For The Herald Bulletin
Years ago, I received valuable insight into the eyes of the Internal Revenue Service.
A client was being audited, and I saw the writing on the wall of the financial impact if the fines were truly assessed.
My argument was the client was being taxed too heavily to ever stay in business or even survive as an individual. The agent told me that in financial fairness of capitalism that he had to impose the fines or it would be unfair to other businesses that paid their taxes on time.
That was an interesting perspective for certain and backed with logic. We should have a fair application of the tax code across the business world, and people and businesses alike should comply fairly.
The climate of taxation has really changed the past couple of years. According to the Taxpayer Advocate Service’s (TAS) annual report, there have been more than 4,600 changes to the tax code since 2001. TAS also reported that in 2012 taxpayers spent 6.1 billion hours filling out tax forms to meet IRS requirements.
As revenues have fallen, different taxing authorities have taken different routes to navigate the climate. The decision from Washington is to increase taxation on the nation’s higher-income earners and investors.
States that have huge debt issues — namely Illinois and California — continue to raise rates. Other states are finding this is the time ripe with opportunity to bring in high-income earners by making tax policies more attractive. Their strategy is to reduce taxes of all types, betting they will attract new residents.
With 45 states imposing a sales tax, many have reduced their rates in recent years. Some have reduced their state income tax or even removed it all together. Our home state of Indiana has recently eliminated the inheritance taxes. Many will argue that this should never happen unless all previous debt is paid off, but states have a different take on the perspective.
The logic is just as a business may go into debt to build a building or develop a new product line, where they would employ leverage states that can are making a bet on the future. The evidence shows the practice is working.
Professional golfer Phil Mickelson aired his issues about California’s tax practices in public and eventually apologized, but it’s not the celebrity leaving that will crush states with aggressive taxation. It’s the investor and high-income earner around the corner who feels compelled to make a change.
The future landscape is different than it was and will most certainly change again. We are in a currency battle with our trading partners, especially Japan and China. We are in tax competition with other countries and work to try to find ways to bring dollars held overseas back to our shores.
Now we have added states and even local communities in battle with one another for new business and new residents. The game is on and far from done! We live in a fluid investment world with ever-changing tax policy and social implications galore. Stay tuned, but most importantly stay alert.
Joseph “Big Joe” Clark, whose column is published Sundays, is a certified financial planner. He can be reached at firstname.lastname@example.org or 640-1524.