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Certainties in Life: Death and Taxes

Click here to buy - A How To Book of SMSF's by Tony Negline
Lester Wills

Benjamin Franklin is responsible for the famous quote, "In this world, nothing can be said to be certain, except death and taxes." He wrote this in a letter right after the establishment of the Constitution, and more than 200 years later, his quote still holds true.

I came across something recently that brought this to mind regarding the average rate of tax paid by the average American. But before that some background.

I can recall back in the 60s/70s, the left wing Labour government in the UK imposing a top rate of tax that was 98%, i.e. for every dollar you earned at that level, you only got to keep 2 cents! This was based in the typical, soak the rich approach that the left love so much. Needless to say, it did not work and many high income people simply moved overseas meaning the government totally lost out on any tax revenue from them.

But, along came Maggie, as in Thatcher. She, being of the right, had a very different approach and changed the tax rates to a maximum of 40%. The funny thing was that pop groups like the Rolling Stones, thought this was fair and reasonable and moved back to the UK. They had no problem with paying tax that was set at a sensible rate. Because many high income earners, moved back and started paying tax, new money was flowing into the government's books, to say nothing of the economic stimulus such moves provided. Strange to think that people like Mick Jagger agreeing with Maggie Thatcher, you probably could not get a more diverse range of people. This was of course at the time of the Reagan years of low taxes and the fantastic economic growth that followed.

When I moved to Australia I must admit I was horrified at the income tax rates and how low they came in. I found Keating and his rhetoric about how rich people should pay their share more than a little frustrating as the approach seemed counter productive to me. Even though the top rate of tax had come down from something like 66%, it still came in at a very low level of earnings it was a real disincentive.

Fortunately the Howard government reduced tax levels further although they still did not introduce indexation so we got the usual bunkum about "bracket creep".

I am not up to speed as to what the Rudd government has done but I somehow doubt he believes in low taxes. The experience of Ireland however should be on the agenda for all those, soak the rich people.

Ireland was not a vibrant economy, (I am being extremely kind here) until they changed their approach and dramatically reduced taxes. They became a European Dragon very quickly. It was obviously not as simple as that but you get my drift.

Whilst going over this I am not suggesting that everything was right as recent history has shown that the laissez-faire attitude was a major factor in the economic problems we are all facing. However I am getting concerned that the wheel is turning as it always does, and we may end up with it going too far (again).

Then I came across this in the Washington Post. It explained that the many thousands are protesting about their tax bills over here. However, new data showed that the federal income tax burden is already hovering near its lowest level in three decades for all but the wealthiest Americans.

The nonpartisan Congressional Budget Office estimates that the average family forked over barely 9% of its earnings to the Inland Revenue Service in 2006, the most recent year for which information is available. The effective tax rate hit its all-time low in 2003 and has since crept up only slightly.

Just in case you did not get that, the average family paid approximately 9% in federal income tax!

But just in case that made you feel just a little sick, read the next part.

Middle-class families, to whom President Obama has delivered even more tax relief since he took office in January, have fared especially well, according to the Congressional Budget Office. The middle fifth of taxpayers, who earned an average of $60,700 per household in 2006, paid just 3% in federal income tax in 2006.

3%!!!!!

I must add that you also pay state taxes and local taxes here so it is not quite as rosy as this would suggest. But even so....


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