Do Higher Taxes Lead To Socialism In America?

Someone once said, “nothing is certain except pressing the reply all button by mistake and taxes.” How true the saying as we face rising taxes under the new administration.  Supposedly 32% of Americans filers pay ZERO TAXES!  I doubt this statistic sits well with the other 68% of files who pay taxes.   I also doubt the percentage of non-tax payers could be that high, but either way, even 15% is a lot.  The good thing for high income earnings is that the highest marginal tax rate has come down by almost half  since the 70’s.  Furthermore, generally if you are paying no taxes, your adjusted gross income is less than $8,350 as a single, or $16,700 as a married couple.   Wouldn’t you rather make more money and pay taxes than make little money and pay nothing?

Given we don’t blog for a living, and several readers asked me this afternoon “whether I think higher taxes lead to Socialism in America, Yes or No only”, my answer and thesis is therefore: “Yes, higher taxes do lead to socialism in America.”

SOCIALISM

Some people bristle when they hear the word “Socialism.”  I just use the word Socialism as a term for the redistribution and equalization of wealth.  Socialists share the belief that capitalism unfairly concentrates power and wealth among a small segment of society, and therefore creates an unequal society. It’s true, life is unfair.  I wish my parents were Bank of Mom & Dad billionaires who bought me a condo during college, and then a black Ferrari afterwards, but nope.  No such luck! Socialism is just a political idealogy that occurs every time America gets in a whole lot of DO-DO-BROWN.

The hyper-capitalists of America helped bring us down with their inventive slicing and dicing, and securitization of leveraged products.  And ironically, it was the hyper-capitalists who got bailed out the most over the past 18 months.  The survivors over at AIG, Bear Sterns, RBS, Citibank, Bank of America, and Merrill Lynch are back in a commanding position now that the “bull market” has returned.  Just look at their share prices.  Remember, Andrew Hall at Citigroup is getting a $100,000,000  bonus due to his correct bets on oil this year!

Everybody knows that the Obama administration plans to raise the highest marginal tax rate from 35% to 40%.  Sucks for those making over $372,950.  It also sucks for those making over $171,550, because your marginal tax rate will probably go from 33% to 36%.  The proposed increase in taxes is a given, and serves to redistribute the wealth from the “rich” to the “poor.”  Unfortunatley for the rich, this comes at a bad time because the economic collapse has been 10X more effective in equalizing wealth than by simply raising federal taxes by 5%. See “The Less You Have, The Less You Lose.”

The question we should ask ourselves is: “Is Socialism bad?” It’s probably downright evil for hyper-capitalists because it incentivizes those who can make more to do less.  But, for the rest of us, who aren’t making big bucks, and who need some help from this current recesssion, maybe Socialism isn’t so bad after all.  Maybe we should support Obama’s big government initiative, and taxation policies as we might all benefit?  We never know when disaster will strike, and it’s worth knowing that if it does, we have big brother ready to take care of us.

ASYMETRIC THINKING

Most would love to pay lower taxes, but there is an asymetric thought process here.  The more you make, the more you dream of paying zero taxes because the absolute savings is huge.  If you make $1 million dollars a year, your effective tax rate is around 40%, and your marginal tax rate is over 50% if you live in places such as California and NYC.  Thoughts of wiping out $400,000 in tax expense makes the rich salivate, and some unfairly start cursing the “deadbeats” who don’t pay a single cent.   Yet, ask the rich to trade places with the poor, and you won’t get a single taker.  Funny ain’t it?

Some of the “poor” on the otherhand think the “rich” are greedy capitalists who already make enough and should stop complaining.  I would hypothesize that if the poor eventually got rich, many would change their way of thinking.  Take this interesting phenomena for example: The vast majority of college students are poor by definition, and the majority are for higher taxes and big government programs (Democrats) to help the people.  In college, it’s just cooler being a Democrat and demonstrate against big bad corporates.  I remember picketing against one shoe corporation for providing deplorable conditions and wages in Vietnam.  I believed in my cause, and I also had nothing better to do because my homework was done!

Yet, why is there a gradual political shift 10 years out of college? It’s because people vote with their pocket books, and the cool poor college kids are finally earning some taxable dollars.  Interestingly though, if you become extremely wealthy, the balance shifts back to the Democrats, because it really doesn’t matter how much you tax them, they have enough money to last many lifetimes.

PROPOSAL

The Flat Tax is the easiest solution to America’s tax debate.  If the flat tax is 15%, and you earn $1,000,000 you pay $150,000 in federal taxes.  If you make $60,000, you pay $9,000.  How is this not fair?  How is this not easy to understand either?  On an absolute level, the richer person pays $141,000 more in taxes, and on a relative basis, the richer person also pays 16.7X more in taxes because his income is 16.7X more!

With a Flat Tax system, there is less gray area and less painful hours of tax preparation to go through.   Could it be that the multi-billion tax prep industry have super-lobbyists with big bucks brainwashing government officials never to change our complicated system? Conspiracy theorists believe so!  Simplier and fairer tax systems help discourage tax cheats as well and would help increase the overall revenue to the government.

REALITY & ACCEPTANCE

Unfortunately, there’s less than a snowball’s chance in the Sahara, America will adopt a flat tax system over the next 8 years.  The rich need to embrace higher taxes.  In this market upswing, the rich are gaining the most anyway.  We’ve been spoiled by lower taxes for the past decade, and it’s now time to pay the piper.

If you’re making much more than Obama’s $250,000 bogey, do your best to defer every dollar above $250,000 into a deferred retirement plan.  If your firm doesn’t go bankrupt, you would certainly gain from deferring your income to when you don’t have any income i.e retirement.  The funny thing is, even if you amass $2 million cash, you are considered average based on the interest income generating power of $60-80,000 a year.  Finally, see if you can set up residency in one of the seven no income tax states.  At the end of the day, if the US gets out of this funk, even with higher taxes, we all win!

Recommendation: I’ve been doing my own taxes with H&R Block At Home for the past ten years. H&R Block is so easy to use, anybody can do their own taxes with their step by step guide with audit protection plan. The program has consistently found thousands of extra dollars in tax savings I did not realize I could have. Why bother paying an account hundreds of dollars when you can learn more about your financials, find extra tax savings, and do it all from the comfort of your own home? Get the H&R Block At Home Online Free Edition!

Keigu,

Financial Samurai – “Slicing Through Money’s Mysteries”

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

    “The rich need to embrace higher taxes. In this market upswing, the rich are gaining the most anyway. We’ve been spoiled by lower taxes for the past decade, and it’s now time to pay the piper.”

    Really? Is this a serious statement? We’ve been spoiled by lower taxes for the past decade? From this statement it could be said you view the individual as reliant on the state – that the individual could not exist without the state. What I find disturbing is your solid belief that government “allows” us to keep part of our income; that they own our income and allow us to have some of it back. Saying we have been spoiled is saying that the government has “allowed” us to keep too much of the income they “allow” us to have.

    The rich do not need to embrace higher taxes. They need to embrace drastically smaller government! I posted this on the GRS blog but I will say it on here as well: why do taxes need to be high? Because our government is so large. The size and scope of government has reached unprecedented levels. If the government budget was only $100 billion, would you still say the rich needed to embrace higher taxes? Of course not! We would be well on our way to a budget surplus and it wouldn’t make sense to have so much extra cash lying around.

    So instead of debating whether or not taxes should be higher, let’s get to the root of the problem – government should be smaller. The federal government should be cut in half – both budgetwise and the scope.

    • says

      David – I write “embrace higher taxes” because it is inevitable. If I knew we could change what’s coming, I would say otherwise. When we embrace change, we find ways to cope and flourish. If we keep battling against the inevitable, we end up miserable. Big government may be inefficient, but big government is needed in crisis times. During recovery, however, big government is a hinderance. Can’t have our cake and eat it too.

      Since Obama will be here for 8 years, we need to accept big government and find ways to prosper.

      Shogun

  2. Old Man says

    Back in the 70’s and 80’s, the highest marginal tax rate was between 50-70% David. You may be too young to realize this. But yes, taxes have been lower now for more than 2 decades, not just one. -Oldie

  3. Gen Y Investor says

    I wouldn’t say that higher taxes lead to socialism… I’d say that socialism leads to higher taxes. Or put even better bigger government leads to higher taxes. Now whether or not this is a good or bad thing depends upon your political views.

    The one thing I will say is that the deficit and our entitlement spending is out of control… I don’t care if they rearrange spending, cut spending, raise taxes or some combo of all three but I really would like to see some fiscal responsibility take hold.

    -Gen Y Investor

  4. says

    @Gen Y Investor
    I agree, spending is of control! Good point about socialism leading to higher taxes. However, since we are a capitalist democracy and still raising taxes, I donno about that. Glad you sold most of your stocks yesterday?

    Shogun

  5. says

    @Old Man
    You said

    “Back in the 70’s and 80’s, the highest marginal tax rate was between 50-70% David. You may be too young to realize this. But yes, taxes have been lower now for more than 2 decades, not just one. -Oldie ”

    And your point is…? I never disagreed with this, did I? Thanks for the facts, but I’m not sure what your point is?

  6. says

    @Gen Y Investor
    “The one thing I will say is that the deficit and our entitlement spending is out of control… I don’t care if they rearrange spending, cut spending, raise taxes or some combo of all three but I really would like to see some fiscal responsibility take hold.”

    ABSOLUTELY AGREE!

  7. says

    I’m a big fan of the flat tax. It’s fair, fair, fair. I don’t know why the government won’t just simplify the system either. Billions in tax evasion will be recaptured with a simpler system.

    Singapore has a 20% flat tax, and Hong Kong has a 15% flat tax. They are in budget surpluses. Ain’t that nice?

  8. Old Man says

    As a person who receives a tax free pension, and pays little tax, i’m obviously for the government taxing the rich as much as possible to provide for the rest of us! Just being honest here. When you guys reach retirement, you’ll realize your mortality, and you’ll get a sense that since you already paid your fair share of taxes for 30-40 years, why shouldn’t someone else.

  9. says

    @Old Man You still totally avoided what I posted earlier, so I will post it again:

    “The rich do not need to embrace higher taxes. They need to embrace drastically smaller government! I posted this on the GRS blog but I will say it on here as well: why do taxes need to be high? Because our government is so large. The size and scope of government has reached unprecedented levels. If the government budget was only $100 billion, would you still say the rich needed to embrace higher taxes? Of course not! We would be well on our way to a budget surplus and it wouldn’t make sense to have so much extra cash lying around.

    So instead of debating whether or not taxes should be higher, let’s get to the root of the problem – government should be smaller. The federal government should be cut in half – both budgetwise and the scope. ”

    Also, I care too much about the future of our nation and the principles our nation was founded on to ascribe to your belief that just because I’m retired I believe the wealthy should be taxed to provide for the rest of us. Do you enjoy being a parasite? Just curious. Instead of wanting to take from others, I actually oppose redistribution of wealth! I know, shocking in today’s day and age.

    If you really think taxing the rich is going to make America more prosperous, get a clue. How about you take a few hours out of your “retired” lifestyle and read “The End of Prosperity.” Or just use some common sense and think “hmmm I wonder why companies do not even consider basing themselves out of the U.S. anymore?” Or look at Northern Ireland who had a 10% flat corporate tax who saw thousands of companies relocate from other nations!

  10. says

    @admin
    Shogun I see where you are coming from. You are in the Robert Kiyosaki camp that says “let’s do what we can do with the government and policies that are in place.” But you differ in embracing higher taxes. I agree we need to play the games with the rules in place (regardless of whether we like them or not) but I don’t think that means we should embrace having the rules turned against prosperity. I’m pretty active in politics which is why I have such a passion about this stuff. I still hope to change the rules in the future, but I agree with doing what we can within the framework we currently have.

  11. Old Man says

    @David@DINKS Finance David, the world is your oyster. When you get older, you’re realize that you too will need some help one day. Big government is there to help those who cannot help themselves as much anymore. Relatives and parents pass, and sometimes you’re stuck with only yourself.

    How does one take care of themselves if they do not have that sizeable nest egg? For a student, I’m surprised by how right-winged you are, given you’re still a student.

  12. says

    Look, higher taxes support the growth of ever larger government. The more government you’ve got, the less freedom and individual initiative you’ve got. There just aren’t any two ways about it.

  13. Gen Y Investor says

    @ Shogun, Yeah I’m happy I sold some of my more aggressive stocks earlier in the week. I still have my defensive dividend stocks and will use my cash to buy more if we go a lot lower.

  14. Old Man says

    @David@DINKS Finance You wrote “Really? Is this a serious statement? We’ve been spoiled by lower taxes for the past decade?” So yes, I’m responding to your question as taxes are now lower than they have been before you were born.

  15. Bill in NC says

    Effective, not marginal tax rates are what matters.

    Married w/ kids and with a modest income my effective federal rate is under 15%, even though my marginal bracket is 25%.

    What I’ve noticed is over even the last decade is the expansion of state taxes.

    Here in the “low-tax” southern U.S. my effective state income tax rate has risen to north of 6% from under 4% (& the state sales tax rate has doubled over the last 25 years)

    • says

      Hi Bill – Thanks for sharing. I agree about your comment on effective, hence why I wrote about the $1million/yr income effective rate of 40%, and marginal at 50%+. The question remains though, do you think higher taxes lead to socialism in America? :)

      Shogun

  16. marci says

    Higher taxes make me want to earn less money so I pay less in taxes….
    but still do for myself – I definitely do NOT want to have to rely on the govt
    to take care of me….. I am doing just fine on my own, thank you very much :)

    Higher taxes are a disincentive to higher wages.
    Why earn more when you will pay more in taxes?
    Not me. Find a frugal level you are happy at, and live within your means.
    For me, it is 8.5 % tax bracket…. That’s where I can still live ok.

    • says

      Hey Marci! Thanks for stopping by! I hear you regarding paying less taxes and not relying on the government. The sweet spot seems to be a $200,000 income for singles or less. Doesn’t look like Obama will touch folks with income less thank 200K.

      What exactly is the 8.5% tax bracket you are referring to? Is that your effective tax rate? Or is that your state tax rate? I’m looking at the US marginal tax rates, and the lowest is 10% for income $8,350 or below. I’d love to pay 8.5%!

      RB

  17. says

    A very provocative article, to be sure! :-)

    Socialism definitely leads to higher taxes – or hyperinflation for governments without the courage to raise the taxes to pay for the services.

    Higher taxes also lead to socialism by default, because government is not capable of fiscal restraint.

    As David has eloquently said, the real answer is less government.

    And re: the flat tax… I don’t know about you, Sam, but I think you might want to reconsider who a flat tax would hurt most – it’s actually the poor and middle class. Folks earning $30,000 per year are not paying $4500 per year in taxes. I know my taxes would more than double and I am solidly in the middle class.

    Very interesting post! :-)

    My $0.02 (after taxes),

    Len

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