Understanding Where Our Tax Dollars Go

 Budgeting, Taxes  17 Responses »
Jul 162012
 

What is the largest expense you have? For me, it’s taxes, which makes up about 30% of everything I make. As a democratic society we are not only responsible to pay our fair share of taxes, but we should also try to understand where our tax money goes.  Did you know the CRA (IRS equivalent) uses up 3% of all our tax money?  Before the next time you sit down with your accountant or pull up some tax software, have a look at these charts below showing where the federal government gets all their taxes from, and where they spend it on.

image source: creditcardscanada.ca

In today’s reality it’s common practice to want the best education for our kids and the best health care for our elderly parents, despite whether or not we have the ability to afford it or not. So if a family is already in debt and is living paycheck to paycheck, what can they do to maintain their style of living? They borrow more money of course and dig deeper into debt, just so they can pay for those services with the hope that their financial situation will get better in the future. Sounds familiar?

Canada is in a similar situation. This country is in debt. And instead of saving money each year to pay off that debt it chooses to borrow even more money to continue paying for all it’s important federal services. Our teachers and nurses are being paid by borrowed money (a loan) that every future tax payer is on the hook for. It’s a fine balance between doing what’s best for our people now, VS what’s best for the future. I would personally like to see a balanced federal budget and will gladly pay more taxes, or receive less social benefits, or some combination of both. But I know not everyone would be on board with that. Fortunately our financial situation hasn’t hit a point of no return yet. But if we continue to spend more than we make then eventually, if nothing is done about it, we might find ourselves facing the same challenges as Greece is right now. The United States also has their own financial difficulties.

The Double Irish

 Taxes  7 Responses »
Mar 142012
 

We often hear about wealthy individuals finding loop holes in the tax system by storing their money in offshore banks. Companies, as legal entities, also have tools to pay less taxes. The corporate tax rate in the US is 35%. But a lot of companies get away with a much lower rate. Below is a graph from focus.com explaining how it works.

Giant tech companies have huge influence in our political system and they hire oodles of talented lawyers and accountants, and compensates them very well to make sure the companies are saving as much money as they can in the long run. Canada’s corporate tax rate is usually below 30% depending on the province. And our government wants to lower it some more to encourage entrepreneurs to do businesses here, but now we know it’s not that simple. Corporations could still end up paying more taxes here than in the US despite our lower tax rate.

According to this bloomberg article, US companies now hold over $1.2 trillion in profits around the world, that’s $1,200,000,000,000. GE and Pfizer have $102 billion and $63 billion respectively (゜o゜) Companies like Apple, Google, and Microsoft have increased their accumulated overseas profits by more than 40% last year. This creates a bit of a dilemma. Companies have lots of money to innovate, to spend on R&D, and to create jobs inside the US (which is what everyone wants, including us Canadians.) But they don’t want to repatriate their offshore money back into the States, because they would be forced to pay the full corporate tax rate on worldwide profits, maximum being 35%. It’s similar to how I can use an RRSP (401K plan) to defer my taxes. There’s no point redeeming my RRSPs if I’m currently still working, saving, and in the highest tax bracket. Companies are the same way. They are making so much money right now the US stock market is hitting multi-year highs (+_+) 

There are lots of different opinions out there on how to improve the economy and lower unemployment. One particularly interesting idea is a tax holiday for companies to bring back some of their profits from lower-tax countries, without facing such a hefty tax penalty. Personally I would rather see this happen than another round of quantitative easing.  Why not make use of all that money sitting on the sidelines (^_^) 

  • R&D – Research and Development. Developing new ideas or products.
  • repatriate - Send something (money) back to it’s original country.

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Random Useless Fact: There are 2.3 billion internet users around the world.