Taxes​—Price of a “Civilized Society”?

“Taxes are what we pay for a civilized society.”​—Inscription on the Internal Revenue Service building, Washington, D.C.

GOVERNMENTS argue that taxes are a necessary evil​—the price of a “civilized society.” Whether you agree with that sentiment or not, it is undeniable that the price is usually a high one.

Taxes can be divided into two categories: direct and indirect. Income tax, corporate tax, and property tax are examples of direct taxes. Of these, income tax is probably the most resented. This is especially so in lands where income tax is progressive​—the more you earn, the more tax you pay. Critics argue that progressive taxes punish hard work and success.

The OECD Observer, a publication of the Organization for Economic Cooperation and Development, reminds us that in addition to taxes paid to central governments, “income earners may have to pay local, regional, provincial or state income taxes on top of the central government income tax. This is the case in Belgium, Canada, Iceland, Japan, Korea, the Nordic countries, Spain, Switzerland and the United States.”

Indirect taxes include sales taxes, taxes on liquor and cigarettes, and customs duties. These are less visible than direct taxes but can still pack an economic punch, especially among the poor. In India’s magazine Frontline, writer Jayali Ghosh argues that it is a myth that middle-class and wealthy taxpayers pay the bulk of India’s tax bill. Ghosh says: “For the State governments, indirect taxes amount to more than 95 per cent of their total tax collection. . . . It is likely that poorer people actually pay out a larger share of their income in the form of taxes, than the rich.” High taxes on items for mass consumption, such as soap and food, evidently create this disparity.

Just what do governments do with all the money they collect?

 Where the Money Goes

Admittedly, it costs governments massive amounts of money to operate and provide necessary services. In France, for instance, 1 person in 4 works in the public sector. This includes teachers, postal workers, museum and hospital personnel, the police, and other government workers. Taxes are needed to pay their salaries. Taxes also provide roads, schools, and hospitals and help pay the bill for such services as garbage collection and postal delivery.

The demands of the military are another force driving taxation. Income tax was first levied on wealthy Britons to finance the war against the French in 1799. During World War II, however, the British government began requiring the working class to pay its share of income taxes. Today, oiling a nation’s military machine continues to be a costly affair, even in times of peace. The Stockholm International Peace Research Institute estimated world military expenditure in 2000 to be approximately 798 billion dollars.

Social Engineering

Taxes also serve as a means of “social engineering”​—a tool to encourage or discourage certain forms of behavior. Taxing alcohol, for example, supposedly curbs excessive drinking. Thus, in many lands taxes make up about 35 percent of the retail cost of beer.

Heavy taxes are also levied on tobacco. In South Africa taxes make up from 45 to 50 percent of the cost of a pack of cigarettes. However, a government’s motive in promoting such taxes may not always be purely altruistic. As writer Kenneth Warner observes in the magazine Foreign Policy, tobacco is “a powerful economic force that annually generates hundreds of billions of dollars in sales and billions more in tax revenues.”

One notable example of social engineering took place early in the 20th century. U.S. lawmakers sought to curtail the formation of wealthy family dynasties. How? By creating an estate tax. When a rich man dies, taxes take a huge bite out of his accumulated wealth. Proponents argue that the tax “diverts resources out of familial, aristocratic channels into civic, democratic ones.” Perhaps, but wealthy taxpayers have developed numerous strategies to soften the blow of that tax.

Taxes continue to be used to promote various social issues, such as the environment. Reports The Environmental Magazine: “Nine Western European countries have implemented environmental tax shifts recently, mostly as a means to reduce air pollutants.” Progressive income taxes, mentioned earlier, are yet another attempt at social engineering; the idea is to reduce the gap between the rich and the poor. Some governments also give tax relief to those making charitable donations or to couples who have children.

Why So Complicated?

Whenever a new tax is proposed, legislators try to close any possible tax loopholes. Remember: Enormous amounts of money are at stake. The result? Tax laws tend to be complex and highly technical. An article in Time magazine explains that many of the complications in U.S. tax law “come in defining income,” that is, in determining just what is taxable. Further complications come from the myriad rules “allowing various deductions and exemptions.” It is not just the United States that has complicated tax laws, however. A recent edition of the United Kingdom’s tax legislation ran to 9,521 pages, filling ten volumes.

The Office of Tax Policy Research at the University of Michigan reports: “Each year U.S. taxpayers spend over three billion hours on their income tax returns. . . . All together, the time and money spent by U.S. income taxpayers [in filling out tax returns] amounts to as much as $100 billion every year, or about 10% of the tax collected. Much of this compliance cost is due to the mind-boggling complexity of the income tax law.” Says Reuben, mentioned at the beginning of the first article  in this series: “I used to try to do my own taxes, but it was time-consuming, and I often felt I was paying more than I had to. So now I pay an accountant to do my taxes.”​—See the box “Complying With Tax Laws,” on page 8.

Payers, Avoiders, and Evaders

Most people will at least begrudgingly acknowledge the benefits that taxes bring to their community. The head of the British Inland Revenue once explained: “Nobody enjoys paying income tax, but few people argue that we would be better off without it.” Some estimate that the level of tax compliance in the United States is as high as 90 percent. One tax authority admits: “Much non-compliance stems from difficulty with the law and procedures, rather than from wilful evasion.”

Even so, many find ways to avoid paying certain taxes. For instance, consider what an article in U.S.News & World Report said about corporate taxes: “Many firms legally skirt a large share of their liability​—and sometimes all of it—​through tax breaks and accounting maneuvers.” Giving an example of one clever scheme, the article continues: “A U.S. corporation sets up a firm in a foreign tax haven. It then turns the U.S. operation  into a subsidiary of the foreign company.” The company is thus spared paying U.S. taxes​—which might be as high as 35 percent—​even though the “headquarters may be little more than a filing cabinet and a mailbox.”

Then there is out-and-out tax evasion. Reportedly, tax evasion is viewed as a “national sport” in one European nation. According to a survey in the United States, only 58 percent of men between the ages of 25 and 29 believed it was wrong not to declare all income. The survey’s authors admit: “The report doesn’t say great things for the ethics and morality of our society.” In Mexico tax evasion is estimated to be about 35 percent.

By and large, though, people acknowledge the need for taxes and do not mind paying their fair share. However, the famous words attributed to Tiberius Caesar ring true: “A good shepherd should shear his flock, not skin it.” If you feel victimized by a system that seems burdensome, unfair, and overly complex, just how should you view the paying of taxes?

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Think Before You Move!

Tax systems vary from country to country. In fact, local income taxes may vary drastically within the same country. Is it worth considering a move to an area where tax rates are lower? Perhaps, but you should think before you move.

For example, an article in the OECD Observer reminds readers that the basic income-tax rate is not the whole story. It says: “The actual tax bill of individual taxpayers also reflects the impact of various deductions.” For example, some countries have a low income-tax rate. But they offer “little in the way of basic relief, deductions and exemptions.” As a result, one could end up paying more there than in countries with higher tax rates that offer more tax exemptions and deductions.

In the United States, some consider moving to states that are free of state income taxes. But does this necessarily save one money? Not according to Kiplinger’s Personal Finance, which says: “In several cases, our research shows that the states without an income tax make up the difference with higher rates for property taxes, sales taxes and other tax categories.”

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Complying With Tax Laws

For many of us, paying taxes is a stressful, yes, taxing affair. Awake! thus asked a tax expert for some practical suggestions.

“Get good advice. This is essential, for tax law can be complicated, and ignorance of the law is very rarely accepted as a valid excuse for noncompliance. Although a taxpayer might think that tax officials are the enemy, they can often give accurate and simple instructions about how to deal with tax matters. Tax authorities would prefer that you get your tax right the first time. They do not want to prosecute you for noncompliance.

“If your finances are complicated, seek advice from a tax professional. But beware! While there are many tax professionals who have your best interests at heart, there are plenty who don’t. Seek a recommendation from a trusted friend or business acquaintance, and check out the professional’s credentials.

“Act promptly. Penalties for late submission of information can be severe.

“Keep tidy records. Whatever your system of bookkeeping is, keep it up-to-date. That way, the work you will have to do at tax time will be kept to a minimum. You will also be in a much better position should your records be audited.

“Be honest. You might be tempted to cheat or perhaps to bend the rules a little. But tax officials have many ingenious ways of spotting false claims. It is always best to be honest.

“Be involved. If a paid tax preparer submits inaccurate information, it is still your responsibility. So be careful that your representative acts in accordance with your wishes.”

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In many lands high taxes are placed on tobacco products and alcoholic beverages

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 Taxes finance many of the services that we might take for granted