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Taxing Matters

Terry Savage, Tribune Content Agency on

Did Bill and Melinda Gates decide to get divorced now because of potential changes in the tax law? That’s the speculation in the wealth management community, where many advisers are discussing proposed changes in the tax laws with their clients.

The Gates family fortune is primarily tied up in their foundation and will continue to be jointly managed by the couple, according to reports. Neither is worried about spousal support, since they reportedly receive $300 million a year in dividends alone! Their sudden split, likely coming after some extensive financial planning, is being tagged as a reaction to tax proposals in Washington. Two separate estates may incur lower taxes than one large one under plans being considered.

Now, before you dismiss this speculation as a problem only for the very wealthy, you might take another look at the possible impact of tax changes on your family, especially if you’re a baby boomer on the cusp of retirement.

Tax the rich

Making the wealthy pay their “fair share” of taxes has an appeal that is undeniable these days. But history says that taxes often start out aimed at only a few but quickly entrap the many unwary.

When the modern federal income tax was enacted in 1913, the top tax bracket was 7 percent on all income over $500,000 ($11 million in today’s dollars); and the lowest tax bracket was 1 percent.

 

Once enacted, tax brackets inevitably expand to entrap more income. That’s why tax cuts are historically more memorable than tax increases: Tax cuts are so rare.

It’s not the incidence of the tax, but the burden of the tax

An economics professor warned students that while a tax may be levied on a specific group of people or category of businesses, the impact of the tax could be far different. Smart individuals figure out ways to avoid those taxes. And businesses simply pass the taxes along to consumers in the form of higher prices.

Then, when taxes get excessive, the smart money simply stops working or investing for growth. You can’t force people to build businesses or invest capital if the after-tax returns are not worth the effort.

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