Why Pay More than 15% in Income Taxes? – Money Pacers
Why Pay More than 15% in Income Taxes?

Why Pay More than 15% in Income Taxes?

(MP) Once upon a time in both England and America citizens didn’t have to pay income taxes. Occasionally, temporary taxes were imposed to finance wars. A leader would proclaim a tax levy, and so order everyone to turn over their hard-earned money. Taxes were levied in Britain for the fight against Napoleon from 1799 to 1816, and in from 1861 to 1865, the American government demanded money to pay for the Civil War. Then, England in 1874 made income taxes permanent. America followed in 1913, making taxes a permanent fixture by adopting the 16th Amendment to the Constitution. Once Americans were so totally against tariffs — we went to war. It had been excessive tax on tea imposed by the King of England that led to the famous Boston Tea Party. Remember the “Revolutionary War.”

How did income taxes become legal?

Historically, both the British and Americans’ hated tariffs of any kind… However, in those early years levies usually went against the wealthy. Understand, the idea of taxing citizens was accepted by the majority because they told the poor and middle class that tariffs would only be imposed on the rich. It was this Robin Hood theory of economics that made the system possible and thus it was born.  This is why the people voted for the 16th Amendment and how it become constitutionally legal.  Although, it was intended to punish the rich, in reality, it ended up punishing the very people who voted it in — the poor and middle classes!

And, once the federal government got a taste of your money, its’ appetite to tax citizens grew to ridiculous levels. Both the 1920s and ‘1930s saw the creation of a multiple tax system. Sales levies were enacted first in West Virginia in 1921, then in 11 more states in 1933 and 18 more states by 1940. As of 2010, Alaska, Delaware, Montana, New Hampshire and Oregon are the only states without a sales tax. President Franklin Roosevelt signed the Social Security Act in 1935 and payments were first collected in January 1937, although no benefits were paid until January 1940.

But still the fed tax appetite grew worst. The “Alternative Minimum Tax” (AMT), a type of federal wage tax, was enacted in 1978. This parallel system uses a separate set of rules to calculate taxable earnings after allowed deductions. It was designed to prevent taxpayers from avoiding their “fair share” of the tax system, but because it is not indexed to inflation, more and more taxpayers have become subjected to it over the years, resulting in escalating calls to reform or drop the AMT.

These are just a few of the many tariffs Americans are subjected to. Others include cigarette and alcohol, energy, aviation, property, telecommunications and state income taxes. The Tax Foundation revealed that in 2009, Americans on average had to work through April 11 just to earn the amount of money they could pay over the course of the year. It’s better known as tax freedom day. TFD takes all federal, state, and local taxes and divides them by the nation’s earnings.

Paying More than 15% in Income Taxes

The wealthy see an opportunity

Soon as the government’s appetite for money grew – the tax system was levied on any and everybody. The wealthy on the other hand saw an opportunity – because the rich don’t play by the same rules as everyone else. Remember, we make the rules to our advantage. How? By influencing the people whom make the rules. O.k., enough about that. It’s a 1% thing.  You see the wealthy knew about corporations and their by-product insurance, which became popular in the days of sailing ships. The wealthy created corporations and used insurance companies as a vehicle to limit their risk of each voyage. The wealthy placed their money into a corporation to finance a voyage. The corporation would then hire a captain and crew to sail to the New World and Africa to find wealth. If a ship was lost, and the crew lost their lives, the rich only lost the money they had invested for that particular voyage and if insured they lost nothing. It is this knowledge of the power of legal corporate structures that give the wealthy around the world a vast advantage over the poor and middle class. You see lack of financial education is what keeps people in the poor and middle classes. Not lack of finance. To get to the head of the class — you have got to read “Follow the Money.”

How the wealthy pay less on income?

Those whom only earn salaried income are probably taxed somewhere around 35% (only married couples may get 15%) on their earnings. While my counterparts and I are taxed at a rate of anywhere from 11 to 15% every year. And, although you maybe grateful for the current earned income tax credit, of $3,000 to $5,000 — they’re just giving you kibbles and bits. Simply put, business owners and investors whom have passive incomes are the people paying less tax in America. Remember, sole proprietorships, partnerships and closely held “S corporations” – fall under the individual income tax code because their profits and losses are passed through to people. This means your profits must be invested in passive vehicles in-order to benefit and pay the lowest taxes. Get more on this subject read “Save Money on Income Taxes.” Now, let’s take one of our counterparts Mitt Romney for example:

Mitt Romney is the former governor of Massachusetts and his wealth is of no surprise to us. But during the 2012 Republican presidential campaign he offered up some details of his tax returns.  The Romney’s received a tax refund for their 2010 filing. But at $1.6 million, their refund was slightly higher than the IRS-reported average of $3,003. Their return showed that in 2010, Romney and his wife totaled $21.6 million in income and paid slightly more than $3 million in federal taxes. That’s about an effective tax rate of 13.9 percent, according to the documents he released. In that same year, according to estimates released, the pair took in $20.9 million, on which they will pay $3.2 million — 15.4 percent of their income. While the Obama’s, by way of comparison, had $1.7 million in income in 2010 — they paid an effective tax rate of 26.3 percent in income taxes.

So how does a man worth hundreds of millions end up with a tax rate similar to that paid by a household earning $50,000 per year?

“The answer lies not in shady accounting practices, but in our federal income tax code,” explains Joseph Newpol, a professor of law, taxation and financial planning at Bentley University in Waltham, Mass. “Essentially, the government’s policy is this: if you have income from capital, they’re going to tax it at a preferred rate,” Newpol says. Most workers are familiar with the progressive income tax: Money earned in wages or salary is taxed at a higher rate the more you earn. For 2011, a married couple earning a total of $50,000 – after deductions – is subject to a maximum tax rate of 15 percent; those earning more than $379,150 will pay 35 percent on some of their earnings. But capital gains – the profit made from selling an asset, such as real estate or stocks – are taxed differently. Though there are some exceptions, this money is generally assessed at a rate of 15 percent. Other earnings also falls under the capital gains rate, including carried interest, which an individual is paid a part of the profits generated by a fund or partnership.

In Romney’s case, $12.6 million of his 2010 earnings was classified as capital gains, according to his tax filings. Had that money been paid as salary or wages, most of it would have been taxed at 35 percent; instead, it was assessed at less than half that rate. If you want to get your passive earning up – start investing today!

Don Briscoe
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Don Briscoe

Finance educator, advisor, and leading voice in the global financial literacy movement.Founder and editor of MoneyPacers.com.He lives and enjoys life with his family in New York.
Don Briscoe
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