Archive for Tax planning

Taxes: we’re not Europeans

We don’t want to pay as much tax as the Europeans do. How many times have you heard that? If less than 1,000 times, congratulations—you live without internet service. But, I still retain an old-fashioned interest in verifiable facts, not just what I’d like to be true. I hope one or two readers still feel the same way, so let’s take a look at some numbers on just who pays what taxes, and what those taxes pay for.

The moment you delve into comparing countries, you have to contend with currency conversions, buying power and the cost of necessities (what’s a middle class house in Chicago vs. Lyons vs. Haarlem?) so of course we can argue “not comparable” whenever. We work with what we have, and what I found was some very interesting data on the Forbes website. Forbes states all figures in Euros, but I’m going to use a handy dandy currency converter to put this all in U.S. dollars. (I wish these figures were newer–2009–but it isn’t easy finding facts that are up to date. I just don’t know where all those Freedom Caucus people can get their information.)

Let’s look at a couple earning $108,667 (100,000 euros) with two children. Here’s what Forbes says their after-tax income would be:

United States (overall—some states like Illinois have higher taxes) $84,760
France $78,029
United Kingdom $72,154
Germany $73,676
Netherlands $64,113

 

I could add more countries, but as you might expect, taxpayers in countries with small population bases (Netherlands, Norway, Denmark, etc.) keep less of their gross because there are fewer taxpayers to pay for services.

So, we ARE better off by at least $6,000 and maybe as much as $20,000? Wait a minute—you get what you pay for. And our mythical couple is going to have to pay for a lot more out of that after tax income—stuff that is already paid by government programs in these other countries. I’ll admit I don’t have the specifics on every policy in every other country (but would welcome input from anyone who does), but I do know a few expenses our model couple would need to cover out of pocket:

  • Yearly deductible for health care. Mine’s $3,500/family but employer plans can range anywhere from about $2,000 to $6,000. I’ll be conservative and use just $2,000. Let’s assume the parents’ employers cover all health care premiums—increasingly rare, but I’m trying to be conservative here.
  • Savings needed to cover $30,000 in college costs per year for each of two kids—I’ll again be conservative and assume the kids aren’t going to Harvard, and are 2 years old and newborn, so the amount needed will be on the low side. If the kids were older, more would need to be deducted. According to the SavingForCollege calculator, the parents would need to be saving $613/month for the 2 year old and $558/month for the newborn: a total of $14,052/year.
  • If these parents have such young children, they’re probably not very old themselves. Nevertheless, since in the US people are “free” to pay for their own long term care, and this is covered by many European health systems, let’s estimate a low $1,000/parent per year for long-term care insurance: $2,000. (forget saving for the actual cost of care—it would about double the amount needed if the parents are currently in their 30s and can save for 40 years).
  • I’m not including the value of the living allowance that is given to college students in some countries (Netherlands), the free student exchange programs that are routine, the excellent trades and vocational schools available to non-college Europeans (and which are hard to get at any price in the U.S.), the lump sum children’s benefit given to parents upon birth of a child, or the cost of co-pays and prescription drugs, since these vary and I wanted to look at just a few things we can agree on. So how does that math look now?

 

US $84,760
health care deductible (cost of insurance premiums not included) -2,000
college savings -14,052
long term care insurance -2,000
what you actually have left after being “free” to pay for those services yourself. $66,708

 

Another “but wait”—what if mom and dad are both working and need to obtain child care? In my neck of the woods that’s going to cost around $20-25,000 a year, but Europeans can pretty much depend on free or very low cost service from shortly after the child’s birth. So now, our model couple could easily be down to $46,708 after paying for the same services the European family would get for free (or greatly reduced costs). I’ll try not to go on about the paid-for health spas that are routine in Europe, the far-more-luxurious birth center experience, the well-child checkups and assistance, the earlier retirement age, the longer paid vacations, guaranteed paid maternity leave, the housing assistance for the elderly and low-income families…

Yeah, I’m glad we pay such low taxes. And that we get what we pay for.

 

Should you pay more taxes?

We’ve all been flooded with rhetoric lately on the necessity of either a) tax cuts or b) tax increases. It’s been on my mind lately at every level: national health care, State of Illinois cuts to services for disabled people, and a referendum in my school district to increase property taxes. Okay, I’m a liberal so my general impulse is to agree with taxes that look like they’ll improve services or take care of a need not obtainable elsewhere—I’m not actually opposed to paying taxes. But not every single increase. This post is an effort to come up with some principles to help with future decisions. I’m going to try to use some personal financial planning procedures to inform my reasoning.

Is the problem being addressed the result of poor decision making or abuse in the past?

There isn’t a citizen of any country I know of who thinks their government runs efficiently. We tend to scrutinize and complain about the public sector mostly because we feel that the money which funds it comes directly out of our pockets. But, I ask you, have you ever worked for a private company that didn’t have some benchwarmers, incompetents, and people who were missing in action in the middle of the afternoon? Someone who sloughed their work off on subordinates, had an in with the boss, maybe family money, and blamed everything on somebody else? Oh, wait, I got distracted there, since that perfectly describes our current “businessman-in-chief”.

As with personal financial mistakes, you can’t rewrite the past. But making up for these mistakes (personal or public) requires significant belt tightening, enterprising ways to earn more, identifying greater funding sources or some combination of all three. I don’t think that we can ever achieve total perfection—we’re all going to be tempted by some non-essential purchases, and every employer is going to have some non-productive employees they can’t get rid of. But the last choice, not the first, should be a tax increase.

Is the proposed tax reasonable compared to the benefits produced?

In other words, are we getting bang from our buck? Like Woody Allen, in my family it was a sin to buy retail. So before I can support paying increased taxes, I have to know that cost controls are in place, a real plan has been thought through and vetted or beta tested, and that the benefit will be at least commensurate with cost (which immediately disqualifies the current Republican health care proposal).

I am, for example, willing to pay more taxes to support a single-payer national health care system, because countries that have them have clearly better health outcomes at far lower per person cost. I currently pay about $14,000/year in health insurance premiums + $3,500 in deductible. I have yet to see a proposal for even luxurious health care that would cost me an extra $17,500 in taxes, although it appears Paul Ryan will give me the opportunity to pay more for even less coverage. Similarly, I’d gladly pay an extra $2,000/year (my current long term care insurance) if it would guarantee not only me, but every elderly person good quality long-term care.

When I hear that something is pitched as more value to me, I want to be convinced by the numbers. The current school referendum is being pitched to residents as a way to maintain and increase property values. However, I haven’t seen any math that wasn’t, shall we say, a little bit fuzzy. So let’s say that I pay an extra $450/year for 5 years—will my property value increase by $2,250? Or will the increased taxes hold down property values because the cost of carrying the property becomes so high compared to neighboring communities? Arguments that might sound reasonable but have no research to back them up don’t convince me.

On the other hand, if the schools are truly deteriorating, why has there been an increased population of users? One of the arguments for increasing school taxes is an influx of new students, but then there should be an increase in the tax base. Personally, I would have preferred to deliver a baby in the comfort of the maternity care provided to French citizens. But since I’m not a taxpayer or citizen of France, they weren’t eager to provide those services to me.

Is the tax fairly distributed?

As a general principle, people who pay the tax want to derive benefit from it. It’s not a direct payment for services, though. There are some services, and some population segments, that need services but cannot pay for them, or the scale is so big that the costs need to be distributed—the military, services to the elderly and disabled, health care, and education.

Some things can be handled locally, some must have state level participation, and some jobs are so big that the federal government is needed. The larger the vulnerable population or need compared to the tax base, the higher the level we need to go. And we need to consider our society as a whole, not just our individual gain or loss.

Could the same benefits be obtained in some other way with fewer burdens?

I think it’s a myth that private enterprise always does things better, but without private initiative, innovation and sensitivity to consumers also suffer. On the other hand I strongly believe that the government needs to put some brakes on robber baron capitalism, For example, prescription drug prices negotiated by a national health care system can hold down costs for all of us—and I don’t notice drug companies pulling out of business with countries that have those controls.

I’m going to take a deeper dive into some specific issues in future posts—I’d love to hear your comments and reasoning on health care, long term care for the elderly, and college funding costs.

Giving to charity: doing the best you can

By now, your mailboxes (IRL and virtual) are probably crammed with year-end catalogs and heart-rending appeals for donations. But just as with spending, we want to maximize the use of our hard-earned dollars when we make charitable donations.

As I’ve suggested before, it’s worth checking out any potential charity with Guidestar.org and Charity Navigator. These ratings groups aren’t infallible, but they can give you some idea of how well your money will be spent. There are lots of well-known charities whose funds seem to go mainly to publicity and their CEO’s salary. Really, look up a few that come to mind—you’ll be shocked. And just because the charity says they focus on minorities, or women, or autism, or your favorite religious orientation doesn’t mean they’re good stewards. As Harry Truman once said, when anyone prayed too loud in the Amen corner, you’d better go home and lock your smokehouse.

Many of us are considering directing more of our charitable contributions to advocacy organizations this year and going forward.  However desirable and necessary such donations are, they may not be tax-deductible. For example, donations to the American Civil Liberties Union are not tax deductible, although donations to their information and education arm, the ACLU Foundation, are. Another organization that interests me greatly, the National Lawyers Guild (motto: Human Rights Over Property Interests) is also an advocacy organization, and donations are not deductible except to their foundation. However, the Southern Poverty Law Center, which constitutes its mission as fighting hate through education, is a tax-deductible charity organization. You want to look for the term ” 501 (c) 3″ if you’re looking for the tax deduction.  Of course, if you care passionately about current issues, you may not feel the tax deductibility of your gift is the most important factor, or you can allocate some portion to advocacy and the rest to educational or service delivery organizations.

Most of us have a tendency to give small amounts to any request that crosses our paths. However, I’d encourage you to consider a more planned approach. Giving larger amounts to fewer charities actually helps them: it saves on fundraising, processing, and other administrative costs.  Consider where your priorities lie or where you believe there is the most need: rights advocacy (disability, women’s, ethnic & racial groups); international poverty; animal rescue; anti-violence; gun control; legal change are all areas to consider.  While you’re at it, try not to use a credit card until you determine if the charity will be charged the fee for use by that card company (some don’t charge charities, some do).

As with any money management, there will always be more demand than funds available, so do think about your priorities. Many of these organizations will be particularly embattled or short of funds under the next administration, so need for your thoughtful contributions can only grow.