The word has some of the more negative connotations that exist for any non-expletive in the English language. In fact to some, it could be argued that it is a “bad word.”
What term are we discussing here? Taxes!
You’d be hard-put to find anyone, even among those supporting the idea of government originated social programs, who likes the idea of being taxed.
For most folks, that attitude is exacerbated by the fact that they look at themselves as being relatively poor, and at others, who they see as working every bit as hard as they, to not “pay their fair share,” to be among the rich.
The situation becomes even more knotty, when you tell them a rich person paid basically no income tax for a given year.
“How can that even be?” they might be prone to ask. The reality is, as a younger person, I would’ve been right there with them. These days, I think I have a slightly better handle on the world.
There are a couple of considerations that I think can help to clarify such a question. Allow me to lay out a scenario in which I can demonstrate one of them to begin with.
Imagine a person who’s made millions of dollars as a result of being the owner of a successful business.
She worked for years to build it, and ate a ton of boxed noodles and PB&J sandwiches to achieve the pinnacle upon which she now finds herself.
Along the way, she paid herself an income out of the activity, and over the course of time, it came to be in the millions on an annual basis.
On all of that income, at some level or other, she paid taxes.
Since she remained frugal even through those years of great gain, she was able to put aside money for future hard times, should they come along.
Now imagine the company she created, falls on hard times, let’s say due to a pandemic, for example.
Instead of ditching the company, she chooses to bring her personal payout from it, down substantially. After all, she can afford it, and the company will live to fight another day as a result.
Maybe by doing so, she can even keep folks on, who she’s managed to help to have jobs.
So she starts to draw on her savings, and assumes at best, she can count on a moderate income from the business.
It’s not as though she hasn’t saved enough such that, if she slips back into “frugal mode” for a time, she won’t be able to live comfortably on what she has in savings, until her baby stops limping along and can again fight itself. It’s even possible her lifestyle won’t be affected horribly badly.
The thing is, those resources she’s put aside have already been taxed. Her drawing them out of a savings account shouldn’t cause another tax to be incurred. It’s not like she withdrew them even from a retirement account. Supposing she had, in my opinion, the taxes one pays on such a distribution, should be no higher than income tax, which regularly, it is.
So she continues to live off that which she’s been careful to sock away.
The hope is, in the course of time, the company will again come to receive sufficient revenue, to make it possible for her to begin to draw a salary in the future. For now though, she continues to reap no gain from her own business.
Now let’s switch gears for a moment. Instead of an endeavor struggling to survive, we’ll consider one that’s doing quite well.
So successful is that bastion of industry, that the owner seeks to expand it. He looks at his options and comes to the conclusion the best way to do business, is to “self finance.”
Again, he’s been able to pay himself reasonably well up to this point (paying income tax as he went along), and so, is pretty much flush with cash. That said, he has no desire to cause those employed by his little workplace, to suffer a reduction in pay, nor to reduce the quality of his product or service to the marketplace.
His business is profitable, but he’s beholden to shareholders to keep it that way. What can he do?
Well, yet again, he can “take a pay cut” with the express intent of moving the money he would’ve received into a “pot” designated for the expansion of that company.
Here too, the person in question has chosen self-sacrifice, to make it possible to grow that which he’s spent countless hours building.
As a result, he make take on more employees. He may begin new construction. He may add to the tax base of a nearby city or town, by putting a facility there.
When he decides to forgo his benefit for the sake of that which he’s built, he too, finds himself making very little new income as a result.
Because again, he has a way to finance his lifestyle, he can take the hit for a time, and move on.
The point of both of these little stories is pretty simple really. In both cases, the person in question may be wealthy, but he or she is not earning what’s traditionally referred to as, “income.” It’s not hard to see that in such situations, that individual likely will be paying little to nothing in income tax.
You can be certain I’ve only scratched the surface. There are sure to be a plethora of reasons those with some wealth, may not earn what’s traditionally couched as income.
In some cases, they may pay some other type of tax (capital gains or a number of others). Then again, they may pay none at all, since they could be using money that was already taxed instead of accruing new income
So, if you wonder why somebody seen to be financially well off, may show basically no income tax when you’re able to get a glimpse of their IRS documentation, you can be sure the reasons may be many. And no, they’re not by any means all indicative of “bad action.”
Thanks for reading, and may your time be good.