Death and Taxes

Filed In Taxes ♦ Last Updated June 16, 2008

As I write this article it is tax time again in the United States. A time of year that strikes fear and dread in the productive and brings glee to those “in the cart*.” Those of that that produce something will have to pay taxes. Those of us who simply exist off the system will get child tax credits and the like, basically welfare embedded in the tax system.

You may think I sound a little bitter, and I will admit this time of year puts me in a bad mood as I Uncle Sam pries through your personal life looking for each last cent. However, as a pragmatist, I understand that taxes, like death, are something that is certain in life.

Certainty? In this world nothing is certain but death and taxes.
-Benjamin Franklin

There are various tax reform measures floating around. Plans such as a flat tax and a fair tax; the former is just a flat percentage of your income; the latter is sales that would replace the income tax. While I wholeheartedly support tax reform, the chances of it actually happening are slim to none. Why? Because politicians (on both sides of the aisle) use the tax code to reward and punish industries. In essence the government uses the tax code to pick winners and losers.

What do I mean by winners and losers? If you’ve ever filled out a tax return you understand that you can take a deduction for your dependants and you may also claim a child tax credit. In essence the government is saying we want you to have kids to we’ll help you out through the tax code. Is this good or bad? It depends on your view of the world I guess. Do you think more kids is a good thing or bad thing? I’ll leave that for you to decide, this is just an example, there are more. But it serves as an illustration of how the government uses the tax code to enforce behavior.

I mentioned earlier that the child tax credit is welfare embedded in the tax code. Uncle Sam is encouraging out of wedlock births through the tax code. I’ve seen this first hand through my wife’s work. Many couples do not get married as they will lose their welfare benefits. A lot of her clients love tax time as they get a large rebate because of tax credits. They take this money and buy furniture, clothes, cars, or almost any consumer good you can imagine. To them, this tax rebate is found money, they didn’t earn it, so they have no problem spending it. The government has chosen low income single woman with many children as winners, at least as far as the tax code goes.

Now consider your local taxes. Does you local government (state, county, city, municipality, etc) tax cigarettes or alcohol differently than food? These so called “sin taxes” supposedly discourage use of products that government deems harmful either to individuals or society.

So at the local, state and national level, politicians use taxes to modify behavior. Again, is this right or wrong? It depends on your philosophy. I personally don’t feel that the government should be telling adults what to do and how to do it. Government also shouldn’t be picking winners and losers with the tax code.

The US government at this time is subsidizing ethanol in several ways. It subsidizes corn production through the farm program. The government has also mandated that oil companies must increase their use of ethanol by 2012. Many states, especially in the Midwest mandate that an ethanol blend (typically 10 percent) be available at the pumps. Also many states subsidize this ethanol blend with reduced taxes meaning that consumers don’t pay as much gasoline tax on ethanol blends. Again, this is an example of the government using the tax code to influence behavior. I won’t go into the science and controversy surrounding ethanol. I reside in a state where agriculture and agribusiness provides a majority of the economic activity. Several ethanol plants have sprung up in the surrounding area and they have become an economic force because of government subsidies. It’s hard to judge how this industry would look without government subsidies and favorable tax treatment at the pumps. However, it’s obvious that governments at many levels have chosen ethanol as a “winner” whether the market agrees or not is another question.

Why the philosophical discussion of taxes and winners and losers in the tax code? If you are reading a site like this, you may at one point in your life pay a substantial amount of taxes. If you do even the minimum intelligent investment you will at some point accumulate wealth and pay the associated taxes such as capital gains, income tax, etc. You need to understand the implications of changes in the tax code.

Consider what happens when congress changes the capital gains tax rates. When congress adjusts the rates, it sends a signal to investors that may alter their behavior. Higher rates, increase the effort to minimize these taxes, lower rates, taxes become less of an issue in sell decisions.

Once last point, the government is in the process of issuing tax “prebates” to certain tax payers. Of course this is an election year so politicians on both sides are anxious to avoid the specter of recession. The government is choosing winners, in this case consumers and certain businesses and losers, high income tax payers and the people who will have to eventually pay off our enormous government debt.

I think that hoping for fiscal sanity in Washington is like hoping for a million dollars to magically appear in your bank account. Both parties are fiscally irresponsible. One wants to cut taxes and spend the other wants to raise taxes and spend. Both sides are raiding all the social trust funds, like social security, to pay for their social engineering experiments. Eventually something’s got to give. Having an openly hostile dictatorial regime (China) holding a large amount of American debt should be troubling to anyone with common sense.

So what can you do? Voting for and financially supporting fiscal conservatives in either party is a good start. Talk to your tax preparer or accountant to find ways to minimize your tax liability. Don’t contribute any money more money to this financial train wreck than legally required.

Remember, you must pay taxes but the government is not a charity, you don’t get anything, spiritually or otherwise, for contributing more.

*There’s a minority of people who pay a majority of taxes. So those “pulling the cart” are paying a disproportionate amount of taxes compared to the services they receive. Conversely, many on the low end of the income scale receive a disproportionate amount of services. These people are said to be “in the cart.”

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