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Dissecting Taxation - Part 1

Before one can really gripe about a tax, he or she must understand what a tax is. According to Wikipedia (Yes, I know that's not really an authoritative source, but bear with me!), a tax is defined as:
"To tax (from the Latin taxo; "I estimate") is to impose a financial charge or other levy upon a taxpayer (an individual or legal entity) by a state or the functional equivalent of a state such that failure to pay is punishable by law.

Taxes are also imposed by many subnational entities. Taxes consist of direct tax or indirect tax, and may be paid in money or as its labour equivalent (often but not always unpaid labour). A tax may be defined as a "pecuniary burden laid upon individuals or property owners to support the government [...] a payment exacted by legislative authority."[1] A tax "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority" and is "any contribution imposed by government [...] whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name."

(NOTE: I would point out, for the benefit of Warren Buffet and those other uber-wealthy individuals who want more taxes that they can make a "voluntary payment or donation" to the government at any time, without being required to do so in the form of a tax. Mr. Buffett and Bill Gates each have huge foundations that provide them with sizeable income tax deductions so that they can pay LESS in the way of taxes. If both of them were truly sincere about wanting to help the government, why don't they give their charitable contributions to the federal government instead? More on that in a later post!)

Although people will always grumble about taxes, they are necessary. We can't have government services unless there is a means to pay for them. Now, before some of you state, "We don't need government services," realize that I am talking about, among other things, what are provided for in the Preamble to the U.S. Constitution where it states that the government of the people will, "establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare." Those things cannot be done without money. Therefore, tax become necessary. I'm not sure that anyone disagrees with that statement. If you do disagree, please tell me how those services are paid for. Therefore, the disagreement is over the tax rate and who pays it and for what.

There is quite a psychology behind taxes and the payment of taxes. What if you walk into a movie theatre and see that your favorite movie is playing. The ticket price is $8.00 and you willingly pay it because, of course, you want to see the movie and know that you must pay an admission price to do so. Then, as you walk away from the ticket counter, fully satisfied with your purchase, the next person comes up and buys a ticket. However, because they tell the ticket agent they don't earn very much, they are only charged $4.00 for the same ticket you bought for $8.00. The next person steps forward and, after some discussion with the ticket agent about that they barely earn enough to feed their family, is allowed to get into the movie for free. Finally, the next person steps forward and, after some discussion with the ticket agent that they aren't employed at all, but REALLY want to see the movie, is GIVEN $8.00 and a ticket to attend the movie. Clearly, you -- having paid full price -- would be upset, frustrated, and possibly resentful. After all, each of you is seeing the same movie! I believe those are all feeling felt by taxpayers. The problem even gets worse when the movie theatre announces that they will have to cut back on the number of movies shown unless they receive more money and the customers who aren't paying or are being paid to attend start demanding that you (not them) pay more to attend. In addition, those who are being paid to attend start loudly threatening protests and civil action if their paid stipend to attend the movie is cut back or eliminated. Then, to make matters worse, they also complain that the movie theater is not satisfactory enough for their needs and it needs to be improved and modernized and that, by golly, the paying patrons need to pay for that too.

Depending upon where you are in that scenario, your argument may be different. If you are the one paying the $8.00, you certainly don't want to pay more if there are others either getting in free or receiving money to go to the movie. It is, logically, your position that those getting paid to attend should be denied such payment (or that such payment be cut back) and either not permitted to attend or are permitted to attend at no charge. It clearly makes sense to argue, "Why should I be asked to pay more for a movie that others are being paid to watch?" Additionally, you, as a paying patron, will be livid over the fact that these "freeloaders" are now demanding that you pay to improve the theater! Excuse me?

Those people who are not paying to see the movie clearly have no problem with or objection to those who are paying having to pay more. In fact, the ones getting in free might even feel threatened with the thought that, if those who are paying don't pay more, they (the ones getting in free) might have to start paying. Therefore, since it is not costing them any more, they would approve of a higher price for the paying attendees. They also would welcome improvements to the theater because they aren't having to pay for them and they will realize the full benefit of the improvements. Therefore, their movie experience will be enhanced at no cost to them. Such a deal!

Those who are getting in for a reduced price will probably object to having to pay more because the reason they were getting in for a reduced price was based on the fact that they are not earning enough to afford to pay full price. Therefore, since you can afford to pay $8.00 to attend the movie, it makes sense to them that you should be able to afford $12.00 to attend, just so that the others might not be affected.

The current tax system in the United States and in many other countries is not fair. Unfortunately, little is being done to make it fair. In fact, the current trend is really exacerbating the problem. The call is for the rich to pay more. Similar to my movie theatre analogy, it is the majority of those not current paying taxes that are lobbying and demanding that those already paying taxes pay more. Is is that same group that is also lobbying for improvements to the social services offered by the government (e.g., universal health care).

According to the National Taxpayers Union, as of 2008, the federal government collected $2.5 trillion. 45% of that amount came from individual income taxes and 36% came from payroll taxes. In other words, 81% of all federal income comes from working citizens and the companies that employ them. However, of that federal income, 25% of all income tax filers paid 86.34% of those taxes. The top one percent of all filers (those earning more than $380,354) paid 38.02% of all income taxes. The top five percent (those earning more than $159,619) paid 58.72 percent. On the other side, the bottom 50% of all filers (those earning less than $33,048) paid only 2.7% of the taxes collected. Why is that? Of course, it makes sense that those earning more be required to pay more. However, with the economy struggling, why are we still letting people in to watch this "movie" for free?

You and I hopefully know that if your pay is cut or if you have unusually high expenses, you have to either cut back on other spending or do without. If your disposable income goes down, you can't continue to eat at fancy restaurants, buy top quality clothes, and go out for entertainment purposes as often. As an estate planning attorney, I deal regularly with elderly couples who are having to substantially cut back their expenses because one of them requires nursing care or health care assistance. Similarly, when a government "earns" less, it must make cutbacks. Although it is logical and expected that each particularly government recipient will argue to maintain their current kind of compensation at its current level (or higher), something has to give. This is the "gridlock" that now exists in Washington. The Conservatives argue there should be cutbacks in spending to make up for the revenue shortfalls. I am one who agrees with that position. When our family has earned less or had greater expenses, we don't spend more. We spend less. The Liberals argue there should be higher taxes to make up the revenue shortfalls so that necessary or allegedly necessary services don't have to be cut back. The typical "poster child" for the Conservatives is defense spending. Similarly, the "poster children" for the Liberals are Social Security and Medicare. The Conservatives argue that entitlement programs have grown too large or are unnecessary or must be cut back until government revenues increase. Otherwise, if we cut back on defense spending, we endanger the safety and well-being of our citizens. The Liberals argue that we can't cut social spending or "throw grandma off the cliff" while the "rich" corporations make obscene profits. The two sides are now so polarized, neither is willing to give in and, with an election year only days away, neither side will give in, for fear of making their own political party appear weak just before the election.

Is there a way to mediate a solution between these factions? I can only offer a suggestion. However, it might shock you! I say we increase taxes by two percent... on EVERYBODY. Clearly, someone earning $1 million a year will pay more. However, even that percentage of the population receiving welfare will be required to pay the two percent tax, until the budget is in balance (By the way, I DO favor an amendment requiring a balanced budget. In fact, I like the proposal of political satirist Mark Russell, who suggested that we take away Congress's salaries and put them on commission! According to him, "Just wait and SEE how fast they will start turning a profit!"). According to my research, 3.4% of Americans receive a welfare check of $366 a month. That is clearly a paltry amount that no one can really live on. However, the welfare system was never designed to be a sole source of income. $366 a month equates to $4,392 a year. Two percent of that amount is $87.84. The federal Supplemental Security Income (SSI) payment to be made for 2012 is $698 for a single person and $1,048 a month for a married couple. Two percent of the single person's payment would be $167.73 a year and two percent of a married couple's payment would be $251.57 a year. Now, before you scream that it is obscene to require these poor people to have to pay a tax on what they receive, please realize that the 2012 payments will include a cost-of-living adjustment of $291.43 for a single person and $437.10 for a married couple. In other words, those receiving SSI in 2011 are receiving less than what they would receive in 2012, even WITH the deduction of a two percent tax. Is a two percent tax an inconvenience? Clearly the answer is "yes!" However, it is an inconvenience that is borne by and shared among all citizens. It is not stoking the fires of "class warfare." Yes, the rich are paying more. However, proportionately, so is everyone else.

Here's a radical, but simple, idea: Let's charge an admission fee to live in this country! If you want to live here and enjoy our "movie", you have got to pay a minimum fee of $10 a year. With 250 million people, that will immediately add $2.5 billion a year in revenue. Even if someone is not earning money, due either to disability or lack of employment, they pay $10 a year from their government benefits or unemployment payments. (QUERY: How long should the government pay someone to stay unemployed? Talk amongst yourselves....) In that way, everyone -- young or old, rich or poor, has a stake in government. A few years ago, Vice President Joe Biden was ridiculed for making the statement that it is "patriotic" to pay taxes. Well, if that is so, why doesn't everyone become patriotic? Or are just wealthy individuals required to be patriotic? I would even go so far as requiring payment of this $10 "admission fee" before one can vote. Otherwise, you allow those with no stake in the government to control the government. Would you give your credit card to a homeless person? No! Would you give a blank check to a stranger?  No! Allowing those not paying taxes to control the government often creates the same results. It's easy for someone not paying taxes to find no objection to raising income tax rates and/or to spending more. However, what if agreeing to raise income taxes even as little as one percent meant that, instead of paying $10 a year, that same person is now required to pay $11?

Shortly after the 2008 election, I watched a YouTube video of a man leaving a polling place stating, "All I know is that if I vote for Obama, my mortgage payment will be paid and my car payment will be paid" Now, I don't know if that video was real or staged. I don't know if that person really thought that because he voted for Obama that he would really receive that sort of benefit, But it highlights the danger of empowering people with no vested interest in creating the government's income to control how that income is spent. Although income taxes have been the largest single source of federal revenue since 1950, other taxes -- including estate taxes -- figure into the revenue stream, although in a much smaller amount. We'll discuss them later.....

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