A question in e-mail based on all the recent “rich people feeling not rich” nonsense, and the associated commentary online:
Why is it that the people freaking out the most about taxes on the rich are the ones who don’t seem to know how the tax code works?
The answer is in the question: Because they don’t know how the tax code works. The major failing seems to be an incomprehension regarding marginal tax rates, but people also seem to fall down on the matter of taxable income vs. gross income (i.e. how deductions can work for you!), how to apply tax credits, and other various and fairly basic aspects of the tax code here in the US.
If you don’t know that stuff — if you basically wander through your life thinking the government taxes all of your income based on the highest possible percentage — then I suppose it’s no wonder you freak out. But it also kind of makes you the financial equivalent of the people who think that Darwin said we are all descended from monkeys, or that the Bible says “God helps those who help themselves.” In short, it means you’re a bit ignorant. You should stop being that. It’s easily correctable. In any event, at some point in time, real live grown-ups should understand the concept of marginal rates. It’s not that difficult to grasp.
There is another answer as well, which can be paired with the above or stand on its own, and it’s that there’s a certain sort of person who believes that all taxation (or all taxation outside of one or two very specific things of which they approve) is theft. Naturally that sort of person will fly to the defense of any who bleat about their taxes being too high, even if in point of fact, the wealthy in the US are currently being taxed at historically low rates (“but they’re still too high!”).
I really don’t know what you do about the “taxes are theft” crowd, except possibly enter a gambling pool regarding just how long after their no-tax utopia comes true that their generally white, generally entitled, generally soft and pudgy asses are turned into thin strips of Objectivist Jerky by the sort of pitiless sociopath who is actually prepped and ready to live in the world that logically follows these people’s fondest desires. Sorry, guys. I know you all thought you were going to be one of those paying a nickel for your cigarettes in Galt Gulch. That’ll be a fine last thought for you as the starving remnants of the society of takers closes in with their flensing tools.
Getting back to the real word for a bit, I’ll be the first to admit that while understanding the basics of the US tax code is useful for not irrationally freaking out when there is talk of raising the marginal rates of the top few percent of income earners in the United States, in point of fact, unless all one is doing is filling in a 1040 A or EZ form, on a practical level the US Tax Code quickly becomes too complicated for most people to deal with, especially when the only time they deal with it is between April 10 and April 15 every year. This is why probably the single most important thing you can do for yourself financially, the moment your tax profile outgrows the 1040 A or EZ, is to get yourself an accountant. Because it’s the accountant’s job to know the tax code — not just a half a week a year but all year long.
In the now-long-gone blog entry of Professor Todd Henderson’s that started off this entire recent round of income-related nonsensery, the one thing in it that actually gave me pause — and which convinced me the man was something of a fiscal naif — was when he revealed that a) he didn’t have an accountant and b) that he was still using TurboTax for his taxes. And I was all, like, what? Dude, you can pay for a gardener but then cry that paying for an accountant is too dear? No wonder you’re all worked up.
I very specifically don’t want to start another round of Henderson-whacking — the man’s been whacked enough — but I will say that after a certain level rather below Professor Henderson’s income and taxation situation, you should recognize that what you don’t know about the US tax code is probably making you pay more than you have to and/or making you miss something you shouldn’t. Which will come back to bite you in the ass in the form of an audit, followed by late payment penalties and fees.
My own moment of clarity on this score came in 2001, when we moved to Ohio; we became landlords and I also started my own company. Both of these things, and other financial events, caused me to look at my tax profile and go, oh, man, I am so very over my head right now. Bear in mind that I said this when I had written a book on finance, and when I was currently writing a finance newsletter for AOL, and also working as a consultant for a number of financial services companies. I was not exactly innumerate. But then maybe that was the thing: I knew enough to know I didn’t know nearly enough. So we got ourselves an accountant, and she was (and is) very good at what she does, and her competence at her job means our tax situation is both well-managed and never a surprise.
So. If you’re freaked out about taxes, please make sure you actually know what you’re talking about when it comes to taxes. If you are a high-income earner and/or have a complicated tax profile, invest in an accountant. Either or both should help to calm your tax frenzy a bit. And if they don’t, accept that the reason you’re in a frenzy is probably because you want to be, rather than because the situation genuinely warrants it.