FT218: “The withholding tax is the greatest sin government ever perpetrated against the people.” —Old Pithy

Posted by PITHOCRATES - April 18th, 2014

Fundamental Truth

The tariff was the funding source for most of government for about a century.

Once upon a time there was no federal income tax.  No estate tax.  No gift tax.  No payroll tax.  No capital gains tax.  And no corporate tax.  Taxes we take for granted today didn’t exist a century or so ago.  The country was a lot leaner back then.  People kept most of their money.  And took care of their families.

The federal government used to fund everything thing they did with tariffs.  A tax on imports.  Paid in ports.  As ships unloaded their goods.  Far away from most people.  And few people complained.  Our first excise tax was a different story.  A 7 cent per gallon of whiskey incited the Whiskey Rebellion.  After fighting the Revolutionary War to escape the oppressive taxation policies of Great Britain the people were in no mood for a new tax.  The whiskey tax lasted for about a decade.  Then they repealed it.

This left tariffs as the funding source for most of government for about a century.  But even that grew controversial.  And began the divisions between North and South.  The North protected its industry with protective tariffs on iron products, textiles (wool and cotton) and agricultural goods.  Shipped from the more industrialized Britain.  Which Britain responded to with tariffs of their own.  On cotton and other agricultural products grown in the South.  So the more the North protected their industries the more difficult it made for the South to export their raw goods.

In 1913 the progressives reintroduced the income tax and taxed the rich at 1%.

This wasn’t the only difference of opinion the North and South had.  And their differences resulted in war.  The North was able to win the American Civil War with its expansive industry.  But the war devastated the country.  Especially the South.  Which lost about 8.6% of her population.  To get an idea of what an 8.6% population decline is consider this.  That percentage of the current U.S. population is approximately 27 million.  So the losses the South suffered were similar to what the Soviets lost on the Eastern Front during World War II.

The South may have lost more of its population.  But the North suffered nearly the same number of war dead.  She just had a larger population to begin with.  To run all of that industry that won the war.  America’s first modern war was a costly one.  And one that President Lincoln had to turn to a new source of revenue.  The federal income tax.  Which taxed the rich.  At 3%.  Then it taxed the super rich at 5%.  But after they paid down the war debt they repealed America’s first income tax.

Then came the progressives.  And their taxes.  In 1913 they reintroduced an income tax.  Taxing the rich at 1%.  And the super rich at 6%.  To fund an expanding federal government.  Then came World War I.  To fund the war they increased the tax rate on the rich to 15%.  And the super rich at 77%.  The top marginal rate fell during the Twenties.   But FDR raised it back up during the Great Depression.  Until it reached 94%.  Where for every dollar they earned in and above the top income bracket they got to keep only 6 cents.

Few would be able to write a check on tax day to pay their full tax bill.

Then came all the other taxes.  And they just kept coming. Our tax bill grew to staggering amounts.  Which posed a problem for the taxing authorities.  As people just didn’t keep that kind of money around.  They worked.  They raised their families.  And what little they had left they put into the bank for their retirement.  Making it very difficult for them to pay their tax bill when it came.  Especially when it was 30% or more of their entire income.  So what to do?

The Founding Fathers created a nation out of a tax rebellion.  And then when that nation levied its first excise tax they got a little rebellion of their own.  Being opposed to taxes is part of the American DNA.  So the taxing authorities had to somehow hide the large amount of taxes we were paying.  That is, they had to reduce the transparency of these taxes.  For if you don’t know what you’re paying in taxes you really can’t get mad at paying high taxes.

Enter the withholding tax.  The greatest sin government ever perpetrated against the people.  For it takes our money before we ever get it.  Conditioning us to accept ‘net’ pay as the norm.  And making ‘gross’ pay some meaningless payroll jargon.  Because you can’t spend ‘gross’ pay.  You can only spend ‘net’ pay.  Which is the only pay people care about.  Making it not only easier to hide the soaring amount of taxes people were paying.  But because it’s so easy to hide what we’re paying they could raise those taxes to confiscatory heights.  Because we never have that money in our hands.  We never see it.  It goes from our employer to the taxing authorities.  Which is the only way they could collect these soaring amounts.  For few would be able to write a check on tax day to pay their full tax bill.  As people just don’t keep that kind of money around.

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Class Warfare

Posted by PITHOCRATES - January 3rd, 2013

Politics 101

Over 99.5% of all Rich People ARE paying Federal Income Taxes

President Obama won reelection by denigrating Mitt Romney.  He didn’t win by running on a successful record.  He did not win by running on a plan to pull the economy out of one of the worst recoveries in history.  No.  He won it by getting people to hate Mitt Romney.  And by getting people to hate Republicans.  Who they painted as evil rich people who want nothing more than tax cuts for the rich.  And to take away birth control and abortion so only rich people can have access to them.  As well as taking welfare benefits from the poor.  It’s called class warfare.  And it can be very effective.  For it won President Obama a second term despite a horrible first term by almost any metric you measure it.  At least based on the majority of the electorate that just believed the rich aren’t paying their fair share.  So let’s just see who is paying what (see Table 3.  Number of Individual Income Tax Returns, Income, Exemptions and Deductions, Tax, and Average Tax, by Size of Adjusted Gross Income, Tax Years 2001-2010).

The above chart shows who are NOT paying any federal income tax.  Approximately 40% of all taxpayers.  Are these the evil rich people like Mitt Romney?  And those rich Republicans?  No.  Contrary to the Left, it’s not the rich.  They’re paying their taxes.  It’s the poor and the middle class not paying their fair share.  Those earning $5,000 and less pay virtually no federal income taxes.  Over 80% of those earning from $5,000 to $13,000 pay no federal income taxes.  You have to get up to those earning $25,000 or more before more than half of that income group pays any federal income taxes.

We don’t see who actually pays the majority of federal income taxes until we get into the middle class.  Where those who DON’T pay any federal income taxes rapidly drop away.  Those at the low end of the middle class taking advantage of the tax code to maximize their tax credits and deductions (mortgage interest, energy tax credit, medical and dental Expenses, child and dependent care credit, etc.) to reduce their tax bill.  While those at the higher end of the middle class are likely small business owners suffering a business loss.  Or a personal or business bankruptcy.  Approximately 0.8% of those earning $100,000 – $200,000 pay no federal income taxes.  While less than half of one percent of those earning $200,000 or more pay no federal income taxes.  Perhaps this tiny sliver of income earners are not paying their fair share.  But one thing for certain is that over 99.5% of all rich people ARE paying federal income taxes.

Those earning $1,000,000 and more account for less than 1% of Tax Exemptions and Deductions

So are the rich taking advantage of the tax code to reduce their taxable income and federal tax bill?  We hear a lot about tax loopholes.  Those perfectly legal tax credits and deductions written into law by the United States Congress.  That both those on the Left and those on the Right take advantage of.  Yet those on the Left have convinced enough of the electorate that these legal credits and deductions are tax evasion.  And that only the rich on the Right are using these to evade paying their fair share.  So who is taking the biggest advantage of the tax code to reduce their tax bill?  In 2010 this totaled about $3 trillion.  Is this why those earning $100,000 or more paid no income tax?  For those few not paying any federal income tax?  Not exactly.  (The dollar amounts in the following charts are in thousands of dollars.)

In 2010 taxpayers claimed in total about $3 trillion in exemptions and deductions.  The deficit in 2010 was about $1.3 trillion dollars.  So perhaps this is the reason why we had a deficit in 2010.  This is what the Left would have us believe.  It’s those tax loopholes that the evil rich take advantage of to avoid paying their fair share of taxes.  The only problem with this is that it’s not the rich taking advantage of these tax loopholes.  It’s the poor and middle class.

Those earning $1,000 and less account for less than 1% of these exemptions and deductions.  Those earning $1,000,000 and more also account for less than 1% of these exemptions and deductions.  It’s those earning from $1,000 to $1,000,000 that are taking advantage of these tax loopholes.  Especially those earning from $50,000 to $200,000.  The only income groups claiming 10% or more of the nearly $3 trillion in exemptions and deductions claimed.  So not only are the evil rich paying federal income taxes whatever they claim as exemptions and deductions doesn’t even come close to what the poor and middle class are claiming.

Prosperous Economic Times brought about by Tax Cuts INCREASED Tax Revenues

These numbers don’t exactly support the claim that the rich aren’t paying their fair share.  They’re paying federal income taxes.  And what tax loopholes they exploit hardly makes a dent in the amount of tax revenue the IRS collects.  Which can only mean one of two things.  Either the poor and middle class need to pay more federal income taxes.  Or the federal government is just spending too much.  Well, as we just witnessed in the fiscal cliff debate, President Obama and the Left want to raise taxes.  Blaming the record Obama deficits on the Reagan and Bush tax cuts.  Their deal includes higher income tax rates on households earning $450,000 or more.  But NO spending cuts.  Which will be a problem.

In 2010 the total adjusted gross income totaled just over $8 trillion.  Most of which came from 4 income groups.  About a trillion each from those earning from $50,000 to $75,000, from $75,000 to $100,000 and from $200,000 to $500,000.  Those earning from $100,000 to $200,000 earned in total almost $2 trillion.  Which means the new higher tax rates aren’t going to bring in much new tax revenue.  Because they aren’t taxing the people with the money.  The middle class.  And with some additional spending instead of spending cuts the deficit will only grow larger.  So this whole fiscal cliff debate was nothing but theatre.  For it wasn’t about deficit reduction.  It was about politics.

The Left wants to destroy the Republican Party.  And to do that they need to turn prosperous economic times brought about by the tax cuts of the JFK, Reagan and Bush administrations into the source of all our problems.  Yes the economy boomed, goes the argument, but at what cost?  Massive deficits.  Deficits not brought about by tax cuts.  But by spending.  For those prosperous economic times brought about by tax cuts INCREASED tax revenues.  The deficits resulted from spending increases greater than the revenue increases.  But with a successful campaign of class warfare they have revised history.  Those deficits are now the result of the rich not paying their fair share.   Which helped them increase tax rates on the rich today.  Because the Left got everyone to hate the rich.  And the Republican Party.  Even though the rich are the only ones paying their fair share.  In fact, they’re paying more than their fair share.  But the majority of the electorate doesn’t know this.  Because of that successful campaign of class warfare.

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Even Democrats are Complaining about the High Cost of Government Workers Bankrupting their Cities and States

Posted by PITHOCRATES - April 29th, 2012

Week in Review

So who isn’t paying their fair share?  I know who you’re probably thinking.  And if you are you’re wrong.  For here it is direct from a Democrat mayor’s mouth (see Steven Malanga: How Retirement Benefits May Sink the States by STEVEN MALANGA posted 4/27/2012 on The Wall Street Journal).

Chicago Mayor Rahm Emanuel recently offered a stark assessment of the threat to his state’s future that is posed by mounting pension and retiree health-care bills for government workers. Unless Illinois enacts reform quickly, he said, the costs of these programs will force taxes so high that, “You won’t recruit a business, you won’t recruit a family to live here.”

We’re likely to hear more such worries in coming years. That’s because state and local governments across the country have accumulated several trillion dollars in unfunded retirement promises to public-sector workers, the costs of which will increasingly force taxes higher and crowd out other spending. Already businesses and residents are slowly starting to sit up and notice…

Government retiree costs are likely to play an increasing role in the competition among states for business and people, because these liabilities are not evenly distributed. Some states have enormous retiree obligations that they will somehow have to pay; others have enacted significant reforms, or never made lofty promises to their workers in the first place.

Indiana’s debt for unfunded retiree health-care benefits, for example, amounts to just $81 per person. Neighboring Illinois’s accumulated obligations for the same benefit average $3,399 per person…

Back in Illinois, Dana Levenson, Chicago’s former chief financial officer, has projected that the average city homeowner paying $3,000 in annual property taxes could see his tax bill rise within five years as much as $1,400. The reason: A 2010 Illinois law requires municipalities to raise the funding levels in their pension systems using property tax revenues but no additional contributions from government employees. The legislation prompted former Chicago Mayor Richard Daley in December to warn residents that the increases might be so high, “you won’t be able to sell your house.”

What was that about the 1%?  Just who is it living off of the generosity of the 99%?  Who isn’t paying their fair share?  And is asking others to pay far more than their fair share?  Who is it that has pension and retiree health care plans worth several trillions of dollars?  All funded by tax dollars from the 99%?  As well as the 1%?  Our government workers.  That’s who.  Those people who have made themselves more equal than the 99%.  Even though they claim to be a part of the 99%.  While living more like the 1%.  But one thing you can say about the 1%.  They’re not bankrupting their cities and states like these government workers are.  Or destroying our lives to pay for their lives.

You want to talk class warfare?  Let’s talk class warfare.  The richest 1% pay approximately 30% of all federal income taxes.  The richest 10% pay approximately 70% of all federal income taxes.  And we don’t pay any of these rich people with our taxes.  They get it however they get it.  But they don’t get it from us.  The taxpayers.  So they providing a huge net good for us.  Paying the lion’s share of taxes.  And not taking our money from us.  And yet these are the people that we vilify.  While those who are harming us the most get a free pass.  Now that’s some clever class warfare.  Making it sound like it’s the rich who are oppressing the middle class.  While it is the wealthy government class oppressing the middle class.  And they do it very well.  You’ll hear people everywhere say that the government should stick it to the rich.  But they never say a word about these government workers who live a better life than they do.  Even though they are paying for that better life.  Through ever higher taxes.

So when your property taxes go up think about your retirement plans.  And though you may not have much be comforted in the fact that your government workers do.  Thanks to you.  So even though you may not be able to travel the world in your retirement you’ll know that somewhere a retired government worker is.  Because that’s only fair.  And being fair is important.  Fair share sacrifice.  That’s all they want.  As long as, of course, your share of sacrifice is greater than theirs.  The wealthy government class.

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FUNDAMENTAL TRUTH #85: “The rich pay more than their fair share of income taxes to provide tax relief for the poor and middle class.” –Old Pithy

Posted by PITHOCRATES - September 27th, 2011

The ‘Rich’ Obama wants to Tax more already Pays the Majority of all Federal Income Taxes

Some people complain that too much wealth is concentrated in too few hands.  And they say that isn’t fair.  But you know what else is concentrated into too few hands?  Federal income taxes.  That is, who pays these taxes.  The top 10 percent of income earners pay about 70% of the taxes.  That doesn’t sound fair.  This 10% paying 70% of the tax bill.  While 90% only pays 30% of the tax bill.  No, this isn’t fair.  But that’s okay.  At least that’s what the 90% think.  I mean, we don’t hear them demanding to pay their fair share of federal income taxes, do we?

Let’s look at some of the numbers.  From 2008 tax returns (see Table 2.  Returns with Modified Taxable Income [1]: Tax Generated, by Rate).

The first thing that jumps out at you is that the poor pay no income taxes.  Only the middle class and rich do.  The biggest income groups of taxpayers are those earning from $100,000 to $200,000.  And from $200,000 to $500,000.

Are these factory workers?  No.  Are these construction workers?  No.  These aren’t blue collar jobs.  These are white collar jobs.  And small business owners.  Currently in the crosshairs of the Obama administration.  Those ‘rich’ people who aren’t paying their fair share of taxes.  People who in fact pay the majority of all federal income taxes.

Those who don’t Pay Income Taxes are Dictating Tax Policy on those who Do

So why is president Obama so vilifying these most generous ‘rich’ people?  Because it’s the largest group of ‘rich’ people whose taxes he can raise.  From the same data let’s take a look at the distribution of income earners.  By looking at the number of actual tax returns filed by each group.

Interesting.  The distribution has shifted down to the lower income groups.  There are very few people earning $1 million or more and yet they pay a substantial amount of the total federal income tax.  While there are a great number of people earning less than $50 thousand who pay little to no federal income tax.

There’s another way to look at these numbers.  One person one vote.  Despite the amount of money you earn.  And the amount of taxes you pay.  Or the lack of taxes you pay.  So in essence what we have is those who don’t pay income taxes dictating tax policy on those who do.  Hence the appeal of class warfare.  Tax the rich?  Raise tax rates on high earners?  A millionaire’s tax?  Absolutely.  As long as I remain in the near 50% of those people who pay no income taxes.

Small Business Owners Earn a lot because they’re both CEO and Investor

There’s yet another way to look at these numbers.  With 70% of all taxes paid by those earning $100,000 or more let’s focus on these people.  We’ve summarized this data here (Taxable Income and Income Tax Generated are in thousands of dollars):

The sweet spot of tax revenue are the people earning from $100,000 to $200,000.  Who pay an effective tax rate of 17.91%.  And a good chunk of these are small business owners.  Who have S corporations.  Where their earnings pass directly to their private income tax return.  That’s why they earn so much.  Because they’re both CEO.  And equity investor.  But they don’t use those retained earnings to live an extravagant lifestyle.  No.  Instead, they use them to grow their business.  And create jobs.

Raising the tax rate on those retained earnings will not help grow these businesses.  In fact, it will prevent these businesses from growing.  And you don’t want to do that.  Because not only do these small business owners pay as much in federal income taxes as all the millionaires do.  They also create the majority of jobs in the American economy.

If you want Tax Policy that will Raise Tax Revenue don’t Raise Tax Rates on Job Creators

Is the purpose of tax policy to raise tax revenue?  Or politics?  When about half of the people pay no income taxes there is definitely a political aspect in taxing the rich.  But exploiting the political capital in the tax code defeats the purpose of the tax code.  Raising taxes.  Let’s look at a simple example.

Everyone agrees that lowering taxes helps businesses more than raising taxes.  That’s why even President Obama extended the Bush tax cuts to prevent a double-dip recession.  So let’s look at some numbers.  Let’s say we make it more business friendly out there.  Cut back on some onerous regulations that cost businesses.  Such as repealing Obamacare. Or some other costly legislation(s).  Not cutting taxes mind you.  Just cutting the costs on the job creators.

If we do this business-friendly deregulation let’s assume businesses respond.  They do well and grow.  And these small business owners earn more income.  So much that about 20% of them move up from the $100,000 to $200,000 income group to the $200,000 to $500,000 income group.  This group pays an effective tax rate of 23.3%.  Federal income taxes would increase approximately $100 billion with this growth in income.  Or an increase of 23.3%.  And that’s without cutting taxes.  Imagine what they could do if did cut taxes.

If you want good tax policy.  If you want tax policy that will raise tax revenue.  Don’t raise tax rates on job creators.  Instead, cut their costs.  Cut the cost of job creation.  Then watch the jobs they’ll create.  And the tax revenue they’ll pay.  Both the small business owners.  And their new employees.

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From the Democrat Playbook: When your Economic Policies Fail, commence Class Warfare

Posted by PITHOCRATES - July 9th, 2011

A Look at Future Obama in 2012

Michael Medved looks into the future.  To what a future State of the Union Address may be like.  For a president suffering low approval ratings.  And an insufferable economy (see My 2012 Obama Nightmare by Michael Medved posted 7/8/2011 on The Daily Beast).

“It’s a national tragedy when 14 million people want to work, and the rest of us see important work that needs to be done, but the big corporations that run our economy won’t match the willing people to the necessary tasks. Big companies have benefited greatly from our economic recovery, and they’re right now sitting on mountains of cash. But they apparently prefer to hoard these resources or, even worse, to use them to build new plants in Asia or Latin America, taking millions of American jobs even further away from the people who need them.

“We’ve waited three long years for bankers and CEOs to step up and do their part but when it comes to offering new jobs to their fellow Americans, these pampered plutocrats  say ‘we can’t’ or ‘we won’t.’ America deserves a better answer than this smug selfishness. The long wait for a corporate turnaround is now officially over. On the crucial challenge of providing a meaningful job to every single American who wants one, we say tonight, ‘we can’ and ‘we will.’”

At this declaration, the Democrats in the House chamber erupted in boisterous cheers, providing further sustained ovations as the president explained his bold plan. He promised to hire 10 million unemployed Americans—a full 10 million!—in federally funded jobs by the end of the year. He proposed to put them to work repairing highways and building high-speed rail, constructing and repairing schools, restoring and expanding parks and recreation facilities, planting trees, tutoring kids, providing day care, caring for the sick and elderly, policing our streets and neighborhoods, putting up new, environmentally responsible power plants, cleaning up pollution, building homes for the homeless, helping update and replace the equipment for our military.

You can actually hear the words from Obama.  Attacking big banks and corporations.  Because he has already attacked them.  And offering a huge job bill to put millions to work.  Because he already has done that, too.  The American Recovery and Reinvestment Act of 2009.  Which promised to do what future Obama is promising.  But didn’t.  So although this is a work of fiction, we have no problem in believing it.  Because we have already lived it.  And could very well live it again.

The president’s plan would tap those concentrations of wealth to fund his vast jobs program with an emergency tax increase on the wealthiest Americans—restoring the 50 percent top marginal rate that Ronald Reagan championed in his initial tax reform of 1981. “My Republican friends love to cite President Reagan’s administration as the golden age of American conservatism. And I propose to follow his great example as a tax reformer. No, I won’t raise taxes on ordinary Americans—and 98 percent of you will pay nothing more. Even the wealthiest Americans won’t see a difference in what they pay on the first $250,000 they earn each year.

“But in tough times, every family needs to reassess its economic priorities. And right now the American family needs to ask, what’s more important—new yachts and island vacations for billionaires, or providing jobs for decent people who need to work?” To underline his point, Obama cited 10 wealthy Americans, seated in the gallery, who came to Washington to express their own eagerness to pay taxes at the higher rate.

Of course, Reagan dropped the top marginal rate from 70% to 50% which was a substantial cut.  In this narrative, which may very well play out in real life, Obama would be raising the rate to 50% from 35%.

In case you’re not sure what this means, let’s look at someone who earns a million dollars a year.  Say a baseball player.  Different ranges of that million are taxed at different rates.  Everything over $372,951 is taxed at the top marginal rate.  That’s $627,049.  At the 35% rate, the player owes $219,467.15 in taxes on that amount.  At the 50% rate, the player owes $313,524.50 in taxes.  Or about $94, 057.35 more.  For a total tax due of $327,888.40.  Which is 32.8% of that million dollars.

Now, if you earn a lot less than a million dollars you, no doubt, don’t care.  You’re not particularly fond of rich people.  Until you become one, that is.  Suppose you win a mega lottery and they pay you one million a year.  How would you feel then?  Being paid one million dollars but only being able to keep $672,111?  Before you start paying your state and local taxes.  Which will probably take another $100,000 or so.  Sure, it’s okay when it’s the rich ballplayer.  But I’m guessing it’ll be different when they’re taking $327,888.40 from you.  To have a federal tax bill every year equaling the cost of a real nice house.  That’s why a lot of people that come into big money have tax problems.  They’re buying those houses.  Instead of giving that money to the IRS.

The above was only a work of fiction.  But should we worry?  Perhaps.

The political fiction offered above should sound alarms for conservatives who seek to extend their progress in 2012. With Obama’s campaign already on a path to raise $1 billion through donations from his diehard loyalists, he isn’t worried about losing Wall Street support. Some of his closest advisers, as well as progressive pundits like former Labor Secretary Robert Reich, have already begun pushing for a radical, vastly ambitious new job program like the one described here.

No, the Democrats will never let the failure of their policies stop them from implementing their policies.  For they are economic deniers.  They know how things should be.  And they learned how in those Ivy League universities.  Some even go on to teach those same failed economic policies in those Ivy League universities .  And sound so smart and erudite when they champion the same failing policies over and over again that people believe that they know best.  When, obviously, they don’t.

Ivy League Economic Deniers

Those on the left use class warfare because their policies typically fail.  And no one really wants what they’re selling.  They want to tax and spend.  And boy do they.  Ronald Reagan had $200 billion deficits.  Obama has $1.5 trillion dollar deficits.  So you can’t deny that they like to spend the money.  And to spend the money you have to have it.  Which means they’re constantly trying to raise taxes.  But that has never proven to be a good campaign message.  “Vote for me so I can raise your taxes.”  Hence the class warfare.  Because once they raise rich people’s taxes, it’s much easier to raise your taxes.  Which they have to.  Because there aren’t enough rich people to tax to pay for their spending.

We need to remember this when future Obama says this when he is present Obama.  Which you know is coming.  Because Democrats are economic deniers.  They look at the worst economy since the Great Depression caused by their policies and say what we need is more of the same.  A lot more.  Not because it has worked before.  But because they learned this in some Ivy League classroom.

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LESSONS LEARNED #34: “Sure, until you win the lotto you’re all for sticking it to the rich.” -Old Pithy

Posted by PITHOCRATES - October 7th, 2010

Buddy Can You Spare a Dime

In the old days, we used to jail people who didn’t pay their debts.  Even in the United States.  A couple of signers of the Declaration of Independence even served time in a debtors’ prison.  We took it seriously.  Honoring your debts.  For those who didn’t, they found themselves inside a jail until they did.  Or until they died.

We jailed some people over small sums.  The severity of the punishment (broken families, disease, starvation, privation, physical abuse, etc.) was often extreme in comparison to the size of the debt owed.  In time we would move away from such barbaric justice.  No, in the modern, caring world, we don’t torment those who are down on their luck and find themselves penniless.  You see, the modern world is a caring world.  We abhor the sufferings of our fellow man.  So we show them kindness.  Charity.  We forgive them their debts and help them rebuild their lives.  Well, most of us do.

If you find yourself owing the IRS, you better pay up.  For they will send you to prison.  And take whatever you have.  They will destroy your life.  And your family.  Because they want to make something perfectly clear.  You don’t f*ck with the IRS.  They play to keep.  All the time.

The War on Alcohol

The 18th Amendment prohibited “the manufacture, sale, or transportation of intoxicating liquors within, the importation thereof into, or the exportation thereof from the United States and all territory subject to the jurisdiction thereof for beverage purposes.”  The government may have shut down supply, but the market remained.  Enter criminal gangs.  Who furnished the supply to meet the demand.

None did it better than Al Capone.  His gang ruled Chicago.  People admired him.  After all, he wasn’t hurting anyone.  He was just giving the people what they wanted.  A way to relax and blow off steam.  Like we do today when we enjoy an alcoholic beverage with our friends.  But the gang violence grew.  The pictures following the Saint Valentine’s Day Massacre were just too gruesome.  Soon thereafter the FBI branded Scarface as public enemy #1.

Bootlegging, prostitution, murder, extortion…Capone broke a lot of laws.  But he crossed the line.  He committed a crime that was so heinous that it would land him ultimately in Alcatraz, America’s most secured federal prison.  That crime?  Income tax evasion.

On the Road Again

Willie Nelson is a big time Democrat.  He’s into saving the environment.  Animal rights.  Legalizing marijuana.  Helping the farmers.  And he’s a regular peacenik.  So you’d think he’d be a big fan of Big Government.  Well, yes and no. 

He became very wealthy by the 1980s.  And like a good Democrat, he tried to shield some of that wealth from the IRS.  He parked some of it in some talk shelters.  Then came along Ronald Reagan.  He understood what Andrew Mellon understood (Secretary of the Treasury for Warren G. Harding).  High tax rates made rich people hide their money.  Lower tax rates encouraged rich people to invest their money.  When Mellon cut the tax rates wealthy people paid more taxes and less wealthy people paid fewer taxes.  The progressive tax system worked even better at lower tax rates.  Tax revenue increased as the wealthy invested their money instead of finding creative ways to hide it.  It worked for Reagan, too.  He even closed tax shelters as a further incentive for the wealthy to invest their money to grow the economy and create jobs.  That worked, too.  Savvy wealthy people everywhere were putting Americans back to work.  Only one small problem.  The not so savvy wealthy were caught unawares.

Willie Nelson didn’t move his money from his tax shelters.  When Reagan disallowed those shelters, his money sat there accruing federal taxes.  And interest and penalties.  He blamed and sued his accountants.  The accountants countered that they only did the accounting and taxes.  They were not investment advisors.  Anyway, the IRS seized his assets.  He went on the road again and often to pay off his tax bill.  His total bill came to about 16 million in back taxes, interest and penalties.  Which he paid.  As he no doubt would have from the get-go if he had sought appropriate counsel to help him negotiate the 1,000+ page U.S. tax code.

Easy Money – For the IRS

There are many stories like Willie Nelson’s.  Even Treasury Secretary Timothy Geithner, the smartest man in America, couldn’t figure out his own taxes.  (But we were to excuse him for this because no one else was as qualified as he was to write and administer the U.S. tax code).  But it’s not only the not-so-savvy celebrity rich and the intellectually challenged intellectuals who have trouble with the U.S. tax code.  The poorest of the poor who never had money can sometimes run afoul of the IRS.

Playing the lotto.  Millions do.  Most lose.  And they’re lucky that they do.  Many lotto winners have their lives take a turn for the worse.  Friends and relatives you don’t know are reacquainting themselves with you.  Well, not you so much as your new found wealth.  Con men target you.  Charities.  Neighbors.  Some spend the money fast.  Or recklessly.  Develop drug addictions.  Get robbed.  Even murdered.  There are a lot of stories out there.  Just search the Internet.

When you win the lotto, you can take a lump-sum payment.  Or you can take a series of payments.  Either way the IRS taxes this as income.  And the amount of these payouts will most probably push you in the highest income tax bracket during the period of these payouts.  So the IRS likes lotto winners.  Your odds of winning are slim to none but someone always wins.  And that’s a tax bonanza for the IRS.  Not-so-savvy people who become rich overnight.  The full force and power of the U.S. government falling on some poor schmuck who probably never had a tax liability in his or her life.  Money just doesn’t get any easier. 

Capital Gain or Income?

Some may sell the rights to their future payments.  It’s sort of like selling a rental property.  For example, take a house that rents for $1,000 per month and sells for $150,000.   The buyer gets those future rent payments.  The seller gets the money back that they paid for the house and, hopefully, a capital gain (i.e., they sell the house for more than they paid for it).  The seller pays a capital gains tax on their capital gain.  They do not pay any further income tax on the rental income that the buyer now collects.

Some lotto winners see selling their rights to future payments in the same light.  And that they should only pay a one-time capitals gain tax (at a lower capital gains tax rate) in lieu of the higher income tax rate.  The IRS begs to differ.  And they usually get their way.

Sadly, some buyers advised those selling their rights that they could pay the lower capital gains tax rate.  Which they did.  And faced heavy tax bills for back taxes, interest and penalties as a consequence.  Once again, easy money for the IRS.  You can search the Internet for stories like these, too.

Pay or Else

Whether a gangster, a celebrity, a Democrat brainiac or a low-income lotto winner, we all share something in common.  Whatever our politics, when it comes to our money, we all try to avoid paying our ‘fair share’ of taxes.  We may demand that other rich people pay their taxes, but we will do everything we can to avoid paying our taxes.  But we play a dangerous game when we do.  For those who do and lose, they learn a painful lesson.

You don’t f*ck with the IRS.

www.PITHOCRATES.com

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