Warning: A few readers might become bored or irritated by this post. Those are the readers I want to have read it a second time.
When you raise soda taxes, the obvious purpose is to discourage drinking soda, right? Likewise, when you place higher and higher taxes on cigarettes, the purpose is to discourage smoking. I mean, duh.
Said another way, one of the functions of taxes (beyond the obvious function of raising money for the government) is to mold and manage behavior. Of course, there can be exceptions: if you hate soda, a soda tax won't impact you no matter how punitive it is. Likewise, you might continue smoking no matter how expensive cigarettes get.
But for now, let's think in terms of the general impact. Overall, hiking taxes on cigarettes makes people in general smoke fewer cigarettes, and hiking taxes on soda makes people in general drink less soda. So the impact is real at the societal level, even though there may be exceptions on the individual level. Makes total sense, right?
Okay. Let's add a twist to this concept: What if we thought about taxes on income using this framework?
In other words, what if the tax rates on certain kinds of income are lower than the tax rates on other kinds of income? Wouldn't it be self-evident to say that the government favors the earning of income taxed at lower rates, while it also discourages earning income taxed at higher rates?
I want readers to to think through what this framework suggests about their personal savings and investment decisions. Consider why a government might want to encourage investment in the economy, and why it would be supremely logical to use the tax code as a tool to do so. Then, consider why certain investments are highly taxed, other investments are taxed less, and some investments are juicily tax-free.
Now, a question: when you think about this topic, do you get political? Do your emotions fire up and your logic center shut down? Do you mentally shake your fist at those dumb politicians who made up all those dumb tax rules? Do you get angry, and then autonomically assume these rules exist only to help "the rich"? Do you even go so far as to picture some imaginary greedy rich dude somewhere getting a free ride on his lame-o "tax-free" investments?
Yeah. Me too. :)
It's okay to do this--for a second or two. But then, please get over yourself, take action, and learn how to make these types of investments yourself. Don't give your power away to the tax code, to your emotions, or to some imaginary rich dude who doesn't even exist. Instead, take your power and put the tax code to work for you. Start taking steps to secure your financial future by seeking out those favorable tax rates and putting your money to work there.
Finally, don't make up hypothetical guilt complexes about taxes. Please don't financially emasculate yourself this way.
Lose the guilt and emotions on taxation. Recognize that the tax code is the tax code is the tax code. You are free to attempt to effect changes to it through your elected representatives, but in the meantime, you are also entirely free to earn income in any form you want. And the government will tax that income at the rate it specifies.
And if tax rates are higher on certain types of income and lower on other types of income, why hasn't it occurred to you that our society is in reality doing the same thing it does with cigarettes and soda?
So seek out income that the tax code favors. Put your money where it will work hardest for you. There is nothing wrong with doing this.
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Posted by Daniel at 3:11 AM on Sunday, November 11, 2012