Be Thankful I Don't Take It All

"Let me tell you how it will be,
There’s one for you, nineteen for me,
‘Cause I’m the Taxman,
Yeah, I’m the Taxman.
Should five per cent appear too small,
Be thankful I don’t take it all.
‘Cos I’m the Taxman,
Yeah, I’m the Taxman."

"Taxman" by The Beatles

 Watch this video while you write your checks. Beatles Cartoon - Taxman

The Beatles - Taxman

Shocking news from our friends at Gallup, "48% of Americans say the amount of federal income taxes they pay is "about right," with 46% saying they are "too high," one of the most positive tax assessments that Gallup has measured since 1956. Could this stunning revelation, that nearly half of all Americans think their tax level is OK, have anything to do with the fact that 47% of American's pay no income taxes at all? 

	Number of Returns with Positive AGI	AGI  ($ millions)	Income Taxes Paid  ($ millions)	Group's Share of Total AGI	Group's Share of Income Taxes	Income Split Point	Average Tax Rate
All Taxpayers	141,070,971	$8,798,500	$1,115,504	100%	100%	-	12.68%
Top 1%	1,410,710	$2,008,259	$450,926	22.83%	40.42%	> $410,096	22.45%
Top 2-5%	5,642,839	$1,286,283	$225,367	14.62%	20.20%	-	17.52%
Top 5%	7,053,549	$3,294,542	$676,293	37.44%	60.63%	> $160,041	20.53%
Top 6-10%	7,053,548	$933,297	$118,139	10.61%	10.59%	-	12.66%
Top 10%	14,107,097	$4,227,839	$794,432	48.05%	71.22%	> $113,018	18.79%
Top 11-25%	21,160,646	$1,817,515	$171,443	20.66%	15.37%	-	9.43%
Top 25%	35,267,743	$6,045,354	$965,875	68.71%	86.59%	> $66,532	15.98%
Top 26-50%	35,267,743	$1,674,859	$117,368	19.04%	10.52%	-	7.01%
Top 50%	70,535,486	$7,720,213	$1,083,243	87.74%	97.11%	> $32,879	14.03%
Bottom 50%	70,535,485	$1,078,287	$32,261	12.26%	2.89%	< $32,879	2.99%
Source: Internal Revenue Service

Bob Williams, from the Tax Policy Center, points out that our income tax code really has two purposes:

…The explanation is simple: the income tax serves two masters. On one hand, it raises nearly half of all federal revenues. On the other, it delivers a broad array of social benefits in the form of exemptions, deductions, and credits that reward people for government-favored behavior…

Over the past two decades, Congress has repeatedly used the income tax to encourage or subsidize specific activities. We subsidize kids with the child credit, college attendance with multiple higher education credits, retirement with all sorts of tax-favored savings plans, work with the earned income credit, and child care with, you guessed it, the childcare credit. And we’ve retained most itemized deductions that subsidize homeownership, state and local governments, and charitable giving…

This non-partisan Tax Policy Center also came up with a little "what if" scenario, to see what would have to happen to lower the federal deficit from its current 10.64% of GDP to something more sustainable like 3% (it was 3.18% in 2008). In order to lower the deficit to a more sustainable 3% of GDP, the government would have to find about half a trillion dollars every year in either new revenue or spending cuts. Half a trillion dollars is about what the government spends on Medicare each year. The Tax Policy Center calculates that, if we assume our representatives in Washington continue to focus their revenue generation efforts on those rich families with income over $209,000 annually, then the top two tax brackets would have to go from 33% and 35%, to 72.4% and 76.8% respectively. In real numbers, that means if you make $209,000 now you pay Uncle Sam about $69,000, and if you are to be counted on to lower our deficit you will have to pay $151,000. You get to keep $58,000. Now of course this is a worst case scenario for you wealthy folks, one of the big assumptions is that there is any political will to lower the deficit anyway. 

The top 1% of US income tax filers pay 40% of our nation's taxes, which is only fair since they are rich, why shouldn't they pay 80% of our nation's taxes? What are they going to do, leave? Well, in fact, they are leaving. We just found out that in the last quarter of 2009, 500 American citizens said good-bye to America forever. While 500 is a small number, it is double the number of expatriations in all of 2008. Good riddance, other millionaires will take their place, and if this trend continues we'll just increase the exit tax to something like 50% (it is now at 30% of your mark-to-market assets!)..."be thankful I don't take it all, cause I'm the taxman, yeah, I'm the taxman." 

So if you are fortunate to find yourself in that upper 5% with adjusted gross incomes of greater than $160,000, what are your options? 1) Work harder, make a lot more so you will be able to keep about the same dollar amount. 2) Work less, enjoy more free time, and have your income fall to the nearly tax-free range of $50,000. 3) Renounce your citizenship, pay the very heavy exit-tax and hope the country you emigrate too treats you and your money well. 4) Work very hard to elect representatives that believe in a smaller government.

Be careful out there, and don't forget, "Yeah, I'm the taxman, and you're working for no-one but me."

Chris Wiles

www.rockhavencapital.com

This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management.  The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.