First of all people need to realize that the tax code rewards you for two things:
1) Doing the governments job for them (mostly creating jobs).
2) Taking risk.
Using the risk criteria, the employee really does not carry much risk (although employee’s may disagree saying there is a risk getting a degree etc). However, the entrepreneur is the one who takes the most risk. From risking consistent income to start a business, and the list grows from legal issues to insurance etc.
Now to income and taxes.
There are 5 sources of income:
- 1) Employee
- 2) Small Business
- 3) Corporate
- 4) Investment
- 5) Passive
The lowest tax rate is on the last two sources of income, on Passive, and on Investment (keep 50% and can use losses as tax deferrals).
The rich and wealthy make their money with these sources of income. Even Warren Buffett says he pays less than his secretary, and it is because of his tax deferrals. Some even say that this is really how he has made his wealth.
Corporate Income is in the news a lot these days as governments try to tax corporations as a source of income. However, as we have seen when President Obama put high taxes on corporations, they will just take their money overseas.
This is the issue with the battle between governments and corporations. That corporations have the upper hand because they employ a lot of people, so governments do rely on them, and they can just move their money (like Apple). This is pretty much the reason why socialist governments and policies fail because corporations can just go elsewhere where tax laws are more favourable.
If people demand government go full dictatorship to punish corporations…well then you need to ask yourself what kind of world we would be living in.
Back to Investment and Passive incomes.The governments will never change tax laws on these two incomes. Why?
First of all, it is the rich (who make their money with these two sources) who generally donate to political parties. When I mean donate, I mean much more substantial amounts.
The rich would not give money to political parties if that party would increase taxes on them. Just doesn’t make sense.
Also, career politicians make money using these two sources of income as well.
So when you hear about how governments should tax the rich, what they really are doing is increasing taxes on those who make 100k plus (or whatever high income bracket number) in the EMPLOYEE bracket. The rich do not work as employee’s for 1 million dollars.
This is why the burden of taxes always falls on the employee.
How about small business? As of now, small business is great. However, I do not think that will last too long.
As the employee bracket is already taxed up to their necks, governments are now turning their eyes to small business’, who for now, can write off a lot of things to retain money. This is slowly changing.
Here in Canada, they are talking about small business taxes of around 90%, and are already removing popular small business write offs to retain money through taxes such as income to a family member, and buying a house or vehicle under your business.
What is required to implement these policies to ensure small business’ pay up all money that is owed to the government? A digital currency/money system. I have repeated this many times on this blog. Governments are licking their lips with thought of blockchain and a money system where all money flows are tracked. This means government will tax you for everything and actually take all the tax money they are owed.
As governments turn more socialist, or the people elect more socialist governments as the real economy deteriorates, this trend against small business will strengthen.
President Trump brought corporate tax down…and just a few weeks ago, Prime Minister Trudeau lowered Canada’s corporate tax.
The issue on taxes is the fact the governments are too big. As they get larger, and have to pay more social benefits, taxes will increase. The solution is to make government smaller, and to try and cut social programs.
As debt becomes more expensive due to higher interest rates, governments will need to tax more to be able to have the income to even pay off interest payments on their debt.
It is an interesting period in history, where the people are demanding taxes on the rich…but as I have explained, for that to occur, the government will require more power.