More On Tax Planningfrom The Advisor's Professional Library
- ETF Taxation The use of ETFs may be attractive to certain investors. The tax advantages may make them even more attractive.
- 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.
On a family trip to Mickey Mouse headquarters (Disney World) last month (a trip I highly recommend for everyone; kids or no kids), we hit the toll road that takes you from Ocala into Orlando, Fla., where the magic makes it all believable. As we pulled up to the toll station, the toll taker cordially stuck her hand out and said, “$4.75, please!” My kids started asking questions. “Daddy, what was that?”
At that moment it hit me that a toll road is a good metaphor for our current fiscal cliff issues. Of course, for my children, it was a great educational moment, at which my wife turned to me and said, “Explain it in simple terms.” So over the next 20 to 30 minutes they learned how toll roads and bridges are built and funded, at a level a four- and five-year-old could understand. During my entire explanation, I continued to get the repetitive “Why?” so I had to try explaining it to them in a variety of ways. It was then that I realized half of America doesn’t even know why or what the fiscal cliff issues mean and why tolls are a great example of how our tax system should foster capitalism not socialism.
Here’s my thinking. The fee I paid to travel down the toll road is a form of tax/financing structure. The toll is used to pay back all the bond investors for their investment—with interest—as well as pay for the ongoing upkeep of the road. It requires management, budgeting, continuous monitoring and funding. Yet at the end of the day, the capitalistic investors who bought the bonds are the only ones at risk if everyone stops driving down the toll road. The money can’t be redirected for things like Social Security funding, Medicare funding, or even welfare financing, as the bond issue is specific in nature to the toll revenue collected.
That’s the opposite of our fiscal cliff issues, which are the direct result of mismanagement, over-spending and misappropriating money from one fund to another, which isn’t specific in nature to the revenue received. So here we are again at the so-called fiscal cliff, requiring the U.S. government’s borrowing cap limit to be increased, while forcing prudent citizens to pay more in taxes for which they receive no benefit.
Further points to note:
- The toll taker didn’t ask me to fill out a net-worth statement or provide a copy of my latest income tax return before assessing my fee.
- The 2012 top-of-the-line red Lexus in the lane next to me paid the same $4.75 to travel the road as I did, even though my vehicle is five years older and worth a lot less.
- It didn’t matter that I was carrying two adults and three kids in my older Suburban, versus only one person driving the new, decked out Lexus.
- There wasn’t a progression in fees the more I traveled the toll road; if anything, there’s a discount for increased usage through various card structures for locals.
Those are all capitalistic points in nature. The people who travel the road most often wind up paying most of the toll funding and maintenance. Same thing with a gasoline tax, as those who buy the most gasoline pay the most gas tax, right?
So why is it that our archaic income tax system penalizes people for working hard, trying to grow a business and making more money, by forcing them to pay more in taxes incrementally as their incomes increase?
Furthermore, what really puzzles me is why hundreds of politicians can’t logically understand the simple comparison mentioned above. Why can’t they see that America needs a structure that puts the tax decision back in the hands of the people, rather than politicians? Even my young kids logically understand why we had to pay the toll road tax, just as they understood the logic of my last article and the analogy between income tax and their Halloween candy.
As a country, we have allowed self-interest, manipulation and prosperity for all to cloud our views to the point we’re all going to die on the vine while we socially press towards a utopian society, which will never be accomplished economically. So my advice is to never pass on an opportunity to teach your kids the basic principles of capitalism, because it’s the only reason we, as a country, are where we are today and the only way to prevent fiscal cliff issues in the future.