The Taxation Kill Zone

The Taxation Kill Zone

(As I got to the end of this, I realized it’s really a thesis on why we need a flat tax, with a progressive bend for lower income households. Our system is set up to be gamed, and will be gamed until we do something. I did not mean to make the post as complicated as I did, but I was hoping to educate. In my case, I am open to learning, but I just ‘don’t know what I don’t know.’ I wish I would get more comments and feedback. Eventually, my fear is that the doctor who we all depend upon, firmly in the middle of the TKZ zone, with massive education debt and huge malpractice insurance bills, is going to tell us to all piss off and go surfing)

Taxation Kill Zone is a phrase on the internet that refers to a group of people in the U.S. who pay a large tax burden as a percentage of their total income. Actually, this is probably the first time this phrase is on the internet, because I just made it up. I did it to illustrate a couple of things. First, why rich people get richer, pay less taxes, have a huge income inequality gap to the masses. Second, why lower wage earners who would like to see more taxes on the rich are un intentionally harming our most productive citizens. In the end, it is this group in the center who shoulders the burden.

The Taxation Kill Zone, TKZ from now on, is artificially made up of couples making approximately $180K to $600K per year. That is three to ten times the national median income. Their wages come from a paycheck that gets reported on a W2 at the end of the year along with interest and gains from investments, also reported on yearly tax documentation. Their deductions are minimal, most likely a mortgage and some charitable deductions. Their tax rate, including FICA, property tax, state and local tax, and federal tax is going to be solidly in the 30-40% region. We will call in 33%; if you look at progressive tax rates, and factor in FICA, and various state and locals, the majority of people in this group would call this number conservative. It is made up of well educated people, many with masters and doctorates, along with skilled tradesmen. In many cases, the income comes from two sources.

These are the people you see with a nice suburban home, and maybe some toys like an RV, boat, RZR or a 2^nd home in a vacation spot. They have some disposable income, and work hard, trickling their paycheck down in their communities. They don’t commit serious crimes. They have kids and between work, family, and some focused recreation, don’t have time for much else. Life comes at them, they pay bills, vote, and move on.

In addition to spreading their money in the community, they spread a third of their money in various government entities. They fund the roads, police, fire, schools, military, etc that is used by all. Those government entities take their cut on the both the front and back ends. Paychecks have regular State, Federal and FICA deductions on the front end. Use taxes and sales taxes come in on the back end. These people are surrounded by government entities taking their shares; they are caught in a crossfire, and all they can do is work hard and bleed. They become numb to it, and many people in the group don’t even realize their number one expense throughout their lives will be taxes.

Is a progressive tax rate like we have in the US fair? There is a fixed cost for basic needs like food and shelter, and if you earn at or below the median income level, you must pay less taxes to survive. But if you make More, or a Lot More, or a Really Lot More, should you pay More Taxes, a Lot More of taxes, or a Really Lot More taxes? That is a fascinating question, and is really a moral judgement on money and success. Step back for second and ask why do we in general think that someone who makes a lot of money should pay an extremely high tax rate? Just because they can afford it or are there other reasons? Frankly, I don’t care one way or the other; I am only interested in the result. Before we dive off into a review of Marxism versus Capitalism, lets get back to these TKZ folks.

The TKZ people fund our economy and our government, and for obvious reasons, pay a larger percentage of take home pay as taxes than those who make less. In addition, TKZrs don’t have the time and ability of the of the people in the Very Rich bracket to avoid taxes, so their take home pay as a percentage is less. Wait, what did I just say? People who make more than TKZ people have the option to less in taxes? I thought those darned Tippy Top people just wrote down what they made and sent it in! Zuck and Bezos just go to the gold vault on April 14^th, load up a couple trucks and ship it to the government, right? Wrong!!!

Instead of being caught in the crossfire of taxation, the Very Rich build fortresses, and infiltrate the enemies infrastructure, buying info and favors. They hire accountants and tax lawyers to find ways to avoid pay taxes, and they create and donate cash to political action committees, which grease the skids of government and allow flow of money to politicians. They donate to foundations created by politicians, who then work to create loopholes in tax code and build favorable business situations. This is not specific to the right wing or a left wing of government; it is the entire plane! Rather than being surrounded by tax collectors, taking fire from all sides, the Very Rich have the tax collectors surrounded!

Not to belabor this, but there is a huge difference between taxable income, and actual revenue. You have got to understand that is a key point. A person who brought in $50m can show loss and pay less taxes than a person making $500K. Politicians who want to tax the super rich are either ignorant or on the take. They must be targeting the 10 lottery winners from last year, because they are the only ones going to pay.

If you don’t believe me, I will give you a real world example. This is not someones life story, but an amalgam of some of my friends.

Robert and Sherry are classic TKZrs. Robert has a STEM degree, and has gotten a masters in business at night, and had multiple professional certifications. Sherry is a degreed physical therapist, working in a large medical organization. Between the two of them, they make $275K per year. They have a suburban house, and when they went on vacation to Park City, decided they would like to have a condo there. They bought a very nice little unit for $350K.

Scotty and Alexa are Very Rich. They made their money in the business world, and also have real estate investments, both in rentals and commercial properties. They went to Park City, loved it, and bought a condo right next to Robert and Sherry at the same price.

Simple and equivalent, right? Not even close. Let’s look at the real costs. Robert and Sherry are spending money after taxes. Every dollar they spend on this condo has over a 33% discount. In addition, they are paying local property taxes. Scotty and Alexa bought this condo thru their business and will rent this out when they are not there, and will eventually sell it and buy something else. They used what is called 1031 money, or profits from a previous real estate sale to buy the condo. That money was not taxed in any way, so it has no discount. In addition, property tax on this condo will be paid thru the business, so it is a deduction.

Hold on, it gets better. Both couples live far enough away that it only makes sense to fly there. The TKZrs book their tickets and pay with after tax money, while the Very Rich are simply on a business trip to check on their investment and view other property. Their travel and expenses will be turned over to their accountant as expenses, and will be deducted from their tax burden.

Humans are brilliant, amazing creatures, and biology dictates that we will optimize our situation given any means we can. Some deny that, but its factual, and it is built in. If you tax someone too much and they cannot afford basic needs, they will revolt. If you tax someone to the point of not getting benefit for extra effort, you eliminate motivation and they will work less. If you create ways to avoid taxes for super rich, they will pay less money for the same thing and create huge income inequalities.

I don’t think its my place to pass judgement; we have to judge ourselves. If you want someone else to pay higher taxes, but not you, is that right? Remember, we all have the option to pay extra taxes at any time. Statistically speaking, no one in the US pays extra taxes, ever. Lower wage earners who advocate higher taxes don’t kick in 50 cents. Rich people who are on TV ranting about more taxes don’t send in more. The TKZ crowd certainly does not. At the same time, $billions are donated to charities. People are voting with their wallet.

It reminds me of an old saying: a Democrat can justify every dollar he took from the rich, while a Republican can justify every dollar he stole from the poor.

I feel bad for the Taxation Kill Zone folks. They are up early, dropping kids at day care, heading to work, trying to get ahead, and driving our economy forward. They are too damn busy to fill up our courts with problems, and are low impact, high return cash cows for our governments. If it wasn’t for some of them participating in the opiod crisis we wouldn’t even know they were there! They have no options but to work, pay taxes, buy stuff, and just like it says on the shampoo bottle, Rinse and Repeat.

So to them I say simply, start an LLC. Use you brain and think beyond the next paycheck. The system and the government are unlikely to change anytime soon, and its truly one of the few good options.