In the Sunday newspaper, Kevin G. Hall wrote an article called, “Americans Shouldering Rather Light Tax Burden.” He begins the article by saying, “Here’s a dirty little secret that most Americans don’t want to hear: We’re undertaxed.”
By historically, he is talking about post-WWII. Because we are certainly much higher than before then. I’m not going to dispute his statistics as I have no way to verify them. What I do know is that there is one item that is never discussed in the article. This is the effect of inflation on taxes. Is a person who makes $100,000 today paying less in tax than someone who made $100,000 twenty years ago? Could be. However, how much purchasing power does that person have today? Less than half.
So the appropriate measure would be taxes based on purchasing power. In the past year, many companies have downsized their products while keeping prices the same. My estimate of this type of inflation, which I call “sizeflation” is about 20% for the past 12 months. So what is the appropriate income comparison for $100,000 today in 1990 dollars? Not more than $40,000. Are taxes on $100,000 more than taxes on $40,000? Even when you adjust the taxes for purchasing power, the answer is a resounding yes!
Why? Because we have a progressive tax rate system that does not adequately adjust for inflation. So as you earn more income, you pay tax in a higher bracket.
What the article absolutely gets right is that taxes are going up. I’m not going to argue about should they or what should happen with federal spending. What I will tell you is that with a good tax strategy, your taxes can go down by as much as 30-40%. One of the respondents to the article suggested just that. He got with his CPA and his taxes went down.
So get with a good CPA and develop a sound, legal tax strategy so your taxes go down, not up.