Why Do the Wealthy Pay Less Tax than Others?

Well, do they or don’t they, actually? Long debated and often manipulated by the media, the topic of the wealthy and taxation has many, many complex points and counterpoints. First, when people say that, they often don’t define what kind of tax. The people hearing the comment usually go to federal personal income tax in their mind as TAXES. However, if a wealthy person owns 20 C corporations, with each filing their own tax returns, those C corporations pay their own taxes and unless the wealthy person needed to take a dividend or other distribution, then they could pay zero federal income tax, even though their companies paid potentially millions in taxes themselves.  

The kinds of taxes people pay depends on their situation. For instance, a blue collar worker who pays 22% federal income tax, but rents his home, pays no property taxes (at least not directly). The wealthy man who owns 20 C Corporations might pay 10% personal income tax “as a person” but pays millions in property taxes for those factories, millions more in payroll taxes for the hundreds of employees they have created jobs for, and at death will pay tens of millions in estate taxes that the blue collar worker never pays. But the media simply reports that the rich guy paid less income tax than that working American…outrage! 

There are many advanced tax strategies in the tax code that do however give wealthy people the opportunity to avoid what should be a type of income that does flow down to their personal tax return, so they can legally and ethically pay less tax. So, to be fair, it’s not that working people have more tax to pay, it’s that they don’t have as many “special situations” in the code to help them manipulate their own outcomes. That being said, they do have some tax saving opportunities, but most don’t take advantage of any at all. It’s not that the blue collar guy doesn’t have the tax planning advantages of the “rich.” It’s that they often ignore the ones they do have.

Our point? Instead of complaining that the rich have unfair tax advantages, first get a tax planner and spend time looking into everything you can do to improve YOUR tax outcomes that you are currently not doing. It’s a good bet that most people never will, but many will still complain and point fingers. But if they’re not working with a tax planner, then they should be pointing that finger in a mirror!