Taxes and Increased Government Spending

In a recent IRS study, it was found that the top 3% of income earners in the United States pay more in taxes than the remaining 97% of taxpayers (see chart below).

Of course, this top 3% also earns a disproportionate amount of the earnings pie, bringing in approximately 20% of total earnings.

Regardless of personal political leanings, this data illustrates both the wide income distribution of US earners, as well as the progressivity of our tax system.

Why Aren’t Small Businesses Hiring?

Interestingly, a large majority of the individuals in the top 3% are small business owners who have traditionally been the engine of employment growth during economic recoveries.  However, during our current recovery, they have not hired as robustly as in past recoveries.

Some postulate that small business owners are not hiring because of uncertainty from the potential cost implications of the recently passed healthcare bill (payroll tax increases, premium increases, etc.), and the possibility of their portion of the Bush tax cuts expiring.

Digging deeper, a recent study out of Harvard (Title: Do Powerful Politicians Cause Corporate Downsizing?) points to the benefits of having larger amounts of money in the private sector versus in government coffers.  This study analyzed 232 appointments to a chairmanship position in Congress across 52 years.

In the year following a chairman’s appointment, financial earmarks to his / her state increased by an average of 40-50% from the previous year.  However, private firms in those states reacted by reducing capital expenditures by 8-15% and R&D by 7-12%.

Additionally, total employment and sales growth for the state suffered as the private sector was crowded out.  Interestingly, these negative effects tended to fully reverse after the chairman retired and earmarks were curtailed.

Similar findings have been reported by the OECF, concluding that a 1% rise in government consumption reduced private sector consumption by 1.9%.

The more money spent by the government, the greater the economy suffers through larger private sector contractions.

It should therefore come as no surprise that after $850 billion of government “stimulus” by Republicans and Democrats, our unemployment rates remain stubbornly high.

Is it your patriotic duty to pay lower taxes?

Whether you have a personal preference for reducing your tax bill or believe that investments are best made by the private sector versus government, there are a number of tax reduction strategies that you could be thinking about:

– Maximizing employer retirement plans

– Leveraging expense write-offs and super-sized pension plans within family-owned businesses

– Advanced estate planning techniques such as family foundations, charitable trusts, generation skipping trusts, etc.

If you are interested in exploring tax saving strategies, we are happy to take a look at your situation and provide recommendations.

Additionally, we are offering any of our client’s family members, close friends, or business associates a complimentary second opinion diagnostic review of their situation to see how they are doing both from a tax savings and/or investment strategy perspective.