Category: taxes

A Tax System for a Productive Society

by smallivy, posted in Personal Finance, taxes

As President Trump rolled out his tax plan, one area that corresponds with his campaign promises is a cut in the corporate tax rate.  During the campaigns he said he would cut it to 15%, maybe 20%.  Now it appears that he is eyeing a cut to 15% from the existing rate of 35%.  This has caused some to declare that the rich corporations are getting richer at the expense of the poor.  Yet really, since businesses just pass through costs to consumers, and a tax is just a cost, who is really paying the corporate income tax?

The cuts on the individual side in the Trump plan are a bit less exciting.  Many rates would stay about the same, except there would be a virtual exemption for the first $24,000 of income.  The top rate would only fall from 39.5% down to 35%.  Still, we’re hearing the usual calls from progressives of how the rich are getting a big tax break while the poor and middle class get nothing.

Really, though, what is the purpose of taxes?

The purpose of taxes is to raise the money needed for government functions.  But oddly, some people seem to feel that taxes are to be a punishment for those who make “too much money.”  Originally it was probably just the idea that those who make more would be able to pay a greater portion of costs, kind of like when your parents pay when you go out to eat while you’re in college or just starting a first job.  Or maybe it’s more the thought that those who don’t make much won’t be able to pay much if anything in taxes.  That idea morphed into the idea that those who had more burdens, like children to raise, health expenses to cover, and a bigger mortgage payment, should be given a break since they have less money available to pay taxes.  Somehow along the way it became virtuous to have obligations and make little money and evil to have few obligations and make more money.

              

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Now the thinking goes:

1.  If you make little money or no money, you should not pay taxes and maybe even get money from the tax system.  You should also get a lot of services even though you have paid nothing for them.

2.  If you make more money, you should pay more in taxes and pay at a higher rate.

3.  If you make a whole lot of money, you should pay really high rates.  Maybe above a certain amount you should just have it all confiscated.  (After all, who needs that much money?)  Not only that, but you should also not get to deduct your obligations, and you should not get to partake in many of the services provided by your tax dollars, at least without paying again.

As an example of denying those who make above a certain amount access to services, both Bernie Sanders and Hillary Clinton favored providing free college, but only to those making less than $125,000 per year.  The wealthy would be paying most of the taxes, providing the money to pay for those colleges, yet their children would not even get to go to those colleges without paying again.  After all, why should some son of a billionaire get to go to college for “free” just because his parents paid for it?

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Note that nowhere in the calculus is the amount of effort an individual puts out included.  If someone does nothing all day and therefore makes no money, he is still rewarded.  If someone works 100 hour weeks to make $150,000 per year, he is punished.

Effort is punished.   Resting is rewarded.

But what do we want people to do in a society if we want a wealthy society with lots of wealth to go around?

We want people to do things.

We want them to grow crops so that there is food to eat.  We want them to build houses so that there are places to live.  We want jobs, so we want people to start companies and grow them to the point that there are lots of jobs.  We want lots of managers and supervisors, since those are higher paying jobs, so we want big companies.  In general we want almost everyone working, using their time to make things, so that there are more things to go around.

But think about the tax system described that rewards you for doing little or nothing, but penalizes you for doing a lot.  If you lay around on the couch, you get free stuff and money.  You pay no taxes.  You are considered noble.

If you spend a lot of time working and creating things, you are considered less noble.  You are made to pay more.  You get less free stuff.

If you start a big company and employ a lot of people, you are evil.  You are made to pay a lot as punishment for your sin of making a big company that employs a lot of people.  You get no free stuff, even though you are providing the money that is providing that free stuff.

The current system encourages people to do little or nothing.

You would not want to do too much, or you would be punished.  You get to keep all of the dollars you make between $0 and $20,000, but only 85 cents on the dollar between $20,000 and maybe $80,000.  You also don’t get as much free stuff as you make more money.  Over a certain level, you only get to keep 60 cents for each dollar you make.  If we go back to where we were in the 1950’s before President Kennedy started reducing the top tax rates, at a certain point you would only get to keep ten cents for every dollar you make.   This system does not encourage people to produce and do the things.


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This system does not encourage people to be productive, which is what you want to have a wealthy society with lots to go around.

So what would a system that encourages people to produce, and make jobs, and build big businesses with lots of high paying jobs look like?  Well, it would not penalize people for being productive.  You would not get to keep a smaller portion of each dollar you make as you cross certain income thresholds.  This sounds like something like the flat tax or the Fair Tax,  In fact, maybe there would be an incentive to make at least some minimal amount – to produce at least something – so that everyone would at least spend some of their time working to produce something.  Maybe a flat tax where receiving any sort of aid required that you have some minimum income level (based on your physical and mental capability to make an income), or a Fair Tax where you get the prebate if you earn a certain amount of income each year.  (Go to Fairtax.org for information on the Fair Tax.

So, while progressives may push back against lowering corporate income taxes and lowering the upper tax rates, realize that doing so brings you closer to a tax system that provides what you want in a society:

  1. Lots being produced.
  2. Lots to go around,
  3. Lots of jobs.

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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.

How to Never Need to Keep Tax Records Again

by smallivy, posted in Commentary, taxes

So today is tax day in America yet again.  Sometime in the last few months you probably had to gather your receipts, W-2 forms, and 1099’s.  You had to buy some tax software or set up a meeting with an accountant.  Either way, you were out at least $100 because the forms are too complicated to someone to just fill out.  You then spent several hours away from your family filling in information.  You probably also had to call various places for receipts, send money or letters of authorization to transfer money into IRAs and HSAs before the deadline.  You then needed to go to the post office and stand in line to send in your forms, or sent them in electronically despite warnings from the IRS that many tax returns are being stolen each year when filed electronically and the information used for identity theft.  You do all this because the law says you need to in order to pay your taxes.

If you’re like most people, you probably also got a big refund check back.  You may look forward to receiving that check, and maybe you use it to pay down a credit card bill or just blow it on something, but realize that is your money that the government had all year-long without paying you a dime of interest.  Maybe you paid credit card interest all year because Uncle Sam was holding onto that money.  At 15% per year, that’s $600 per year you are losing if your refund is $4,000.  Even at $2000 per year, that’s $300 you are losing.


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There is a better way and it’s called the Fair Tax.    With the Fair Tax you would receive your entire paycheck each month with no deductions taken out so your paycheck would be at least 20% bigger.  You wouldn’t pay a dime in taxes until you bought a new item, at which point you would pay a sales tax.  That would be the end of your obligation as far as taxes went.  You wouldn’t need to save any receipts.  You wouldn’t need to file anything.  You would pay at the cash register and then go on with your life.

One argument against a sales tax is that it is regressive since people who make less spend a higher percentage of their income.  This is also addressed in the Fair Tax with a prefund.  Each year (or each month) everyone who works would get a deposit in their accounts from the government to cover a portion of the sales tax they pay.  For example, if the Fair Tax is 20% and you wanted to make sure no one who made less that $30,000 paid anything in taxes, you would issue a prefund of $600 per year to everyone.  Then the prefund would cover the taxes on the first $30,000 you spent.  Only those spending more than $30,000 per year would then be paying taxes.  You could set the prefund as high or as low as you wished depending on how much you needed to collect in taxes and at what income threshold you wished people to start paying taxes.


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Another argument is that people don’t want to be paying a 20% sales tax (an estimate for the sales tax that would be needed to raise the same amount of money as is currently raised through the payroll taxes and income tax).  Realize first of all that you are already paying 12% or more of your income out before you get your check.  Including the employer match for Social Security and Medicare, you are paying around 20%.  This is not just on the money you spend, but also on the money you save.  It is also expected that because retailers will no longer need to spend as much money on tax planning, and because they would no longer pay income tax on their earnings, that prices would fall, perhaps by enough to cover most, if not all, of the sales tax.  It is very likely that the government will be raising the same amount in taxes while you are paying a lower percentage of your (increased) income in taxes.

If this sounds great to you, go to www.fairtax.org. learn more, and learn how you can help get the Fair Tax passed.  Let’s have 2016 be the last year you need to spend time away from your family filling out forms.

What do you think?  Don’t like the Fair Tax?  Why not?  What do you think is the best way to collect taxes? Please leave a comment.


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To ask a question, email vtsioriginal@yahoo.com or leave the question in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. 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. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Why Don’t We Have the Fair Tax Yet? A Late Night Rant.

by smallivy, posted in Commentary, Economic Theories, taxes

IMG_0123About three years ago I published Ten Reasons that you should like the Fair Tax.   I gave ten great reasons that we should enact the Fair Tax – yesterday.  Things like not needing to keep records in case the IRS calls and asks.  Not needing to deal with the IRS at all.  Not needing to spend any time filling out forms.  Not needing to have special tax-sheltered accounts for anything.

How simple is this:  You walk into a store, buy something, and pay your Fair Tax when you pay your bill.  About 20% is added on to your purchase (assuming we stay with the same amount of government revenue).  This is compared with having 15% of your full income taken before you get it, plus another 12.4% for Social Security and 6% or whatever it is for Medicare.  If you spend all of your income, you pay 20% for the Fair Tax or about 30% with the income tax and payroll taxes.  If you spend less than your income and actually save, you pay even less with the Fair Tax.

The income tax punishes earning money.  The Fair Tax punishes spending money.

And it even gets better.  Because the company you’re buying stuff from doesn’t need to do fancy maneuvers to avoid taxes, like have a corporate headquarters in Barbatos, the price you pay for the things you’re buying are 10% less.  So you end up paying less than you pay now with the income tax.

So why don’t we have it yet?  Do you like keeping receipts?  Do you like funneling your child care money through a flexible spending account, and then risk losing it at the end of the year if you don’t spend it all?  Perhaps you like a check that is 25-50% smaller than it would be with the Fair Tax.

Maybe you’re worried that it doesn’t zap the evil rich guy enough and punish him for employing all of those people and making all of those products you use every day.  But then you forget about the prebate – money that comes to you to cover taxes up to a certain income level.  If you’re making $30,000 per year, you would still not be paying any taxes.  That evil high earning guy would be paying it all.  Ha ha haaaa….

So come on, what gives?  Why haven’t you called, emailed, and shown up on your Congressman’s door, demanding the Fair Tax?

Do you just like your accountant too much?  Do you like buying TurboTax every year?  ( Their ads talking about  your taxes being the story of your life do make it sound kind of exciting to spend an afternoon with your W2 forms and receipts.)

Tell me, please.  I’d like to know.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

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.