More On Tax Planningfrom The Advisor's Professional Library
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- IRAs: In General Individual Retirement Accounts are highly popular tools for contributing funds that grow on a tax deferred basis. Depending on the type of IRA, the accumulation can be tax free.
At our house over the past few weeks, it’s been candy, candy and more candy after a few days of local church-sponsored Fall Festivals and trunk or treat events (or trick or treat – depending on where you live). Like most parents of young children across the country, my wife and I, along with our “University of Alabama squad” – including a 5-year old dressed as a cheerleader, a 4-year old suited up as the quarterback and a 1-year old decked out as Big AL (the university’s elephant mascot), embarked on our annual Halloween candy extravaganza.
As expected, it was funny, memorable and filled with wonderful laughs and priceless pictures. As we arrived home laden with loot, each child was eating as much of their hard-earned stash as possible, which was bagged and stored and separated by each child’s name so they could enjoy the fruits of their labor for some time to come.
At that point, I was reminded of a video I saw called, “Opinions of Kids on American Tax System at Halloween.” The video is about the “redistribution” of candy – taking some from those who had amassed more and giving it to those who hadn’t collected as much, so as to be “fair” to everyone. If you give it some thought, you can see it’s an amazing representation of the economic and tax structure of America. For a moment, then, let’s delve into the mindset of a kid dealing with the rationing of his or her candy.
It will always be about the amount! The more you make, the more they take. Our government’s tax structure progressively takes larger amounts of cash from those making more, and then redistributes it through various social programs such as welfare, healthcare, food stamps, low-income housing, Social Security, etc.
In the video, it was pretty evident that kids got the big picture, so why is it that many adults don’t? My personal opinion is that most Americans do get the big picture; but some choose to be on the receiving end instead of the paying end. No one likes paying taxes—including those citizens who receive rather than pay. Even the video displayed this concept. You’ll notice that the kids getting the rationed candy didn’t complain about getting more, but also didn’t choose to give the candy back to the kids from whom it was taken.
Society is the way it is because we’re all basically selfish. For example, I want to keep as much of the money I work very hard for, so I can pay for my kids’ college, buy my wife the car she wants, go on vacations to create lasting memories, and save for my grandpa years. Yet on the flip-side, many non-working Americans feel entitled to government benefits, including unemployment compensation—which is sometimes higher than the minimum wage—until their dream job falls in their lap. To me, the rationing of candy on Halloween night depicts what’s wrong with America’s tax and economic system.
It will always be about the candy! Halloween is about kids trick or treating and economics is based on capitalism and making money. However, what’s interesting to me is the psychological misunderstanding by many as to how tax increases affect each side of the equation. For example, continuing my previous point, if the government wants more from me as a taxpayer, then my mindset as a hard-working person indirectly defaults to the question of “How can I keep more of what I have and pay less tax?” On the other hand, if the government wants less from me, then I start thinking “How can I make more money than I currently do?”
This idea is illustrated in the Halloween video. Kids were going from spot to spot looking for more candy, but as soon as the rationing started, they were concerned about keeping what they had rather than getting more. Those who were receivers of the rationing were okay with a “sit back and take” strategy rather than having to work for it. What we really need is a system that indirectly forces everyone to acquire a mindset of “How do I make more?” instead of “How do I just keep what I have?”
The way our kids view their Halloween candy parallels the way Americans view their money. No one likes forced rationing, and the more forceful rationing becomes, the less interested people are in sharing. Wanting to keep what we have and being able to choose when and how much to share is core to our economic landscape.
Hopefully, this Halloween tale will prompt us all to one day choose a tax and economic structure that allows all Americans the opportunity to work hard, earn as much as they desire, and then choose for themselves when, where and how much tax to pay through consumption. Until then, it’s at least an interesting way to teach our kids how economics really works in a way they can easily sink their teeth into.