Last Tuesday I asked how you feel about your taxes. Are they too high or too low? Are they fair? (You can read the whole issue here.) Many of you agreed with me that your taxes feel unfair, and you gave a variety of reasons. A reader named Bob Bottini thinks inefficiency is the problem, and wrote: “Chloe—I think my taxes are both too high and unfair. The fed gov’t is totally out of control with spending. They see a problem and believe it can be fixed by throwing money at it! The whole sequester debacle is the epitome of what’s wrong with big gov’t. If our elected officials can’t find 2-3% waste and inefficiency in our trillion dollar budget, they should all be fired.” A reader in the financial industry named Cynthia also complained about her tax money being spent irresponsibly, writing: “One definition of ‘fair’ is ‘marked by impartiality and honesty: free from self-interest, prejudice or favoritism.’ If those who are elected didn’t spend my money on things like lifetime pensions for themselves and healthcare benefits superior to what I am able to afford, then perhaps I would be less unhappy with the percentage of my income they confiscate. “Whether by individuals or the collective, money spent should reflect needs met after which wants might be satisfied with any excess funds. “Protein, fruits, vegetables, dairy and grains are needs. By any standard, lattes are wants. The food stamp recipient able to purchase a latte either does so by shortchanging the 5 food groups or because they’ve been given more than that which is truly required. In the latter case, that would mean more has been taken from me than that which is truly required.” John Boname from Birmingham, Alabama, also feels there is too much waste in the system: “Rather than playing the class-envy card, let’s zero in on several reasons why our taxes are not fair, i.e., not equitable or attractive. “1. The governmental tolerance for waste, graft and fraud is unconscionable. “2. The refusal to recognize, from historical data, the link between lax, and insufficiently-regulated, welfare payments and general social demoralization is stark. The lack of work requirements attached thereto simply amplifies the degradation and diminishes morale further. “3. An unwieldy, overburdened and grossly amended tax code saps our time while adding substantially to our expense. “4. A flat tax, possibly with two or three set points, or alternatively a tax on expenditures, would assure that everyone had some ‘skin in the game’ with a feeling of responsibility for themselves and for the officials they elected. Loopholes would vanish.” John was one of several readers who feel a flat tax would be more “fair.” Marcus M. wrote: “Our graduated tax system is unfair. A flat tax would be equitable and thus fair. Using the tax code to maintain an industry is unfair.” And an anonymous reader made this argument: “My taxes, and those of every other American, are not fair. The only ‘fair’ tax is a flat tax - everyone should pay the same percentage of their income. Regardless of one’s wealth, the impact of a flat tax on one individual will be the same on another. “If two people, one 5 ft. tall and one 6 ft. tall, each were to lose 20% of their fingers, would the 6 ft. tall individual be better off than the 5 ft. tall individual? If these same individuals were to play a 1-on-1 game of basketball, should there be a handicap implemented to give the shorter individual an advantage? What if the shorter player were inherently more talented? The only way to be fair is to treat everyone equally.” Another fairly popular idea was scrapping our complex progressive income tax system for a national sales tax, or VAT (value-added tax). Richard W. wrote: “Consider the number of Americans, uber-rich and working/non-working poor, who pay no taxes and you will probably come pretty close to the percentage of Americans who think their tax burden is fair. My ‘tax rate’ was higher than Mr. and Mrs. Obama’s while my income was about 20% of theirs. Let’s go to a sales tax-based system where everyone pays in accordance with what they spend. “It could simplify the tax rules, reduce the number of government employees required to process and collect income tax, and allow everyone the privilege of paying their way in our country, even ‘undocumented’ aliens and criminals. At the proper rate it could provide more revenue than currently collected and would be automatically adjusted by the ability to spend; i.e., the rich pay more because the rich spend more. Items such as unprepared food and medicine and medical appliances such as glasses or dentures could be exempted from the sales tax. If one is paying a 12% tax there might be fewer folks buying lattes with food stamps.” Richard wasn’t the only one who assumed the people paying no taxes are the same people happy with their tax burden. Robert Wangard, an author, wrote in: “You missed the main reason that over half the people believe their taxes are fair. Most of them pay NO income taxes—close to 50% of the total. If they pay no income taxes, its no surprise they feel the system is fair.” And a reader named Bruce wrote: “Chloe—please remember the “47%” that Mr. Romney said we would never be able to win over—those people who pay essentially no tax, or receive subsidies enough to counter any potential tax they may pay…. And then there are the big profitable corporations that pay no tax. That really bums me.” Of course, not everyone agreed with me! Linda V. defended some parts of our current system, writing: “Having your tax money ill-spent by the government is part of being in a democracy, just like any other thing ultimately decided by the government (availability of abortion, who can marry). Love the decisions or hate them, they are part of the way our government works and the only way to have a voice in the outcome is to speak up and get involved in shaping that government. “It does seem very unfair when the super-wealthy [people or corporations] get tax breaks. It’s easier to have a say in how the government decides things when you have many millions [or even billions] backing up your request for a bigger place at the table. (I attached a relevant chart from Wikipedia.)
“And it also does seem really unfair when we work hard to pay for our little luxuries and we see some of that hard-earned money going for someone else to have them for nothing. (Though personally, I ‘d never want to trade lives with that woman your husband saw—free lattes or no.) [As a side note, you already cannot buy prepared foods with food stamps; the latte woman must have been using welfare cash benefits—same principle.] “So yes, there surely must be a fairer way to apportion the responsibilities for and benefits from our government’s programs and services, but I do not know what it is. In the meantime, I will pay my taxes and keep writing my Congressman. ‘Many forms of Government have been tried and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all wise. Indeed, it has been said that democracy is the worst form of government except all those other forms that have been tried from time to time.’—Winston Churchill” And not all my readers agreed that their taxes were too high either! M.L. from Massachusetts wrote: “I paid $1700 in 2012 Federal income taxes, very low in my opinion (low salary and many deductions). I really don’t think the issue is low taxes; it’s low salaries. I would be thrilled to pay more in Federal taxes! (Real estate taxes were another story, over $7000—these taxes pay for local services; and my state income taxes were over $1800). So for me, I don’t see Federal income taxes as the biggest burden.” Finally, I’ll close with one of the most thought-provoking responses I received, from a reader with first-hand experience of how “fairly” government spending is distributed. He wrote: “Great article. I think taxes are a bit unfair. I am blind, worked 26 years programming, receive Social Security and am now working outside corporate in insurance and investing (with great help from Cabot). “I don’t approve of how much I owed and [how some of it was used by] another person to get goods [on] a government ticket. Now, I speak from both sides because I am receiving help from the system as well. Many things I pay taxes for I do not get the same use from as the rest of the world (for example road maintaining—I use the roads but not in the same means as others).” Thanks to everyone who wrote in about your tax experience. I didn’t have space to print all your responses, but I read every one. And remember, you can share your opinions with me any time by responding to one of these emails. I love hearing from you!
Wishing you success in your investing and beyond,
Chloe Lutts
Editor of Investment of the Week
