Paying Taxes is a Wonderful Use of Money

I don’t like to be entirely one-dimensional, so I decided to follow up my last post with some contrarian thoughts. I want to clarify that I am not a tax accountant nor a tax lawyer. I’ve found information on the Internet that you could find. I don’t rely on it, and you shouldn’t. If I needed to apply it, I’d either ask a professional advisor, or I would study enough primary material to become a professional advisor myself. The numbers and information that follow are for purposes of example. The concepts are what matter. The concepts are hopefully timeless, while the details, even if accurate, will change each year and in each country.

Pay Taxes

Paying taxes is a great use of money… for most people. Most people don’t give much thought to how they’ll spend their money. A substantial portion of many budgets pays for beer, parties, entertainments, gambling, hookers, and televangelists. If this describes your spending pattern, then the government probably wouldn’t do worse than that with your money. Taxes are the government’s gentle way of trying to make productive use of money that represents a surplus that you don’t really need in order to maintain a minimal standard of living on a par with the average person. And it’s a perfect arrangement for people who want to contribute to the world around them but don’t want to take the time or responsibility to investigate other fruitful humanitarian uses of that money.

Local and property taxes are used ostensibly to fund local public works. All good if you appreciate things like roads, schools, and jails. Schools and jails? Wait, that’s redundant. Oh well. There are a lot of good things that come of paying local taxes, but there’s a lot of money wasted or spent inefficiently in the process. Still, it would be hard for all of us to maintain the roads by ourselves without a big bureaucratic engine helping us. In fact, none of us would have a private incentive to do so, and that is why the government takes on certain infrastructure tasks.

Take Deductions

For people who want to make more thoughtful, grown-up decisions about what their money should be spent on, the government offers some choices. I’m speaking of the United States Government and the Internal Revenue Code… if you live somewhere else, your mileage may vary. I will also be referring to “the government” as if it is some sort of monolithic creature with some personal attributes.  The IRS recognizes that it is not the only agency involved in gathering alms for the public good. Therefore, it allows you to make donations to your favorite charities or nonprofit organizations and deduct that donation from your taxes, up to a certain limit. Don’t want to support foreign wars? Then give to your favorite anti-war organization instead– as long as it’s recognized by the IRS. Don’t want to help pay salaries for right-wing politicians? Give to your local Unitarian Universalist church instead. The government will understand.

Grow Your Tribe

For people growing a tribe, there are other deductions. My cursory review of some of the Internet literature turned up a few gems. Again, I don’t rely on these numbers, and you shouldn’t, but apparently you can put $10,000 per year, per child, into a trust fund for that child, and deduct it. You can deduct another $15,000 set aside in a retirement account (or maybe $4,000– see IRS pub. 17). You can pay your child up to a little over $5,000 per year to work in your family business, and it’s a deductible business expense for you, and your child won’t quite be in a tax bracket yet. Just make sure that it’s a legitimate “job” that you would have hired someone else for at a comparable wage. Who knows? Maybe hiring your infant to model for your company’s calender would pass. There are some pretty high-paid infants in Hollywood, I imagine. There’s a standard deduction of $5350 per adult filer ($10,700 for a married couple filing jointly) and $3400 per dependent child. There’s also a deduction for setting aside funds for your children’s college education, but it appears to result in more complicated arithmetic so we’ll ignore it. For a couple with 7 children, it stacks up as follows:

$10,700 Standard Deduction
$23,800 Dependent Deductions
$70,000 Deductible Trust Fund Donations
$35,000 Children’s Wages
$30,000 Parents’ Retirement Accounts

$169,500 Total Deductions

The numbers may vary, but here is the point. Via the Internal Revenue Code, the IRS allows people to make certain grown-up decisions about their money. At the top of the list is the decision to have children (but be careful– there are some income and deduction limits that seem to apply to everyone across the board, regardless of whether they have dependents). Many people forego having children because they want to earn lots of money and spend it on themselves. Guess what? They don’t spend all of it on themselves. They take a substantial portion of the money they would have spent on their children and hand it over to the government instead. The bureaucracy eats up some of it, some of it eventually gets used to further the public good (in whatever form that happens to take), and the rest helps some politicians and bureaucrats take care of their own children.

Give to Charity

Putting money into trust funds and retirement accounts, and paying your children to work for your family business, all appear to be grown-up types of decisions that the government respects. Another is contributing to charities.

“Individuals who give to the private charities, private operating foundations and certain private foundations are allowed to deduct donations that represent up to 50 percent of their adjusted gross income if they itemize on their federal tax returns.”

http://people.howstuffworks.com/philanthropy3.htm

So in principle, if the above family had an adjusted gross income of $300,000, they could donate half of that to their favorite tax-deductible charities, put the other half into appropriate trust and retirement funds, hire their children, and not pay any income tax, all with the blessing of the IRS. In practice, there are probably some gotchas in there to watch out for and discuss with an expert tax planner.

Would the charities spend the money more efficiently than the government would? Not necessarily. Caveat emptor. Depending on the charity, only 10-50% of your donation may actually be used for what you want it to be used for, and the rest may be a victim of entropy. Approximately the same result you’d get throwing it to the wind, or handing it to the government bureaucracy machine. It’s hard to avoid a certain amount of waste. If you think you can do better, perhaps you can start your own charity.

The real benefit of donating to charity isn’t that the charity will spend the money more efficiently than the government would, but rather that the money would be used in a more targeted fashion toward goals you embrace, instead of being spread out to a thousand different government objectives most of which you aren’t even aware of.

Don’t Think, Just Pay Your Taxes

All these deductions and all this charity giving takes a lot of thought. These are grown-up decisions which are so complicated that they may require expert advice, or at least becoming an expert. If you pay taxes, bureaucrats and politicians may spend your money on prostitutes or drugs, or even worse, haircuts. But there’s no guarantee that the officers of your favorite charity won’t do the same thing. If you think you can put your money to better use than the government can, and you can get the IRS to agree with you by giving you deductions, then you are taking on a great amount of financial responsibility. If you turn out to be wrong, your money may end up doing just as much harm as if it had been used for a politician’s haircut. The great consolation of the tax code is that it allows you to assume that responsibility to some degree. But if it’s too much to think about, and you’d be more inclined to spend the money on your own (excessive) entertainments rather than putting it to more responsible use, then maybe the government would spend it better. Bite the bullet, say a few “Hail Mary”s, pay the tax, and hope that some of it will trickle back to you in the form of some public good, like fixing the pothole that you almost fall in each morning.