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Fletcher: Current tax laws are strangling the American Dream

January 30, 2013
Stephen Fletcher , The Alpena News

For the first time ever I feel as if the federal government has painted a bull's eye on my back.

My taxes are due to increase about 30 percent thanks to a combination of tax bracket increases, rising health care costs, Social Security increases, and fewer deductions available this year to myself and others. All this, and I don't get anything more for it.

I'm concerned. Take, for example, charitable donations. Because taxpayers in higher brackets no longer will be eligible for some benefits, I worry whether communities will see charitable donations decrease. Because of lost deductions, I estimate the cost of giving has risen about 45 percent. Will taxpayers still see the incentive to donating?

Then there are business taxes. A business owner is able to determine how much money is paid out of the corporation in the form of dividends. "C" corporations are subject to taxation at the corporate level at 35 percent before any dividends are paid, regardless of circumstances. After a dividend is paid, the amount of money is taxed at the personal level of 45 percent for those in higher brackets.

The math looks like this: Say a company earns $1,000. The tax paid by the corporation is then $350, leaving $650 at the company. The shareholders would like a return on their investment in the company, so the company's board of directors authorizes a dividend of $650, which is taxed at a 40 percent rate (not the 45 percent mentioned above because the Social Security taxes and the Obamacare taxes are on wages paid). Forty percent of $650 is $260 paid to Uncle Sam, leaving $390 for the shareholder to take to Neimans for groceries. So, $390 gets distributed to be spent by the shareholder and Uncle Sam gets $610.

This is not an efficient way to transfer cash from the company to the shareholder who ends up with only 39 percent of what the company made.

What we are going to see going forward is a plethora of company stock buy-back plans. The reason is the tax rate on dividends is 40-plus percent but the tax on a buy-back is only 20 percent. This approach shifts to payout in taxes from 61 percent to the government to 48 percent and the shareholder gets 52 percent of his/her own money to spend as they see fit. The tax rate of 48 cents on the dollar is thought to be too low in some parts of government.

Paying the capital gains rate of now 20 percent is preferable to paying an ordinary income rate of right around 40 percent.

We are seeing high rollers taking off for foreign lands with lower tax rates. It used to be that it was worth the price of taxes to stay in America. The United States was the "land of opportunity" and we offered "equality of opportunity" to everyone. Today our government has raised the price for success. Today our country wants to make everyone equal.

If you work hard and make money for yourself and your family, you now get to pay for someone who isn't working, nor seems interested in achieving success. So where is the incentive in that? It used to be the American Dream involved you making it to the top where you would enjoy the rewards of that hard work.

No so today.

 
 

 

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