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Are You Doing What the Tax Code Wants?

Why the right kinds of rich people get rewarded with tax breaks

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When I was a young boy, my rich dad told me, “You can make a lot of money and still not be rich.” By this, he meant that you could have high income but also low financial intelligence. Many high earners lose their money to two things, expensive liabilities—like fancy cars, long vacations, and McMansions—and taxes.

Back in 2010, I wrote about a Fortune Magazine article entitled “Why the ‘rich’ aren’t feeling so rich”. The article covered the term it’s author had coined, “HENRY”, which stands for “High Earners, Not Rich Yet.” As I wrote then, “What Tully is getting at is that those we’d consider rich because they make a lot of money, such as doctors and lawyers making $250,000 to $500,000, aren’t really rich at all.”

HENRY pays the highest

As it stands today, these high-paid employees pay the most in taxes, with effective rates between 33% to 39.6% from roughly $191,000 to $418,000 a year in earned income. And unfortunately for these high-earning employees, there isn’t much they can do to find relief, aside from a mortgage deduction and family credits.

Some people find this to be incredibly unfair. Why should you pay higher taxes simply because you make more money? Depending on where you land on the political spectrum, you’ll most like have passionate arguments for or against the idea of taxing the rich.

A simple truth about taxes

I don’t intend to get into the fray of that argument in this post. Rather, I’d like to point out a simple truth that is often overlooked in this discussion. In fact, I tweeted about it a couple weeks ago (and boy did it stir up some emotions!):

Rather than talk about whether the tax code is fair or unfair, I propose that the discussion should be looked at through the lens of what I shared above. Given that, the question becomes less, “Is it fair to tax the rich?” and more, “Are high-income employees building the economy and providing jobs?”

The answer is, of course, no. While it’s true they may help build a company’s bottom line, and they may also do some hiring for that company, they are not personally building the economy or providing jobs. Their company is. They are just very high-paid (and high-taxed!) employees of that company.

Why paying $0 in taxes can be a good thing

During the last election cycle, then candidate Donald Trump received a lot of criticism for not releasing his tax returns.

Jumping on this, Hillary Clinton and the Democrats speculated that one reason might be that he paid $0 in taxes. Most people saw this and immediately rose up in righteous anger. That would be so unfair!

I, however, was compelled to write a post called, “Why I Hope Donald Trump Paid $0 in Taxes,” in which I defended the fact that Trump may not have paid taxes. As I wrote then:

As you probably know, the tax codes in the US and in many different countries are long and complicated. The question is, why?

The reason is that government leaders learned a long time ago that the tax codes could be used to make people and businesses do what they want by utilizing the tax code.

In short, the many credits and breaks that are found in the tax code are there precisely because the government wants you to take advantage of them. For instance, the government wants cheap housing. Because of this, there are many tax credits for affordable housing that developers and investors can take advantage of that minimize their tax liability, put more money in their pocket, and in turn, create affordable housing. Everyone wins.

There are many scenarios like this in the tax code that incentivize investors and entrepreneurs to do activities the government is looking for while rewarding those who take those actions with lower-or zero-tax burden.

Because of this, limiting your tax liability actually means you’re doing what the government wants you to do through the tax code. And that is the most patriotic thing you can do.

One of the reasons I supported Donald Trump as president was because I knew he understood how money actually works, including using the tax code to force the right behavior for the country.

How will you respond to the Trump tax plan?

Recently, President Trump rolled out his proposed tax plan. It’s hailed as the biggest overhaul of the tax code in decades. From the White House’s own one-page summary, here’s what the plan wants to change:

Individual Reform

  • Tax relief for American, families, especially middle-income families:
    • Reducing the 7 tax brackets to 3 tax brackets of 10%, 25% and 35%
    • Doubling the standard deduction
    • Providing tax relief for families with child and dependent care expenses
  • Simplification:
    • Eliminate targeted tax breaks that mainly benefit the wealthiest taxpayers
    • Protect the home ownership and charitable gift tax deductions
    • Repeal the Alternative Minimum Tax
    • Repeal the death tax
  • Repeal the 3.8% Obamacare tax that hits small businesses and investment income

Business Reform

  • 15% business tax rate
  • Territorial tax system to level the playing field for American companies
  • One-time tax on trillions of dollars held overseas
  • Eliminate tax breaks for special interests

In this proposed tax reform, you can see that President Trump is setting up the tax code to do exactly what I tweeted about, rewarding those who grow the economy and create jobs, while also eliminating some pressures for the middle-class.

Many people may find reason to complain about this tax code. And many of the arguments can be found in response to my tweet. But I have a different suggestion: rather than get mad, get smart. Figure out how you can be someone who either grows the economy or creates jobs…or both. By doing so you will benefit from the very behaviors the tax code is designed to reward. The economy and your wallet will be better off for it.

Original publish date: October 03, 2017

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