Two steps for lower taxes

With taxes due in less than a week, Derek Thompson over at The Atlantic has some solid advice for “beating the Tax Man at his own game”:

First, be self-employed. Second, be very rich.

Among other reasons that the article notes, “money buys access to the smartest accountants and tax attorneys, who have scoured the labyrinthine tax code for the best nooks and crannies to shelter income.”

It may not be the most efficient allocation of overall resources, but it sure does offer a compelling individual ROI.

Small but taxing

Following up on Brian’s post yesterday on taxation, I just found a 3/29 Wall Street Journal story with some eye-opening tax numbers:

While it’s difficult for large businesses to keep abreast of changing regulations, small businesses pay a disproportionate amount to adjust to new rules. In general, the cost of tax compliance at smaller firms is $1,518 per employee, compared with big companies, which pay about $517 per employee, according to a 2010 study from the Small Business Administration’s Office of Advocacy. [emphasis added]

This throws a rather new light on the “benefits” of temporary, one-off tax breaks aimed at small businesses, doesn’t it?

In other tax news, “Tax Freedom Day” is April 12th this year, though this varies depending upon the tax burdens of your particular state of residence.  Congratulations to Mississippi, Tennessee, South Carolina, Louisiana, South Dakota, New Mexico, and West Virginia, whose residents are (statistically speaking) already through with taxes for the year!

Deciding who is really rich

As the American government considers changes to the tax brackets, James Surowiecki of the New Yorker says this involves an important question: how much money does one have to make to be rich?

While the administration has suggested being rich starts at $200,000 income per year, Surowiecki describes why it is not so simple:

Judging from surveys of how Americans describe themselves, most of the privileged don’t feel all that privileged. Why is that? One reason is the American mythology of middle-classness. Another is geography: in a place like Manhattan, where the average apartment sells for nine hundred thousand dollars, your money doesn’t go as far. And then there’s a larger truth about how wealth is getting concentrated in this country. As the economists Thomas Piketty and Emmanuel Saez have documented, people who earn a few hundred thousand dollars a year have done much worse than people at the very top of the ladder.

Indeed, wealth and income is often relative: if you made $150,000 a year but lived in a neighborhood and mainly associated with people who made around $1,000,000 a year, you might feel poor. The same concept is used to describe various levels of poverty: the relative poverty of the United States versus the absolute poverty experienced in Third World nations. Americans are notorious for feeling like they are middle-class, even if they clearly are not.

At the same time, I find it slightly difficult to believe that $200,000 doesn’t make one rich. Of course, one has choices about how to spend that money. Making $200,000 in Manhattan is not the same as the making that money in Nebraska. However, it should cover all of one’s expenses. Those making over $200,000 are still part of a small and elite group: according to the Census Bureau, in 2006 3.5% of American households made over $200,000 a year.

Surowiecki suggests the solution is to create separate tax brackets for the rich and “super-rich.” If the tax rates are changed, this seems reasonable to me – though it complicates the tax code.