PEMBROKE, Mass. — I’ve been preparing tax returns professionally for more than 20 years, and this year, I’d thought I’d present some misconceptions that I’ve encountered. Of all people, you would think successful businessmen would understand their taxes. Often, their beliefs do not stand up to scrutiny, as you will soon see.
‘THE HIGHER YOUR INCOME, THE HIGHER YOUR OVERALL TAX BRACKET’
It amazes me that many people don’t understand how incorrect this notion is. A successful Laundromat operator approached me with this question: “I make quite a bit of money, so I don’t want my wife working because she pushes my income into the next bracket.”
“What do you mean?” I asked.
“Well, I’m at the 28% bracket now and a few more thousand would put me over into the 33% bracket. It would be pretty silly to pay $20,000 more in taxes just for letting her make $10,000.”
It began to dawn on me that he thought that an additional $10,000 in income would put him into the next tax bracket, and all his income would be taxed at the higher bracket. He didn’t know that he would be taxed at the 33% only on the $10,000 marginal income and that the rest of his income would be taxed at the lower brackets—10% on the first $18,450; 15% on the next $56,450; 25% on the next $76,300; and 28% on the next $79,250.
This is how our progressive income tax system works. Several steps exist. At each step of your income level, you pay the appropriate tax percentage. What this means is that every taxpayer pays the identical amount of taxes for the same income level.
‘TAXES ARE SOMETHING WE SHOULD TRY TO AVOID’
It’s true that no one loves to pay taxes. And, true, 47% of the population does not pay federal taxes (although many of those individuals do pay Social Security and state taxes). Taxes keep our society healthy and vibrant. Taxes keep up the infrastructure, maintain our highways, provide peace in our land, support law and order, guarantee public safety, ensure that our foodstuffs are safe, provide a safety net for the poor, and keep the flow of enterprise rolling. I don’t want to sound super-patriotic, but you should do your part to pay your share of taxes.
For those of you who argue that graft and corruption rule the land and that politicians only want us to pay taxes because they want their share, I respond yes, there is graft and corruption, and there is mismanagement in our institutions. But there is much that is right and functional at the same time.
Our democratic system has worked for more than 200 years to provide us with an ever-rising standard of living. When 68% of the population owns their own homes, that’s prosperity with a capital P. When the average person lives today to 78, compared to the average lifespan in 1900 of 43, that’s progress. When any individual has the ability to open a business and build it into a large enterprise, that’s a remarkably open society.
Check back Thursday for the conclusion!
Have a question or comment? E-mail our editor Bruce Beggs at [email protected].