Bologna Taxes

bologna taxes - stairwayofphiWhen it comes to disliking taxes, I'm no visionary.  I, like many others, do everything I can to avoid as much as legally possible to keep my piece of the pie out of self-interest.  But if you make money, taxes are unavoidable.  Well, at least our tax dollars are going to help people in need, though.  ...Right?

Unfortunately, I reached a discovery yesterday which made me question the effectiveness of the federal government and realize just how a huge chunk of taxes are a bunch of bologna.

 

Bologna Taxes

First, a bit on how I came to this conclusion.

Back in January, I bought and moved into my own piece of property - a 3 bedroom, 2 bathroom single family home with a good amount of free space in need of repair and some major cosmetic overhauling.  Going into the deal, I knew full-well that I would be renovating the house myself with the intent of customizing the place to fit my needs, improve my quality of life, and raise the intrinsic value of the property for a day when I decide it's time to move on.

I worked a little bit to make some beneficial modifications initially, but then I became busy with other projects and even a little bit lazy.  Since then, I haven't done much to it.  But that's about to change.

At the beginning of last month, I had a good friend (and co-writer on my musical endeavors, as well as co-founder in a brand new game-development company) move in with me, renting out one of my spare bedrooms!  In addition to the good company, him moving in brings me an extra $500/month (that is, before any additional utility/maintenance fees related to him moving in are deducted).  I told him about my plans to renovate and he accepted the somewhat-lackluster condition of some parts of my house.  Never did I expect him to assist me in with the renovation.

But with how thin I've spread myself between my job, StairwayOfPhi, investing, my side-endeavors, this new game developing company, and just life, I realize that I don't have the time or energy to do it all by myself.  But that's no excuse for it not getting done.  I've waited long enough - it's time to bring my renovation plans to fruition!

And this brings me to my tax realization.

 

Becoming an "Employer"

Since becoming self-aware that my future is in my hands, I've revered the status of "entrepreneur".  It's my end goal, with all of my efforts moving me towards becoming someone who paves their own way, guided by their own decisions and efforts.  I knew that staying the course I have, I'd one day become an "employer".  But it never occurred to me that it might be around the corner.

I knew that if I could get the motivation and an extra set of hands from someone I enjoy being around, I could make some real progress quickly.  So I offered my roommate a proposition.  If he would give me a hand in the renovation, I would compensate his efforts in the form of a rent deduction - at the rate of $12.50/hour (which seems fair to the both of us).

I felt a bit of pride for having gained enough control of my own life to ascend beyond what I, alone, can do and to have reached a point where my money (at least some of it!) is not worth more than my time!

It was exciting to hear him accept and receive affirmation that achieving the entrepreneur lifestyle is just a matter of doing (this case showing how easy it was to negotiate hiring details)!  But after that initial twinge of pride, my mind wandered to where it has since starting this site - finances.

My $12.50/hour rent-deduction rate is a winning scenario for the both of us.  Yes, I get the help I need and my roommate makes the money he needs - all the while making our living situation considerably nicer, but beyond that, there are deeper win-win elements at play which derive from bypassing taxes (by "bartering").

 

Perks of "Bartering"

My Perks (as the "Employer"):

  • Every dollar deducted is, effectively, a tax-deductible dollar.
    • Since receiving the money would be considered income, I would be taxed on it, reducing it's effectiveness by 22% (combining state and federal income tax).  Meaning that $100 of rent money would only really be worth $78 to me.
    • By deducting the pay from rent instead, I get $100 worth of work for, effectively $78.
  • My property value increases by a certain amount with each amount of work done.
    • The result I want will become accomplished.
  • Higher quality of life (when the work is finished)

My Roommate's Perks (as the "Employee"):

  • $12.50 is actually $12.50.  If an employer who could only afford to pay $12.50/hour, the employee would see considerably less of it after the government took their cut.  By bartering, the employee keeps the FULL amount!
    • An employer would be forced to pay 7.45% of the pay I give out to
      Social Security and Medicare.  This brings the "employee's" rate to $11.57/hour.
    • The "employee" would now be forced to pay 7.45% of that rate into Social Security and Medicare, bringing the hourly rate down to $10.61/hour.
    • After this, federal and state taxes would now be applied.  Let's just look at the lowest federal tax bracket - 10% - and the standard South Carolina state tax - 7%.  After these taxes, the take-home pay of the employee being paid $12.50/hour by the employer is $8.89/hour!  For every $100 an employer pays out, it's only $71.09 for the employer - only 71.1% of what the employer had to pay out!  This is assuming you're in the LOWEST federal tax bracket AND that you aren't working enough for your employer to be legally required to pay for your health care (which, again, would have to come out of the employee's pay)!  And if you're in a higher tax bracket, ratio-wise you're going to be making significantly less than that.

 

Now, you can argue that Medicare and Social Security are beneficial for the employee because they may need to rely on them in their old age, but these are funds that could be used to eliminate interest-gaining debt OR to be invested to appreciate with time, certainly leaving you far wealthier than any cut the government gives out will make you!

You might believe that 7.45% is a small price to pay for these services to help people.  But, if you relate back to the "Employee" example, you can see that for the employee, Medicare and Social Security ACTUALLY costs them closer to 15% (this remains unchanged regardless of how much you make as an employee).

Unfortunately, only 3% of our total federal taxes go to improving transportation and, most frighteningly, only 1% goes to funding education (while 51% goes to Medicare and Social Security)!

While I have qualms with the Social Security/Medicare system because I believe there is a significantly better alternative (which I will lay out in detail shortly), the point of this article isn't to bash them.  The point is to show how truly expensive it is to get the government involved in "regulating" the process for the sake of "helping" people.

I don't see this "service" as being worth it's weight, do you?  Rather than spend gigantic sums of money to play protector, shouldn't we be concentrating on giving more power to EVERY working individual so that people can better help themselves and better take control of their fates?

 

Readers, what are your thoughts on taxes?  Would you rather see your money going to a cause you believe in or leave it to the government?

-Phi

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