Taxes – Punishment or Incentives?

For most people, taxes are their biggest expense and their worst enemy. The government takes a piece of every dollar they make, usually before they even see their money. For other people, taxes are their smallest expense and their best friend. What is the difference?

Most people earn their money as employees or self-employed small business owners. Much of the money they earn, they spend. The rest, they invest in the stock market. They have very little effect on the economy. Other people earn their money as big business owners or professional investors. These people spend a lot of their time and money making their money work for them, either by reinvesting their money into their business or building new businesses and investments, thus multiplying their effect on the economy.

The government recognized many years ago a small tax incentive tends to produce a significant change in behavior. For example, if the government provides a tax incentive for people to own their own home, more people will purchase a home, especially if renters do not receive the same incentive. If the government provides a tax incentive to hire more employees or increase investment in machinery and equipment, businesses will tend to increase employment and increase their machinery and equipment acquisitions.

Government tax incentives are not unique to the U.S. In fact, most governments around the world use taxes to direct investment and encourage certain behaviors. France, South Africa and Singapore, for example, have large tax benefits for research and development. The U.S. has large tax benefits for investing in natural and renewable energy. And most governments provide tax incentives for building commercial buildings or apartments.

Governments typically must give the same benefits to everyone who performs the same activity. In this way, taxes are fair. Everyone who invests in housing receives the tax benefits the government provides for housing investment, regardless of the size of their investment. The same is true for business ownership. Small businesses can reap the same tax benefits as large businesses if they behave in the same way large businesses behave, e.g., through investing in their business.

Anyone can take advantage of the tax incentives provided by their government. It’s simply a matter of understanding the incentives and changing their facts to receive the corresponding benefit. This is why I wrote the book, Tax-Free Wealth. I wanted everyone to understand the many tax benefits available in their country. By understanding how the tax benefits apply, a person can change their situation to receive the tax benefits available. In fact, a person can change their situation to such an extent that they pay very little or no taxes – legally.

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