Crusty Logic Christianity & Liberty

Happy Tax Day!

Taxes are due today. Some quick thoughts.

The IRS says that the average person in the U.S. pays 9.3% of their income in federal taxes. That’s a lot. Now, take a look around you. About half the people you see, 45% to be exact, pay no taxes at all.

The top 400 taxpayers in the country pay 17% of their income to the federal government. Given that the top tax rate is 35%, why do they pay ‘so little’? The two biggest reasons are charitable contributions and capital gains.

Charitable contributions aren’t taxed, so someone who earns $4 million and gives $1 million to charity only pays taxes on the $3 million they keep, giving them an effective tax rate of 25%. Interestingly, conservatives give nearly 50% more of their income to charity than progressives or liberals and it’s upper middle class conservatives who give the most, not the wealthiest.

Secondly, capital gains are taxed at 15%, regardless of income. If $1 million of our $4 million was from investments then this portion would be taxed at 15%, bringing our effective tax rate down to 19%. Why do capital gains have such a lower rate? This lower rate encourages people to invest their money rather than horde it or spend it. This investment provides capital for other people to grow their businesses or start new ones which in turn provides jobs for people and strengthens our economy. This is why even the poor in the U.S. have more cars, TV’s, cell phones, food, furniture, healthcare, and other stuff than middle class folk in Europe or elsewhere.

BTW, my belief, based on some bit of analysis, is that investing $1 million in private enterprise, growing businesses or starting new businesses, provides considerably more benefit to society than $1 million in charitable contributions. Charities, though I support them, are largely ineffective. They do a lot of supposed good for people but fewer than 1% of these people end up any better off in the long run. That $1 million investment in private enterprise provides jobs for about 13 people – in perpetuity. Not to mention the goods and services produced by them each year.

Happy Tax Day.

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