You can avoid paying tax legally. But you still have to pay it.
When I started my first business, a chain of toy stores, I was the sole owner. When I sold it, I paid capital gains tax on the money I made. The buyer offered me a choice: I could sell the company for cash, or for shares in his company instead.
If you get shares instead of cash, a sale is a “capital gain” for tax purposes. But if you never sell those shares, there’s no actual capital gain for the government to collect tax on. So if you make a deal where you get shares instead of cash, and then never sell them, you never pay capital-gains tax.
The guy who bought my business offered me that choice because he knew that if he paid me cash instead of shares, I’d have to pay tax on the money no matter what. He just wanted to save himself from having to pay capital-gains tax on what he got from me. We both ended up paying a lot less tax than we would have if we had both just taken cash.
The short answer is that you probably don’t. The long answer is that there are at least three kinds of tax, and the first kind isn’t really “tax”; it’s more like paying rent.
The first kind of tax I call a rent. If it’s not obvious why you should pay it, think of it as rent for living on a particular plot of land or using a particular machine or driving on a particular piece of pavement. If you didn’t pay, the police would eventually come and make you. But you can usually negotiate: if you go to jail and lose your job and starve to death (or even if you don’t), the police will let you out again if you promise to pay what they say you owe.
The second kind of tax is more like paying for something. For example, if the government decides that drinking water is valuable and starts putting meters on wells, then drinking water becomes something you need to buy—and if you don’t, men with guns will eventually show up at your house and force you to pay.
There are only two basic ways to pay tax. One is to do what everyone else does, and the other is to be an outlaw.
The first option is to use the same loopholes as everyone else. But this is hard to do without specialized knowledge, and specialized knowledge about how to avoid taxes is highly concentrated in the minds of a few people who are not allowed to share it with you. So even if you could figure out for yourself how they are doing it, you would be unlikely to do it as well as they are.
Why does the government allow these loopholes? The answer is that they are loopholes only from the point of view of people who make their living by complying with laws. To the rest of us they are more like invitations, or Christmas presents left on our front steps.
Of course there are still risks in responding to these invitations. The government may decide that it wants more tax revenue, and change the rules of the game tomorrow. Or the IRS may decide that you have been evading taxes, and send agents with guns after you.
The accountant’s answer was that we were legally required to pay tax on our income, but there was no moral obligation. This is not as wacky as it sounds.
Both the American and British governments agree with him. The United States, for example, regards taxation as a “voluntary contribution”. The government’s view seems to be that if enough people don’t voluntarily contribute, it has the right to make them. If you don’t like that idea, imagine how you would feel if everyone did pay their taxes voluntarily.
What about your morals? Well, we had an interesting week discussing this question on the Philosophy Bites podcast (philosophybites.com). In general, philosophers are against taxation. But one of my guests thought otherwise. He thinks there is a moral obligation to pay taxes because not paying taxes makes life worse for other people. A philosopher named Elizabeth Anderson argued that he is wrong: if you have a moral duty not to harm other people by paying taxes, then you have a moral duty not to harm them by smoking or eating meat or failing to recycle your garbage either. I agree with Professor Anderson: most taxes do more harm than good, and so they violate the moral duty not to harm others
The United States Internal Revenue Service says that “Taxes are what we pay for a civilized society.”
I am not sure that I agree with this statement. I need roads, so my taxes go to pay for building and maintaining roadways. But they also tax me to pay for the military, which I do NOT use. I don’t have any children in school so my taxes pay for educating other people’s children. Taxes are supposed to go to pay for things you need, but they often don’t go where you think they will go.
If you are young you might be thinking that you don’t have to worry about paying taxes now because you will be retired when the time comes to start paying them. That is true, but retirement is just another form of payment! You will have to pay taxes on your Social Security checks and if you live in New Jersey or California or other states that tax their citizens on retirement income, then guess what? You will still be paying taxes even when you are retired.
It is said that the Canadian government has a computer on its desk that can read your mind and assess your taxes on the spot. This is an exaggeration, but not by much. The Canadian government has a computer on its desk that can assess your taxes on the spot, and then if it thinks you’re cheating it can read your mind and punish you.
You might think this makes tax cheating pointless. But it doesn’t. In fact it is probably more profitable to cheat at income tax than at any other kind of crime. It is so profitable, in fact, that the government doesn’t really care whether you report all your taxable income or not; it would rather have some cheaters than none at all.
Have you ever wondered why it’s so expensive to live in the United States? It’s because of all the taxes. The government takes half or more of your earnings, and if you find a way to keep some of it, they’ll take that too.
That would be bad enough, but what makes it worse is that much of this money goes to pay interest on loans the government has made from itself, by printing dollars. In effect, Americans who work for a living make interest payments to themselves on money they don’t even have.
This is not as crazy as it sounds. If you buy a bond or a CD from a bank, you are lending money to the bank, and the bank pays you interest on top of returning your original deposit. This kind of lending-to-yourself is called fractional reserve banking, and it is how banks make money. The Federal Reserve system works the same way: when you put money in your checking account, that money becomes available for banks to lend out at interest.
Okay so far?