Thursday, August 11, 2011

Taxes: A Vexing Subject; But Whose Money Is It Anyway?

Taxes: A Subject That Vexes; But Whose Money Is It Anyway?

"Oh boy, Bernie's back with more stuff on taxes." Well yes, but from a perspective that you may not have taken before. Here, I'm not going to try and teach you about taxes, we have plenty of time for that in other articles.

No, here I want us to focus on what taxes are, what their purpose in our system is, and when we talk taxes, whose money are we really talking about. So strap in because this can get bumpy.

Taxes in the news.

You have may have noticed that taxes are in the news quite a bit. And not just now, taxes are always in the news, it just seems like it's more now. Why? Why does the subject of taxes cause so much noise, commotion and controversy? Well, that's the point of this article. The controversy? Taxes involve someone's ox getting gored for the benefit of someone else. No matter how you approach the topic, because of that simple little truth, it will always be controversial.

The controversy is growing due to the country's budget and deficit crises. The so-called "Super Congress", actually a committee, must decide on new tax policy and deficit reductions in the next several months to prevent massive tax increases and budget cuts. The possibility of their success is beyond the scope of this discussion.

What are taxes?

Taxes are nothing new. They were invented the first time that someone decided they were sovereign over someone else. But for our purposes, you may remember the concept of, "rendering unto Caesar". So the simple explanation is that taxes are amounts that the government takes from it's citizens in exchange for the government and services they supply back. The quality of those services is also beyond the scope of this discussion.

In the U.S. the legislative history of our tax system indicates that the purpose of taxes is to redistribute wealth via government. That makes taxes a political animal. Again, the wisdom of this and it's historical results are not our subject today.

What are the main taxes?

While there are several hundred forms of taxes and fees that we pay to various governmental entities, the taxes I focus on here are:

1. Income taxes.
2. Capital gains taxes.
3. Gift taxes.
4. Estate taxes.
5. Taxes imposed on transfers to grandchildren or the generation skipping tax.


Let's expand on each of these so we know what they are:

1. Income Taxes.

Income taxes are imposed on your income as you earn it. You get to see these taxes up and personal every two weeks, or quarterly if you make quarterly estimates. Each pay period you can see what is coming out of your pay. In our system, we have what is referred to a "progressive" income tax. That means the more you make, the higher percentage of tax you pay. Currently, if your income is below a certain amount, you pay no taxes at all.

2. Capital Gains Taxes.

Capital gains taxes are incurred when you sell something that has increased in value. To buy that thing, remember you have already paid income taxes on the income you earned to buy the thing. Let's make the thing your home. If you sell your home and it has increased in value since you bought it (good luck with that given the recent past) then that increase is called gain. After certain exclusions, you would have to pay the capital gains tax.

3. Gift Taxes.

If you make gifts those gifts are subject to the gift tax. Dang, we can't even give something without a tax. That's right. Again after exclusions and exemptions if you make a gift, you may have to pay the gift tax.

4. Estate Taxes.

The estate tax is imposed against your property when you die if you die owning more than the exempt amount. Due to politics, these exemptions have been changing from year to year and the cause of many estate planners like myself going prematurely grey or even worse.

5. Transfers to Grandchildren or the Generation Skipping Tax.

Not believing the first four types of taxes were enough, the government decided that gifts to grandchildren or beyond the generational level of children should also be taxed. So after the exemptions available, this last tax is also imposed.

So to sum it up, you pay taxes as you earn your pay, taxes if what you own increases in value, taxes if make gifts, taxes when you die and taxes if you want to help your grandchildren and great-grandchildren. That's quite a few oxen getting gored.

The answer to my question above, about whose money is it anyway should be clear. It's your money!! We are talking about the government taking your money for it's various purposes. And do you know what all the controversy is about? The controversy is all about "fairness". What is a fair rate of tax for the government to take is also beyond the scope of this discussion. But I would sure like to hear your opinion on that topic!

To boil down the budget crises debate, it's all about whether the government should spend less, or should increase taxes on you. Those are the only two issues that are really going on. The reason it boils down that way is because money will not fall on the government from some aliens visiting (at least as far as we know now). Revenues to any government are enhanced by either spending less, or by collecting more.

Historically, governments are not too successful at spending less. They are very famous for increasing taxes. That's a very tender balance also. Increase taxes too much and the people who pay them are unhappy, sometimes to the point of replacing those politicians. Decrease spending too little and the budget crises remains unsolved.

What makes the current budget problem so intractable is we are attempting to solve a complicated non-political problem with many moving parts politically. It may not happen. But that too is a topic for another day.

So that's my little primer for you about taxes. What do you think? Where do you stand? Comment back and sound off, let's start a dialogue on the subject of taxes. It may not be fun, but it may be necessary because I'm not sure I trust the folks in Washington to solve this one.

Bernie Greenberg

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