When is a Tax Cut REALLY a Tax Cut?

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One of the things Presidential candidates love to talk about is tax cuts. You can generally count on two different plans, one from each candidate, that both claim to be the best for the average American worker. Is someone lying to us? Or, can both be right?

One of the challenges is determining exactly what tax is being discussed. For example, there are often two statements made about the amount of taxes that the rich pay. “The rich pay the majority of the taxes.” “The rich pay less in taxes.” Both statements are true. It just depends on how you define the terms.

In the case of the “rich pay the majority of the taxes”, if you add up the amount of taxes paid by the wealthiest, it is more than is paid by people who make less money. Break it down like that and it’s a bit of a no brainer. Of course they pay more in taxes, they make more money.

They also pay less in taxes. They pay LESS as a percentage of total income. Warren Buffet has publicly stated that he pays about 15% of his income in taxes while his secretary pays 35%.

There are three main reasons why this occurs. First, the rich can afford better advisors. They can plan and control when and how they make money. Secondly, they often have businesses which gives them the optimum amount of control. Notice how the first two reasons all have to do with control. Any of us can take advantage of the very same laws. Start a business and hire top advisors. Of course, advisors are expensive, so your job in all of this will be to start a business that makes money. You’re going to need to make money to keep more of it. And that’s the secret of the rich.

The third reason why the rich pay LESS in taxes is due to the different types of taxes. There is more than just income tax. In fact, for many employees, their social security and Medicare tax is higher than the state income tax they pay, and sometimes even higher than the federal income tax. Look for this tax to get even bigger as the broken Social Security system tries to support even more retirees.

As you listen to all of the political speeches about taxes and tax cuts, pay attention to what taxes they’re talking about. Is it ALL tax that is being cut, or is it a case of trading one tax cut for a tax increase in another area? No matter what happens, I’m certain that in the end, the rich will be able to find a way around most of the taxes. Those are the same tax strategies that I teach to all of my clients every single day.

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