Tax Avoidance

I’ve made comments on the blogs of others critical of raising taxes where my point was that higher tax rates may mean less revenue. Left of center critics of this assertion respond by saying that I’m suggesting that rich people will cheat on their taxes if taxes go up. That’s not what I’m saying. There are two strategies to pay less taxes. One is tax evasion, and the other is tax avoidance. The former is illegal, and the latter is perfectly legal. I’m not going to cheat on my taxes, and even if I were to do so, I won’t tell you. Let’s say my employer offers to pay me $200 to work Saturday, or I can spend Saturday looking over my tax returns for the last 3 years to see if I missed any deductions. If I think that I’m going to find missed deductions worth more than what will be left after I pay the taxes on the extra $200 my employer pays me, I’m digging out the tax returns instead of working.

A classic fictional example of tax avoidance is the detective Nero Wolfe. Part way through the year, Wolfe makes enough money to put him in the 90% tax bracket. After this point, he is very reluctant to take cases. To make an additional $1000 after taxes, he’d have to charge a client $10,000. If he turns down an offer of $5000 to handle a case, he is legally avoiding taxes of $4500. This high tax rate isn’t really making Wolfe pay his fair share, it’s making people who need the services he provides pay more.

Let’s consider the effect of raising the capital gains tax. If you managed to buy Ford stock at its 2009 low, you would have purchased a stock now worth more than $10 for less than $2. You’d be sitting on a capital gain of over $8 per share. You don’t have to pay the capital gains tax until you sell. Any increase in the capital gains tax makes it less likely that you will sell.

We have something called the Alternative Minimum Tax because 200 people in the late 1960’s figured out how to legally make more than $200,000 a year and legally pay no income tax. That is tax avoidance.

Two Things I Feel Compelled To Comment On

Two Democrat members of the US House of Representatives have said things I feel compelled to react to. First, Representative Maxine Waters said, “the Tea Party can go straight to Hell.” With all due respect, Representative Waters, we are already there. I don’t speak for the Tea Party, but I support them because I believe the course of higher spending and higher taxes and more government intrusion in our lives is literally going to destroy our country and our way of life. The second thing I feel compelled to comment about is Representative Frederica Wilson‘s statement, “Let us all remember who the real enemy is. The real enemy is the Tea Party — the Tea Party holds the Congress hostage. They have one goal in mind, and that’s to make President Obama a one-term president.” I have one goal in mind leading me to support the Tea Party. That is to rebuild the United States of America into a country where we are free to make our lives into whatever we choose. Making Barack Obama a one term President is just the first step on the long road to that goal.

It’s A Thinking, Educated Person’s World And You Just Live In It

A friend of mine worked his way through much of his college career washing dishes in a hospital cafeteria. One day, he overheard two of his coworkers talking. They were both black males, and one said to the other, “It’s the white man’s world and we just live in it.” I happen to disagree. More than ever, it’s a thinking, educated person’s world. Over the last hundred years, the importance of intellectual labor has become more important, while the use of physical labor has become less important. There are now machines to relieve some of the burdens of heavy manual labor. This revolution has transformed our society. Sadly some people have missed out on this trend. The one demographic group that has missed out more than any other is the black male.

Stating The Obvious

President Obama is again criticizing Republicans for stopping him from implementing his policy proposals. I think the time has come to point out that the American people elected a strong majority of Republicans to the House with that very goal in mind. So Obama is complaining that the Republicans in Congress are doing the job the American people sent them to Washington to do. Politicians who are doing the job they were elected to do. I guess there’s a first time for everything.

Zillow Price Estimates, Right or Wrong?

If the Zillow estimated price for our house is correct, we have $25,000 in equity in our home. Given that we bought just over two years ago, I’m going to go out on a limb and say Zillow’s price estimate is wrong. I’m going to predict that the current equity we have in our home is closer to zero.

Who Is Really Rich?

A friend of a friend lives in San Francisco and works for Google. I’m sure he makes more than $250,000. My wife and I both work and make less than $100,000 per year. President Obama would have it believe that Mr. California is one of these rich people who can afford to pay more taxes. I’m sure he could afford to pay more taxes, but he isn’t that much better off than my wife and I are. If Zillow prices are to be believed, the price of his house is 5.3 times the price of ours, and it isn’t any bigger. In fact his yard is smaller. He doesn’t appear to have any off street parking.

Would I trade places with Mr. California if I could? Nope. The house price and higher tax burden in my opinion more than offset the extra money he makes. Given the much lower cost of living here in Indiana, we have a much higher standard of living than the difference in income would lead you to believe. I suspect most families who make over $250,000 live in places like San Francisco where the cost of living is just out of sight. So the upper middle class people there just make more money to pay higher mortgages and higher taxes.