February 4, 2009

Are There Two Tax Systems? One For the Prominent & One For “Ordinary” People?

Yesterday, President Barack Obama was quoted as saying, "Ultimately it's important for the administration to send a message that there aren't two sets of rules. You know, one for prominent people and one for ordinary people who have to pay their taxes."

He said this on the heels of three Cabinet level nominees who have been found to have IRS problems. Timothy Geithner, who was ultimately confirmed as the Treasury Secretary, Tom Daschle who was nominated but later withdrew from the nomination for Health & Human Services and then Nancy Killefer who withdrew her candicacy for Chief Performance Officer. The truly shocking aspect of these revelations is that these prominent, high income earning individuals were so cavalier and careless in their rather transparent attempts to avoid paying their taxes. There is a big difference between "avoiding" taxes lawfully and "evading" taxes in an unlawful and sometimes criminal manner.

Avoiding taxes is the lawful planning to avoid paying more than one's fair share of tax. Prominient jurist, Judge Learned Hand said, "Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands."

This is NOT what transpired in these three individuals cases. In Geithner's case, he owed the liability for some period of years after failing to remit self-employment tax for his work at the International Monetary Fund. Incidentally, money that the IMF gave him specifically to pay the aforementioned self-employment tax. But hey, he was really busy.

In Daschle's case, it never occurred to him that the services of a private car and driver would be taxable. Nevermind that the guy served on the Senate Finance Committee for many years. Who do you think makes changes to the tax code every year anyway? And lastly, in Killefer's case, it's not clear but she did have a tax lien filed by the District of Columbia for $946.69 that took her five months to clear up. Big deal you say? If it was only $946 why did it take five months to pay off? You're right, she was probably busy too.

The point is that there are two tax systems but these folks actually weren't smart enough to take advantage of the system for "prominent" people. You see, the tax system rewards those who plan well and penalizes those that don't. Self-employed individuals pay the highest tax because they haven't implemented the rather simple step of incorporating. They pay extra for the fact that they failed to adequately plan. And there are any number of actions that can be taken by the smart taxpayer that wishes to arrange his affairs so as to pay as low tax as possible. It takes planning; it takes thought; and it takes a bit of money but not as much as stands to be saved. I provide this as food for thought and as validation to Mr. Obama's premise that he doesn't want you to know and realize that there are two tax systems. One for those who know what to do and one for those too slothful to educate themselves as to what TO do.