Tim on Taxes - Tax Year 2010 Edition Part 1

It’s everyone’s favorite time of year, namely tax season. Hopefully you’re already done and hopefully you didn’t get back or didn’t owe that much. A lot of people will probably read that and wonder why I didn’t say I hope you got a big refund. It’s pretty simple. If you got a big refund, then that means you gave Uncle Sam a big, interest-free loan. You can avoid that by tweaking your W4 form to increase the amount of money you want withheld from Uncle Sam per paycheck. I’m guilty of not following my own advice, but that’s because I just bought my first house last summer and I want to see a full year of data first. :-p

In general, I believe people not only should focus on trying to earn as much money as possible, but also focus on trying to keep as much as possible. The way I see it, if General Electric can do it, we can and should cut our own burdens down, too.

I think it’s in our collective best interests to reduce our tax burdens as much as possible using legal and ethical means. Uncle Sam is probably the biggest single money drain many of us have. I did my initial calculation of taxes owed and it came out something like this.

25% Federal Income
5% State Income (Connecticut)
12.5% Social Security
3% Medicare

That’s 45.5% total. I understand that I only actually pay half of the Social Security and Medicare taxes and my employer pays the other half, however self-employed people pay the full amount of both and an employer would adjust a worker’s pay accordingly (down) to account for these taxes.

This total also doesn’t include other taxes I pay such as state sales tax (6%), local property taxes, and any other miscellaneous taxes. Sales tax is particularly nasty because it’s a tax on after-tax dollars versus a tax on pre-tax dollars like the others I mentioned. On that note, here’s hoping the national sales tax (aka value-added tax or VAT) never comes into play. So, if we add those in, it’s not unreasonable to take the total over 50%. Of course, this is before deductions and credits.

Yes, the government takes 50% or more of the money we earn before deductions and credits. Several people I know see nothing wrong with that. I think that’s lunacy.

I’m obviously somewhat libertarian in my views. I generally believe the private sector can do things more efficiently (lower costs, faster, and better quality) than the public sector. Of course, there are exceptions like law enforcement, fire departments, and the military. I also generally believe that individual people and businesses know themselves, their situations, their needs, and their desires better than government bureaucrats. Said another way, attempting to centrally plan a society and an economy to too great of a degree is a surefire path to failure. History has proven this repeatedly (Soviet Russia is my favorite example) and will continue to do so (several current nations are proving this now or will prove this in time).

So, what’s my solution? If given the choice, I’d rather take home more money by having less taxes and increase my donations to charity. This offers several benefits. Think about Hurricane Katrina for a moment. Lost in the media’s (largely justified) hack job of Bush Jr.’s and FEMA’s responses was how everyone else from the military to charities to individual citizens (both as volunteers and charitable donors) to private sector companies stepped up to the plate to aid local and state efforts.

An additional benefit to increasing charitable donation is that we as citizens control not only how much we give, but where it goes and what it goes towards. It literally would give power back to the people and take it away from the government. We get to choose what causes we fund, in essence, voting with our dollars. This would reduce the problem of people seeing their tax dollars going to funding things they don’t want funded. People would also gain additional flexibility in their budgets. Maybe your car broke down and you need that money to fix your car instead of donating to charity this month or whatever.

I’ve got a follow-up post in the works about tax policy, what it’s supposed to be, what’s wrong with it in America, and how it can be changed to be better.