you have produced something, and demand that you give up a share of what you have made.
Imagine if you had spent all summer growing corn. In the Spring you dig up the ground and get everything ready. You plant the seeds and spread fertilizer out. All summer long you water, pull weeds, and chase off crows. Finally, in the fall, you spend hot afternoons and evenings picking the corn and storing it away, until your barn or silo is full.
Then someone comes along and says, “You owe me 15% of that corn.”
Now I’ll agree that part of your money goes towards things that government provides that enable you to make an income. The government provides the protections that are needed to allow you to focus on running a business or working in a factory. The government provides roads and infrastructure that allow you to ship goods and travel to and from work.
And actually, my example isn’t quite right. If you just grew the corn and then stored it away, I don’t believe you would owe income taxes. Things you produce for yourself are generally not taxed. And that’s the really strange thing. When you do things selfishly for yourself – build a home for yourself, grow food for yourself (and you family), or make clothes for yourself, you pay no taxes. You could even make yourself a yacht or a private plane, and you would owe no taxes (if you produced all of the materials yourself).
If you do things for other people, however, like grow food for them, build houses for them, or make clothes for them, you are taxed. And the more you do for other people, the more you are taxed! If you make a few clothes per week and maybe provide clothes for 100 families during the year, you’ll be taxed at 10% If you manage a group of people, making clothing for 10,000 families a year, you are taxed at 25%. If you run a company that provides clothes for hundreds of thousands of people, you’re taxed at 40%!
So think about that – the more you do for others, the more you produce, the more you make the lives of others better, the more you are taxed. Does that sound like a good system?
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
Picture Credits: Kevin Abbott , downloaded from stock.xchng.