Do higher taxes lead to Socialism in America? This is the question I had on September 1, 2009 when I was still slaving away at my corporate job. Paying lots of taxes while the world was falling apart wasn't sitting well with me. I had also just started Financial Samurai in July 2009.
Now that the world is falling apart again 2020 thanks to the coronavirus pandemic, it's more than likely we will have higher taxes in the future to pay for our spending. Therefore, I'm once again asking whether the grind is worth it.
Higher Taxes And Socialism
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 Obama 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?
It just feels bad that the average American pays a higher percentage of his or her wages in taxes than in savings.
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 Is OK When The World Is Hurting
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 ideology 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.
Everyone Gets Bailed Out
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%.
Is Socialism Bad?
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 recession, 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.
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 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.
How About A Flat Tax 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! Simpler and fairer tax systems help discourage tax cheats as well and would help increase the overall revenue to the government.
Reality And Acceptance
Do higher taxes lead to Socialism? I think the answer is yes.
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 $10,000 – $20,000 a year given interest rates are now so low.
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!
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Updated for 2020 and beyond. Do you think higher taxes lead to Socialism?
Financial Samurai – “Slicing Through Money's Mysteries”