Keep Taxes in Perspective

Years ago we owned a German shepherd. He was a big dog with a huge strong tail. When he got really excited his whole body would wag with that tail, and little children who got in the way would go flying. Watching that dog we sometimes wondered which end of his body was actually doing the wagging.

Last week a client came storming into my office and declared, “I would like to file a formal complaint and I want you to mention it in your next article.” I was a bit taken back and asked what her concern was. “You made me too much money last year and now I have to pay more taxes and I am not happy about it,” she said. Then she smiled. Her humor led to a great discussion about taxes and how sometimes people dislike them so much that they allow tax concerns to drive investment decisions. Like my dog, sometimes the tax tail appears to be doing the wagging.

It is understandable why people would dislike paying taxes. The taxman does little to help us when times are tough. He isn’t there when we struggle to pay bills. He doesn’t help businesses in the early years as they cling each day to survival. But as soon as the balance sheet turns green and there are profits to be had, he suddenly appears with a big smile, his arm around our shoulder, and his hand in our pocket taking his “share.” And it isn’t like he has a reputation for wisely spending what he takes from our hard earned money. With such a partner as that, it is easy to see why people dislike writing him that check.

During the past two years, a strong investment market combined with higher tax rates have made tax time unusually challenging. I have heard more than a few people gripe about what they are having to pay. One lady in particular actually asked me to move her money to where it wouldn’t earn anything so that she would not have to pay any more taxes. She was serious. Her dislike for taxes was so great, she was willing to forego her share of the profits to avoid giving the taxman his. While talking to her I kept thinking about that dog.

I include myself in that list of tax complainers. Last summer I was sounding off to my big city CPA brother about how much the government was taking. Finally he said, “Look at your lifestyle, your freedom, the great area you live in, and the opportunities for education and advancement that you and your kids enjoy – and then pay the taxes and stop whining.”

Yes, we all like to complain about taxes. Everyone I know thinks they pay too much. In our efforts to minimize taxes however, investors sometimes make good tax decisions that wind up being poor investment decisions. Let us remember that taxes are an important consideration in investing, but taxes are the tail, and your investments are the dog. Be careful which end is doing the wagging.