Nearly every new client tells me they are willing to pay their "fair share" but don't want to pay any more. But hardly anyone can describe what is meant by a "fair share" of the total tax burden.

Some of the more extreme liberal politicians seem eager to tax 100% of everything that can conceivably be taxed. At a minimum, they seem eager to tax more of the income of those they describe as wealthy or as rich. Many liberal politicians claim that the so-called rich aren't paying enough in spite of the well documented fact that the top 1% of income earners are paying about 31% of the total federal taxes. The top 20% are paying about 56% of the total federal taxes. (Source: WSJ) And in terms of income taxes, Allegro Media shows that the lowest 40% in terms of income pay no federal income taxes at all.

If every household paid an equal amount of federal tax in terms of total tax collections, the total would be about $20,000 per household. And if every household paid an equal percentage of the total income tax, they would pay about 18.4% of their income, according to the Congressional Budget Office. The "Fair Tax", which I discussed in an earlier issue, essentially uses an equal percentage -- but it's based on spending rather than on income.

Obviously, those with an income of $20,000 or less could never be able to pay an equal share in terms of total dollars (i.e. $20,000). But if you exclude them, then the thresh-hold would have to increase and each such increase would result in imposing taxes only on higher levels of income. But even the poor can afford a tax that is based on a percentage of their income or spending. The working poor are already paying (directly and indirectly) a tax rate of 15.3% of their earned income for Social Security and Medicare taxes, plus the 3% to 7% that most employers pay for unemployment taxes.

So what represents a "fair share"?  An equal dollar amount, or an equal percentage or a higher (progressive) percentage for those with more income? The liberals in Congress believe the only fair tax is a highly progressive tax rate and that the current tax burden on the highest income taxpayers is not high enough.

But there is another way to define what is a fair share. That's by looking at what the tax law requires in order to be compliant. State and municipal bond interest is tax free, as are gains of up to $250,000 per person from the sale of a primary residence. Earned income outside the U.S. might be exempt (subject to some conditions) up to $87,600 in 2008. A variety of employee benefits are either tax free or at least are tax deferred. Social Security benefits and Medicaid benefits are income tax free for those with little or no other taxable income. Dividend income and long term gains are currently taxed at a maximum rate of 15%.

"Legal Ways to Save Taxes Offshore and Onshore" includes a brief description of over 100 ways to save taxes.

The only way I can define a "fair share" is by determining what is required in order to be compliant with the law. If it's legal, then it's fair within the limits of the present tax system.


Vern Jacobs


Reprinted from the International Wealth Protection Monitor

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