There are two ways to look at taxes. Call them Macro tax and Micro tax. Micro is the taxes you yourself pay while macro tax is the overall system. You will do better in tax management and in other areas of your life if you understand the difference.
Arthur Laffer has pointed out that there are always two rates that will raise the same amount of revenue. A high rate applied to a small base and a low rate applied to a large base. 80% of $250,000 will raise the same revenue as 10% of $2,000,000. Politicians who think rate first often overlook how rates affect the base. If their governing purpose was honest, optimizing revenue would be their first goal and this discussion would be moot.
In most western countries, rates are higher than the optimal amount to raise revenue. As a taxpayer it becomes important to shrink the base that too high taxes attack. It is hard to change the overall system but changes at the micro level work.
A change in income type often gains advantage. Investment income can change from interest to dividends or capital gains. Business income can appear as salary or dividends or interest or pension plans. Employment income can sometimes change into employee benefits of one kind or another. Some forms of income allow more deductions than others.
In a highly graduated tax system, income splitting is useful. Two people with $75,000 each of income pay much less than a single person with $150,000. Watch for other opportunities to split income. It is more difficult with children, not so much with parents. Life insurance offers a chance to pay the advantageous rate insurance companies pay on their income.
Time matters too. Some income is easier to defer than others. Be careful of when you sell investments. A gain in December is taxed almost a year sooner than the same sale in January.
At the macro level, we should be concerned as citizens. Tax policy and methods show the nature of a government. Greed, ideology, inefficiency and stifling structure lead to bad taxation systems. It has been that way for a long time.
Ibn Khaldun was a Muslim scholar who died in 1406. He is regarded as one of the founding fathers of economics, sociology, and demography. This thought on taxation mirrors Arthur Laffer.
At the beginning of the dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty taxation yields a small revenue from large assessments.
When tax rates become too high, society is failing and people invent or discover ways to avoid them. We should notice and act.
Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.