Taxes - What Do We Really Owe?

As I write this, I am sitting here waiting for the final verdict on what we owe in taxes. It seems like a good time to address some of the issues of taxation. Following that I will also have a few notes about how to pay less in taxes, including a discovery I just made that can save a couple about $16,000.

A Moral Obligation To Pay Taxes?

I will not advocate illegally avoiding taxes here. My wife and I plan to pay everything that we legally owe, for the simple reason that it isn't worth going to jail to try to save a few thousand dollars. On the other hand, our recognition of this legal obligation (and the consequences of ignoring it) does not mean that I feel a moral obligation to pay.

There are various arguments for why we truly owe taxes. Some claim that there is an implicit "social contract" we all enter into by living in a society, and that this creates an obligation to play by the rules. This view is bolstered by the fact that we get to vote for those who make the rules.

Of course, that idea conveniently ignores the fact that I may not like any of the choices come voting time, and I may never see the people I vote for elected. It also ignores the fact that though I choose to live here, there would be these assumed "social contracts" in all societies, and I may not like any of them, yet I have to live somewhere. Finally, how do I become obligated to something I never agreed to in the first place? Just by birth in a given place. I can't really buy into any of these arguments, which in the end are all essentially justifications for others to tell me what they want from me.

On the other hand, I do benefit from the services provided by governments. This is true at the federal, state and local level. It seems only fair that I pay something for that.

I also recognize that having a government is better than the alternative of anarchy. I want some concentration of power that can protect me from others, and I am willing to pay for it. Furthermore, I can accept the idea that it is right to force us to pay for this, since the alternative is clearly worse. I might like the idea of a voluntary system, but until we can design one that works, using force to establish some semblance of civil society is okay with me.

I don't acknowledge any moral obligation to pay all the taxes I'm forced to pay. This is especially true when I see the ways that money is used, including not only ways I don't like, but ways that actually do great evil. Yet I will pay for now, both because I value my freedom (by that I mean I don't want to go to jail), and because I have decided that I should pay something in any case.

Paying Less

Because I feel like most of the taxes taken from me are taken without good reason, I certainly try to pay as little as I can, using whatever legal means necessary. I like the fact, for example, that I am allowed a per-mile expense allowance for my car that is twice what it actually costs me to operate it. It makes driving the car for business almost free at our level of taxation, because we get a tax reduction almost equal to the real costs of using the car.

My latest realization came from sitting with our tax preparer yesterday. I noted that within a couple years we hope to reach the level of income in our business where we no longer have to pay the self-employment taxes on the additional income (this is social security and Medicare). You only have to pay up to about $106,000 at the moment. The problem is that my wife and I equally share the profits, so we would have to pay up to that amount for each of us.

He pointed out that we can allocate the profits in our partnership in any way we like, and then it hit me: Someday, when we are making over $212,000 per year, We can shift all the profit to my wife, which will mean she only pays self-employment on the first $106,000. If we split the revenue we would pay on the whole $212,000 between us. This little maneuver would save us 16,218 in taxes, based on the current 15.3% self employment tax.

By the way, though I am disgusted by all the loopholes that allow the wealthy to pay a lower percentage of their income in taxes than many of the poor, I will always seek out those loopholes that are available to us. Why? Because taxes are too high in any case, and it is the system that needs to be changed, not the taxpayers. Nobody can realistically expect citizens to pay more than they legally owe.

Anyhow, perhaps in a future issue of the newsletter I'll cover some other ways to pay less in taxes. For now I have to get busy figuring out how to get that net income past $106,000 so we can have all the problems and decisions that come with making more money.

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