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Entitlements Without Taxes? It Doesn't Add up

Selfishness -- and, apparently, poor math skills -- stand in the way of government programs we like.

As a financial planner I all too often encounter an interesting dynamic in meetings with family, friends and potential and current clients: They bemoan the fact government is not willing to take care of them in some way.

Here is a fairly typical plaint: "I can't believe Medicare does not provide ongoing nursing home care for me and my spouse if we need it."

The sentiment is not bad in and of itself. I find it problematic, though, when it has been preceded by a diatribe against the government and how the complainer dislikes paying taxes.

Let's face it, no one, including me, enjoys paying taxes. But it's the deal we must make if we want government-provided services and benefits -- programs such as Social Security and Medicare.

People in these programs consider them a "right," but when someone else gets a governmental benefit or service it becomes an "entitlement." We have developed a nation of citizens focused solely on their own needs, where no expense is too great as long as it is for themselves. You can't cut funding for my government program but, damn, those other "entitlement" receivers sure are greedy.

Maybe that's just human nature, but you can't have it both ways. Either you want the governmental services and have to pony up -- or dig into your own pocket and pay for it yourself.

The kicker is that while all this gnashing of teeth is going on about how income taxes are too high, they are at historical lows. I recently got a quarterly economic overview from one of the largest U.S. financial services firms that included a chart comparing historical average tax rates based on the highest marginal federal tax brackets:

  • On dividends, the current rate is 15%, while the 40-year average is 44.6%.
  • On long-term capital gains, the current rate is 15%, while the 40-year average is 24.7%.
  • On ordinary income, the current rate is 35%, while the 40-year average is 47.9%.

The sunset of the Bush tax cuts plus the new health care reform taxes merely gets our current low tax rates back in line with the 40-year average. For example, long-term capital gains are slated to rise to 20% next year, from 15%. In 2013, the Medicare unearned income tax kicks in for high earners. Add those and you have a long-term capital gain rate of 23.8% -- still lower, in fact, than the 40-year average.

And on the U.S. deficit, which is expanding at an alarming rate? Again, people are aware of the problem but turn into Jekyll and Hyde when talking about it -- they express outrage at the spiraling deficit but, when push comes to shove, don't want to pay taxes or cut services.

Something has to give. And it has to be people's expectations of what is possible.

Low taxes and high government services are at odds and do not work longer term. Do the math!

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Michael Maye is the founder and president of MJM Financial Advisors, a registered investment advisory firm in Berkeley Heights, N.J. He is a member of the National Association of Personal Financial Advisors (NAPFA) and has been a speaker covering tax topics at NAPFA's national and regional conferences. Maye has also been a frequent contributor to the Star Ledger of New Jersey's 'Biz Brain' and 'Get With the Plan' articles. In addition to NAPFA, he is a member of Financial Planning Association, American Institute of Certified Public Accountants, New Jersey State Society of CPAs and the Estate Planning Council of Northern New Jersey.