Is it really true that taxes have consequences? The phrase has the kind of ring you might associate with an unquestionable Newtonian law of physics (“Every action has an equal and opposite reaction” springs to mind) but what happens when you put it under the microscope? Does it hold up under scrutiny?
Today, we’re going to contend that, for a certain class of people, it does not — that there is a very small number of people for whom the equally universal Benjamin Franklin quote, “…in this world, nothing can be said to be certain, except death and taxes,” only rings half true: billionaires and their progeny.
But first, let’s travel even further back in time to someone infintely more famous than Newton or Franklin — someone who has provided the theoretical framework for our blog post today…
Taxes have consequences? Jesus of Nazareth, circa 30 AD, begs to differ…
Most people are instantly familiar with Jesus’ words when questioned about paying tax to the Roman Empire (“Render therefore to Caesar the things that are Caesar’s, and to God the things that are God’s.” — Matthew 22:21b NKJV), but few are aware of the way Jesus navigates and comments on local taxation a few chapters earlier.
In chapter 17 of Matthew’s Gospel, Peter, one of Jesus’ disciples, is confronted by collectors of the “two-drachma temple tax.” When they ask Peter whether Jesus pays the tax in question, Peter fumbles out an affirmative response, and later has to talk to his rabbi about what he has just said on his behalf.
Jesus, ever-prescient in his dealings with Peter, asks him a question when he walks in: “What do you think, Simon? From whom do the kings of the earth collect duty and taxes — from their own children or from others?” (Matthew 17:25 NIV).
Peter responds, “From others.” Peter is right, of course, that kings pay no tax, which leads Jesus to offer another fiscally-related double entendre pregnant with meaning: “Then the children are exempt.” (Matthew 17:26 NIV)
This strange vignette ends with Jesus instructing Peter to go fishing so that he can pull a literal four-drachma coin out of the mouth of the first fish he catches, “for my tax and yours.” (Wouldn’t it be cool if we could all pay our state taxes that way?)
Interpreting Jesus’ Elusive Double Meaning
Bear with us for a second; we know that this is a financial planning blog, not a theological treatise. We also know that not everyone who reads this necessarily has a religious faith — but, hopefully that needn’t stop us from considering Jesus’ insights in the story, and how they could have pointed meaning for America’s 21st century economic climate.
First things first: the obvious meaning. Peter’s response is clear enough: kings and their children don’t pay tax; ordinary people do. This has been true for thousands of years in monarchical systems like the United Kingdom (and it still rings true in other ways today, even in other political systems — but more on that later).
Things get a little trickier when you move on to Jesus’ second point: what does he mean when he says, “Then the children are exempt?” And why does Jesus rope in a seemingly unrelated governance issue (whether kings pay tax), when the practical issue at hand is the local Jewish temple tax (i.e. a tax for the upkeep of the Jewish Temple building in Jerusalem)?
Here’s our take: Jesus is simultaneously critiquing religious and political hypocrisy (“one rule for them, another for us”) and commenting on power, access and identity for all people in the revolutionary, alternative system he envisages.
In that system, there are enough resources for all people, not just the “children of kings” because, in his view, all people bear God’s royal image. Just as kings who collect tax exempt their children as a means of provision, so too God’s royal children should have enough for all of life’s basic needs (hence the fish miracle).
So what could be stopping that system from coming to be?
Exposing the Ultra Rich
Since the 2020 pandemic, we have seen the single greatest transfer of wealth in history — from the middle-classes to the ultra-wealthy. Much of that wealth transfer happened without any taxation on the ultra-wealthy whatsoever… putting paid to the idea that “taxes have consequences” for everyone.
Why is that? Something called “unrealized gains.” While most people make money from their income (salary) and are taxed accordingly, the wealth of the ultra-rich is usually tied up in the stock market, such that when their stocks increase in value, their net worth increases exponentially.
As long as they do not sell any of the assets that make up their net worth, they will not incur any tax. That’s what an “unrealized gain” refers to: where an asset you own increases in value, but you do not profit from any exchange of that asset in real time.
So while most Americans automatically pay taxes on their income through company payroll, many billionaires avoid those taxes because of the kind of assets they own — and this actually results in a lower overall tax rate for billionaires versus normal, working and middle-class families.
The Center for American Progress reported that “The Forbes 400 paid an average income tax rate of 8.2 percent from 2010 to 2018.” In their analysis,
“The main reason the top 400 pay such a low tax rate is that a very large share of their income is in the form of unrealized capital gains—appreciation in the value of their assets, mostly stocks and other business interests.”
Because of a tax code feature known as “stepped-up basis,” unrealized gain on an asset is never subject to income tax if the asset is not sold during the owner’s lifetime. As a result, much of the income of the wealthiest families in the country never appears on their income tax returns.”
Where Does That Leave Us? (How Certified Financial Planners Can Help)
Here’s the basic point, which bears repeating: the kind of assets you own determines the amount of tax you will or will not pay. As Greg Liszka (CFP®, RICP®), President & Advisor at Iron Point Financial, has said,
“Different asset classes are taxed in different ways. Taxes erode returns. Holding a certain asset in the proper account adds to your bottom line. So what do you want to hold in an after-tax account? Probably ETFs, right? They’re more tax-efficient.
What do you want to hold in an IRA? Something with either a high turnover rate or that produces some weird tax you want to avoid, because those don’t matter in an IRA. Asset placement matters in portfolio construction, because taxes hurt.”
Iron Point Financial: Providing Access
We don’t have the power to make you into a billionaire on the Forbes 400 list, but we can offer financial planning services, and especially tailored, optimized portfolio management, that could provide you with some of the same benefits as the illustrious members of that group.
We believe that part of the reason the Forbes 400 gets richer and richer every year is that they rely on knowledgeable financial professionals to manage their wealth in the most tax-efficient way possible. As Greg often tells prospective clients,
“I would be a terrible nurse. No clue. That’s what they do. That’s their specialty. So, the same feeling I have when I look at that: “You want me to do what? What does that mean?” That’s how nurses feel when they’re coming into my office, into my world, thinking, “I just need to save a couple dollars. I don’t know where. I don’t know how. Here’s a statement.”
They’re busy doing their thing. They don’t have time. It takes a lot of work and effort to understand it. It’s not easy. It constantly changes. The rules change. The tax laws change. They’ve got families and jobs and hobbies and you know what: “I’m more than happy to have Greg just help me get to the end. I’ve got a lot more confidence that he can get me there than me getting me there.”
In other words, our job is to offer you access to the knowledge, skills and platforms we can provide, so that you can focus on what matters most to you.
Our Client Intake Philosophy
Here’s the headline: at Iron Point Financial, we want to help everyone who walks through our doors. We want to see all of our clients’ goals met, whether tax-related or otherwise, and we care more about the quality of your character than the numbers in your bank account when you first come to us. To illustrate what we mean, Greg recounts how,
A couple in their eighties, who I met recently, asked me, “Are you taking new clients, because we have somebody in mind.” Here was my response: “It doesn’t have to have anything to do with money, although it would be better. We have to have some assets to work with, or we’ll go out of business.”
“What really matters is that they have to be good people. If you’re a good person, I’ll figure out a way to help. I love working with people who want help, who know they need it, and who are willing to take direction for the sake of their success.”
While we are certainly not Jesus, and we cannot pretend to hold the keys to any kingdom, we do care about sharing power and access to the best financial planning tools available, and bringing our skills to bear on your unique situation.
At the end of the day, that’s why we’re in this business: we want to open the door to better financial health — for good people like you.
Partner with Us
If the feeling is mutual, and you would like help with your wealth management or retirement planning needs, simply reach out to schedule an appointment with us whenever works best for you.
And if you enjoyed these Tax Day thoughts on the idea that “taxes have consequences,” why not sign up to our email list, so you never miss a future blog post?
Iron Point Financial is here to empower you to secure a brighter tomorrow. We operate physical offices in Grove City, PA and Greenville, PA.
We primarily serve residents of Pennsylvania, Ohio, West Virginia and Florida but we also have security registrations for 22 other states across the continental USA.
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Disclosures
- The views stated are not necessarily the opinion of Cetera and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein.
- Due to volatility within the markets mentioned, opinions are subject to change without notice.
- Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.
- Past performance does not guarantee future results.
