Dealing With The Guilt-Joy Of Raising Taxes On The Rich

view-from-aboveWatch out, rich people: I’m coming for you! A preliminary run-through of my 2013 taxes has revealed that I now earn a low enough amount to no longer qualify as a prime tax hike target. And yet, as sad as this apparent reduction of my own productivity may be, I still possess a wondrous power: the ability to vote to raise taxes on others to benefit me, me, ME!

It’s quite amazing, really; first we learn that the average 401(k) balance surpasses $100,000 for over 50 million working Americans, then we find out that the national unemployment rate has dropped to 6.6%, and now this? Drinks for all, paid for by my rich blogging buddies next time we meet.

I think it’s everybody’s duty to pay taxes. A flat tax above a certain minimum income level of comfort (MILC™) for individuals and families sounds like a fair approach, right? Make 10x more than someone, pay 10x more in taxes than someone. Stuck below the MILC? Don’t worry about income taxes, we got you; just pay sales tax, and FICA tax for your own good (assuming you have a job). We all enjoy the same benefits of military protection, libraries, a functioning judicial system, the NSA, and manicured public parks; it’s only right that we should all help pay for them.

This post offers a little bit of honest introspection as to how I’ve felt going from paying no income taxes as a student, to paying a boatload of income taxes as a worker bee, to once again paying not so much at all. I now find myself assailed by an odd sense of guilt; while my own tax liability has decreased, I still have the ability to potentially vote for legislation to increase someone else’s taxes in order to benefit myself and my family. Deep in my heart I know that ganging up on any one group is wrong, even if the law allows it. But hey— if I don’t pick up the $100 bill lying on the street, someone else will!

As a reminder, the ideal (adjusted gross) income for maximum happiness is $200,000 because:

  • Regardless of how high the cost of living may be in your neck of the woods, anything over $200,000 is a target for tax hikes, period.
  • The marginal federal tax rate is 28%– a reasonable number, even if you add a state tax rate of 8% to your wages.
  • You don’t have to pay the new Net Investment Tax of 3.8% for every dollar you make over $200,000 as an individual, or $250,000 as a couple (why 1+1 = 1.25, I don’t know!).
  • You still get to max out your 401(k) and save plenty in after-tax money at $200,000.
  • You get to be a part of the middle class, which is the best class in society.
  • You can vote to raise other people’s taxes without having to pay more yourself.

DON’T FIGHT THE GOVERNMENT OR THE MAJORITY

Try to fight the government and you’ll likely get crushed. Spend some time studying world history and you’ll find countless examples of people just disappearing without a trace for going against the ruling party. If you walk into a Star Wars convention and take on 100 of the scrawniest teens, you will get beaten to a pulp. Same principle.

I care about all my readers on Financial Samurai, which is why I wrote the Stealth Wealth Manifesto for everyone to follow. To make progress while protecting your family, you must follow my advice and blend in. Telling everybody how much you make if your income is over $200,000 is a sure-fire way to attract Cleaners who will pluck you from your bed one evening for erasure.

For over two years I’ve been trying to keep hope alive by researching what the future of America is likely to be. I spent eight weeks in Europe’s most taxed countries (which also happen to be the world’s happiest countries) seeking to understand the benefits of Socialism. Based on my research, I’m proud to say that America will one day join places like Sweden and Norway as one of the happiest countries in the world. You just have to be on the right side of the debate to see it that way.

I wasn’t always this paranoid or cynical about the government. During college, I loved rallying for world peace, supporting the United Nations, and singing Kumbaya while holding hands with friends. Of course I was also in favor of massive tax increases and income redistribution. Then I got a job.

THE CATALYST TO EARN LESS AND TAKE MORE

Despite paying six figures a year in federal and state income taxes through my 20s and 30s before ejecting myself from the system at 35, I was never bitter about paying taxes. I recognized I was lucky to be earning a healthy wage and paid my taxes on time like clockwork. In fact, every time I finished my taxes I’d say a little prayer: Thank you, IRS– may I have another?!

Then one day a manhole cover started rattling on the street outside my house. The molding surrounding the heavy steel plate had come loose, so I called 311 to see if they could get a city worker out to fix the cover. After 50 calls and 18 months, the city finally sent out a tar truck to simply cover up the manhole completely– a band-aid fix that took a total of 30 minutes to complete. Six months later the manhole cover started rattling again. Bah! Paying tens of thousands of dollars in state taxes a year gets you crap, I grumbled.

Then Proposition 30 passed at the end of 2012, retroactively raising taxes by 3.8% on all individuals who made over $250,000 a year in order to help pay for our public schools. Even though I don’t have children and already pay tens of thousands a year in property taxes to fund education and public works, I’m all for supporting public education in my city. What I mind, however, is getting fleeced by a double standard.

Originally there was Proposition 38, which proposed to raise state income taxes by 0.4% – 2.2% on everybody so that everybody could pitch in to support our children’s education. The proposition would have raised an estimated $10 billion dollars a year. Unfortunately, Proposition 38 was shut down in favor of Proposition 30. The end result is $4 billion LESS per year for education. In other words, everybody is pro- raising money for education to help our children, so long as everybody doesn’t have to pay for it!

After seeing the retroactive tax bill for 2012, I decided I had had enough. I no longer wanted to feel like the enemy, despite paying so much. Instead I went John Galt for a full year. I ate ramen noodles, didn’t work, played tennis all day at the park with my fellow unemployed friends, and lived a generally good life. What did I care? Asset-rich, income-poor is the way to go. I even wrote a long post showing people how to pay little to no taxes on wage income, rental income, and business income. You should check it out.

Anyway, there I was, at last intimately enjoying all the little things the government had to offer while no longer having to pay as much. Success! And yet…After about a year I started feeling kind of useless. While I believed I was doing a small part to help society by consistently publishing helpful articles on Financial Samurai, aiding (for free) anybody who cared to listen, I felt bad for living such a carefree life while others had to work. So, as I saw the economy booming once again, I decided I was willing to pay the price of admission to get back in.

HOW DO YOU DEAL WITH THE GUILT-JOY?

Would I ever actually vote for legislation that raises taxes on some one group in order to benefit my own interests, while not having to pay more taxes myself? I don’t know. Such power feels so intoxicating – like finally, I’m on a dynasty team! I’ll probably just sit tight for a while and enjoy the benefits of no longer having to pay as much taxes while having lots more free time to enjoy what taxes provide. But guilt-joy will inevitably start creeping in as I succumb to greed. Please don’t hate me, rich people — you’ll still have lots of money left over! Tennis anyone?

If you were ever in the assailed tax bracket and successfully transitioned back to center, were you able to stay there for a while? Or did you have an itch to try and make more money, despite paying progressively more taxes? Did you ever decide to execute your right to vote on politicians who backed legislation to take from one group to benefit yourself and your family? If so, how did you overcome the guilt, if any?

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. says

    It’s always easier to spend someone else’s money. When we don’t have our own money at stake we can quickly become selfish and greedy. I’ve had to pay more and more taxes over the years, and while it sucks I’m glad to be earning more money than less. The thing that gets me the most angry is double taxation which California is really bad about. I’ll pay my fair share, but when the government thinks its “fair” to tax me twice, that is just a punch in the gut. Although the lifestyle in CA is awesome, I can’t stay here long term b/c of the taxes!

  2. says

    I didn’t mind paying more tax when I was making good money. I just wish the government is a little more efficient. Now, we are in the center and it’s a good place to be.
    Yeah, I’d probably vote to increase tax on the rich people a little bit. They have plenty to spare.

  3. says

    I hear you on the taxes in California! My husband and I combined make a pretty good living, but we get hosed on taxes because 1. we don’t have dependents (yet!) and 2. we don’t own a home (how can you when the median cost of a house here is past $650K!).

    I’m in favor of taxing the uber rich. I agree, they can handle it.

    Our challenge is getting creative with our itemizing. That’s why we hired a great tax accountant.

    • Ace says

      Well….. Having the tax break on your mortgage interest and property tax is nice….. But, I always thought the idea of buying a house just to save on taxes is a rather poor motivation. Pay a dollar in interest to get back 35 cents?

      Buy a home because you can afford one and plan to live in specific location for a very long time (hopefully, decades). The benefits are housing costs stabilizing and actually owning something after 30 years.

      California will always be a high tax state. The good thing is that there are 49 other states to consider if taxes/cost of living are too big of a problem.

  4. says

    My chief objection isn’t to paying the taxes Sam, it’s how inefficiently the government operates. I don’t like to waste my money at home, so I really don’t like to waste it nationwide. Thanks for the conversation starter FS. Have a great weekend
    -Bryan

  5. Joey says

    I appreciate you sharing the spectrum of going from paying nothing, to a lot, to a little.

    Most people won’t feel “guilt-joy” because most people never ascend high enough to experience the pain of paying taxes and not getting anything worthwhile in return.

    If all you know is being able to have the ability to steal from one group to benefit your own group, you’ll never feel guilty. You’ll feel it’s just the way of life like you wrote in “Being Out Of Touch With Reality Doesn’t Make Sense.” It is the normal reality.

    It’s human nature to try and milk the system for the max and see what you can get away with. This is why if the government gets to keep growing in power, eventually our most productive people will just move elsewhere.

  6. Vincent says

    If you think the Californian tax system is unfair, you should see Australia! You can’t deduct the interest cost of the house you live in yet investment losses are completely deductible against wages. This comes with the understanding that the rich have more tax to deduct, so the waitress who’s earning $25000 a year is subsidising the investment property of the Lawyer earning ten times her salary!

    Not to mention the current government who think that those on welfare like disability pensions and unemployment benefits (means tested and non-contributory like the age pension I mentioned earlier) should get cuts while they scrap proposed taxes on high super balances.

    It’s not a very fair system for all the pretensions we have.

    • says

      But you guys are inheriting $501,000 a pop on average. Can’t be too bd no?

      Good to know investment losses are completely deductible against wages. That would be a sweet new policy if enacted here in US. Might causes us to churn even more.

      • Vincent says

        Well, the inheritance comes with the proviso that your capacity to generate wealth is impaired by the high cost of living (largely caused by the investment loss deduction encouraging the purchase of investment properties). I’m studying at the moment, but the fact that my parent’s house a half an hour from the city is worth over a million AUD is completely crazy! You wouldn’t like it here Sam, the rental yields on property outside of the Melbourne CBD are terrible (you couldn’t rent a place like mine out for more than 700 a week).

        I’m not saying that tax deductions are bad, but this one has the impact of concentrating wealth into the hands of people that bought their properties over a decade ago, it isn’t exactly fair…

          • Vincent says

            I think the house of cards that is the Australian property market will be propped up for a long time so yes maybe I should leave…

            In answer to your second point, yes I’ll probably get half of the value, but what’s the point if I have reduced capacity to generate my own wealth in the decades of interim? I’d much rather a lower cost of living to springboard then a large inheritance. (I personally believe my parents should spend it on themselves, they earned it after all)

    • Austin says

      Given Vincent’s comments. Is it so far-fetched to believe that government intervention, while often well intentioned, is frequently the cause of real-world distortions.

      “Democracy is the road to Socialism”.

      I believe that we are heading for social democracy a la Western Europe. The future likely belongs to Asia (and I don’t just mean SE Asia). I believe this is a good time to start looking at the Russian stock market. In only a few years it will likely be difficult to determine who is more “American”, the US or the former USSR.

      Do you know any doctors? Ask them what they believe the effects of Obamacare will be on their income.

      • says

        My doctor friends have seen a HUGE structural decline in their income.

        One friend expected to make about $400,000 – $500,000 10 years ago when he entered to study cardiology and is now making $250,000. Meanwhile, the cost of becoming a doctor has skyrocketed.

        End result, less doctors at the margin, and less qualified doctors. Scary what things will look like in 25 years, which is why focusing on preventative care is smart.

  7. SD says

    I guest I just don’t know what constitutes “uber rich” and then how to tax them Would it be:
    –Higher investment tax on liquid investment assets greater than $10 million?
    –Higher income tax on income greater than $2 million? Or maybe $5 million?

    I still think this constitutes class warfare, Sammy. Seems like we need to make a harder choice between guns n’ butter. Far fewer guns and a bit more butter.

    • Ace says

      SD,

      I can certainly agree with you here. No country wastes more money (and lives) on pointless military operations like the USA.

    • says

      I certainly do not think anybody making more than $200,000 should be considered “rich” according to the government. It costs $1 million to buy a median price home in SF. More regard needs to be made regarding location / COL.

      Nobody can argue that making $1 million or more isn’t rich though.

  8. Mike says

    It’s that time of the year again..
    Nothing like paying taxes to support:
    1) Welfare for the moocher class
    2) Wars all over the world
    3) Government agencies that could lose 90% of the workforce and nobody would notice.

    And yes, I am bitter about having my hard-earned money taken away for these causes.

  9. says

    Taxes are nonsense. The one that is the most insane is state taxes, 10% just to live in that state is terrifying. One day companies will wake up and move to Texas (a false dream of course)

    Anyway, if people are paying higher taxes they should get some sort of guarantee for the taxes they paid, social security or otherwise. The government is just jumbled mess of idiots.

    All that aside each generation gets screwed even more. So can’t complain.

    • says

      I just wish it didn’t take 50 phone calls and 18 months to fix a manhole cover after I’ve been paying tens of thousands a year to California.

      If they were more efficient, I wouldn’t mind as much. But 18 months means = F U Sam.

  10. Kristy says

    I am firmly in the middle class, albeit the upper middle (in my opinion). However, I do not believe in “just” raising the taxes of the rich. The rich already pay more taxes than the rest of the country. When will enough be enough? I think the government needs to manage their funds better instead and if they do raise taxes, raise them on everyone.

  11. Virginia says

    I love being an american. I see paying taxes as one of my responsibilities as an american. Of course not every tax dollar gets to go to something I want but such a system would be impossible and I accept that. I am very blessed an have had many opportunities and try to make the most of them.

  12. says

    When I was in my 30′s, my mini protest was paying little or no taxes. It was my goal because I did not like what the government spent the money on! I still feel the same way, but I no longer am willing to do what is necessary to avoid the taxes. I still have the mentality to invest in assets that will be taxed at a capital gains rate, but not enough to go overboard. Besides the tax code has changed! Given a choice, I think it is far better to concentrate on acquisition of (business & investment) assets which are taxed at a lower rate.

  13. says

    Ha ha, yes, I have the “itch to make more money”. That hunger is best sated by putting forth productive efforts in small quantities. I make enough to get by without triggering a big tax bill (or any tax bill, really :) ) and have tax efficient income streams (qualified dividends, anyone?) to pad my wallet.

    A question for you, Sam. Did you really eat ramen noodles to slash your spending? We use them as lo mein and occasionally soup, but for us they aren’t any cheaper than buying regular noodles.

    • says

      I love ramen noodles, so yes, I ate a lot of them. Great selection at the local Japanese grocery story.

      I also spent aggressively on my business to do research abroad in places like Europe in order to write posts. Gotta sacrifice profits in order to write firsthand, insightful content and save on taxes. But I think it’s paid off.

  14. says

    The rub is that when poor and middle class people say “tax the rich”, what they end up doing is taxing the high earners. These are not the same group of people. If your income is your best wealth building tool, then why set up a tax system that will penalize you when you reach your goal (presuming your goal is to earn big money someday)?

    • says

      And therein lies a good point on what is rich. I don’t think $200,000 is rich. $1 million +, yes…. but $200,000 is seriously middle class in many of the nation’s most expensive areas where many of the $200,000 income earners reside.

  15. says

    I’m consistent. When I was in the very top California rate (very top), I always voted to tax the rich, just like I do now that I’m not in the top anymore. Sometimes it’s a vote to my own detriment and sometimes not–but I think those that can afford to pay taxes should be the ones to pay taxes.

    Here’s a strange one for you: I have family that are totally conservative Republicans that hate the government and always vote the exact opposite of me. My aunt was a public school teacher for her whole life and now receives a great pension from the government. My cousins have been on Section 8 housing and MediCal, and my other cousins were beneficiaries of extended unemployment insurance. And they all hate all those things, vote against them, and hate, hate, hate big government.

    Go figure, I’m voting to support them, and they are voting to support me.

  16. John says

    I am here in Spain on business….getting ready for a series of meetings over the next 4 days, and all I can think of, as I read this post yesterday, was how European we have become (with California leading the way).

    1.) Very high marginal tax rates (CA leading the way again)
    2.) Ever expanding social welfare system (with new health care leading the way now)
    3.) A perverse belief the “rich” can keep supporting the system (Spain, Italy, Greece long ago ran out of rich people…they are hoping Germany or ECB money printing can keep them afloat)

    I could go on, but it doesn’t help…

    Sam and some of you other folks are, knowingly or unknowingly, poster children of the consequences of this system.. productive people have figured out that the marginal gain on extra work is NOT worth it. I commend you folks for reaching a level of critical mass….however, if we flattened the tax code, I would bet my net worth that many “marginal drop-outs” (e.g Sam and maybe some of you other FS guys), would coming back into the system to pick up the potential gains waiting for you (and in turn actually paying more real tax) We learned this lesson in spades in the 80s…and have forgotten it in the 2000s. Europe never learned.

    Finally, we are going to need to find more ways to raise revenue…with our ever-expanding social welfare system. I used to laugh at the Europeans for their insane VAT tax..an incredibly regressive tax that incentives one to buy stuff overseas (ever meet a European at Disney World? They do most of their annual clothes shopping in Orlando for the year to escape their VAT)….however, even I could start to stomach a VAT…..if it meant getting everone to actually pay some tax! Maybe I’ll make an annual shopping trip to Hong Kong! Our politics no longer enables us to do efficient things (like flatten the tax code, reduce deductions, simplify). Efficiency is not really possible in politics…and we definitely need more revenue for our ever-expanding social welfare system, so a VAT is a given…

    Europe…here we come!

  17. Tom says

    You know how there are those simple-minded people who say “if you dont like it, you can just get out of our country!”. Well, we did, haha. Not to say the main reason we left the US was the taxes, but a huge side benefit to living in the cayman islands is that the first 97k of our salaries are not taxed and at the moment neither of us make that anyway (my income took a bit of a hit moving here, I have to “re-make” my manager status again at my company since I made a bit of a career switch from M&A advisory to corporate restructuring).

    The truth is that we missed island living, but its amazing how much faster your bank account grows when uncle sam isn’t reaching into your wallet. I understand there are some people who will complain and say what we are doing isn’t fair or whatever, but we positioned ourselves so that we can be flexible with our careers and last I heard, we don’t have any moral obligation to live in one particular country for the rest of our lives just because we were born there. At this point the only place we could see ourselves living in the U.S. would be Hawaii, specifically Kauai or Maui and that is mostly because I miss surfing.

    • says

      I totally envy you about not having to pay taxes on the first 97K. I wonder if I can earn a perfect 97K online and relocate to the Cayman Island too to avoid paying taxes? Whatcha think? Part of the benefit of having an internet business. Perhaps I’ll just reincorporate in Cayman, man.

      • Tom says

        Best part is that the non-taxable amount seems to rise every year by about $1-3k (http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Earned-Income-Exclusion—Requirements)

        There are really two ways it sounds like you could go about moving here: (1)The laws here in Cayman are a bit muddled as they like to change them every few years when it comes to expats, but there actually is a big push to get there special economic zone off the ground that your blog may very well qualify for: http://www.caymanenterprisecity.com/

        The other option is to prove that you have “independent means”, i.e. – you make CI$120,000 (~US$146,000) a year or more and make a substantial investment in the island, see #4 http://www.caymannewresident.com/cayman-immigration-entry-requirements.

        The second option isn’t quite as enticing as you’re forced to cough up quite a bit of money up front, but I’d assume once you reside here you can claim the work you’ve done for your internet companies was done on island and shouldnt be taxed. But while I have a CPA, I would NOT take my advice on personal taxes haha.

        • nbsdmp says

          Tom, I have to say the Cayman Islands has been on my radar for a couple of years now…my business partner and I are considering setting up a “captive insurance” company in the Caymans as a 100% legal means to diversify investments and lessen the our tax burden. From what I gather there are something like 160,000 corporations registered in the Caymans and only 50,000 full time residents. Seems like a very business friendly economic environment…I’m planning a visit there later this year to check it out!

          • Tom says

            It certainly is a business-friendly economic environment, although given the economic climate of the rest of the world there is much more pressure, in particular by the UK and US governments for the Cayman Islands to be as transparent as possible because they are convinced the islands are just filled to the brim with tax evaders. So just be prepared for what is most likely a lot of paperwork to go through, more so than in the past.

            Cayman has a large number of captives already on the island, I believe Aon is the biggest manager of these captive insurance companies. I believe the island is number 2 or 3 in terms of total captives domiciled within its borders with Bermuda being by far the largest. But in my biased opinion, I would much rather be in Cayman. I lived in Bermuda for a while and my personal opinion is that the island is going down the drain and its government is in dire financial straits.

  18. Lola says

    Sam,
    Reading this post and thinking about taxes coming due has left me rather depressed. My husband and I are at the top of our careers making almost $300k. I am a bit above $125k, he is making closer to $175k. So, it looks like we have to start thinking about: 1.) moving to an area where we will earn less (and probably have a better lifestyle to boot), 2.) find a part-time job for me or 3.) get a paper divorce (but we have a child, so that could cause problems if he finds out).
    Thanks for your posts.
    -April

    • says

      Wow Lola, that sounds crazy to have that large of an income and you’re considering getting a part-time gig to help out!
      Keep in mind that’s coming from someone with a single income of slightly over $100k and a wife and 4 kids to support and living in the state with the highest property taxes (NJ). :-P
      Good luck to you and your family! :-)

      • Lola says

        Hi Chris,
        My husband and I both have very stressful jobs which are more than full-time. We are required to travel and I often have to work weekends, evenings and sometimes even 36 hours straight. So, it does come at a very high price of our health and sanity. My point about possibly working part-time was so that we can fall under thar $250k threshhold and pay less in taxes. I hear you about the property taxes though, that is keeping us from buying in the burbs in a good school ditrict where the property taxes average $15k a year.
        Lola

        • Tom says

          Thats a pretty interesting point you make Lola – economists always point to your particular situation as to why raising taxes on the rich are not always a good idea (forget the stupid trickle-down economics idiot media folks who never even took an econ course talk about).

          At some point, taxing people for making more money results in a situation like yours where the incremental benefit of working those extra hours are not worth your time. That is where I get aggravated by people who dont understand that the people with money didnt just accumulate it from thin air – a lot of hard work goes into it. Many people do not know what it is like to work 70-100 hours in a week. But for the person who does work those hours and is then told they should feel bad for making more money than the guy working 40 hours a week, frustration sets in and ultimately that person ends up working less, which at least from a GDP standpoint, is not good.

    • says

      Good luck Lola! I’d work until you are burned out because those are great salaries to bank. Once you leave, it’s often hard to get them back.

      See you in Washington, Florida, or the Cayman Islands!

      • Lola says

        Hi Sam,
        We have pretty much reached the burnout point to such a degree that vacations don’t even help us anymore. Of course, we end up working remotely for a few hours on those vacations anyway due to “crises” at work.
        Our salaries are only so-so for living near Boston. Housing prices and having a child in Preschool are big savings killers, but we are very frugal which is the only way we can save toward what will, hopefully, be an early retirement.
        We’re headed to Washington soon to check it out as a possibilty for re-location. And after this winter in MA, FL is looking pretty good. As for the Cayman Islands, I don’t think we could do our same jobs there.
        Thanks.
        Lola

        • says

          I’m wondering, perhaps the best strategy is to have one of you shift in a lower gear first. I think both of you would feel less stressed as a result b/c the working partner has someone they trust taking care of other business.

          Stay warm!

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