Life Insurance and Taxes

This blog post is a continuation of a 7 part series on life insurance. You can find the first post here: http://www.your-insurance-experts.com/why-get-life-insurance-part-1/

Life Insurance Sniper Two – Taxation

Teachers, fire fighters, police officers, and the roads they drive on are necessary to all of us if we want a learned citizenry and safe communities to raise our children. Our tax dollars, when used properly, significantly makes our lives more pleasant. However, history has shown that needs have a tendency to transform into wants as economies become more industrialized. If you feed a dog steak and chicken, then try to feed it dry dog food afterward, your best friend will become your worst nightmare. Similarly, we have become accustomed to a certain standard of living that is well beyond our means. If politicians even talk about taking steps to take our steak and chicken away, they know that their career in politics will end abruptly. As a result, they tend to do what is popular as opposed to what is best.

Those of us who complain about high taxes in America and claim that this country is headed toward socialism needs a brief lesson on the history of the marginal tax rates. As people earn more, they are taxed at a higher rate. Here is a snapshot of the marginal tax rate in America:

  • 1918 (During WWI) – 77 percent
  • 1939 (During Great Depression) – 75 percent
  • 1944 (During WWII) – 94 percent
  • 1952 (Baby Boom Expansion) – 92 percent

It’s important to note that a person who made $200,000 in 1944 did not pay $188,000 in taxes. Remember, we are talking about “marginal” tax rates. The marginal tax rate is the top rate of income tax charged to individuals on their last dollar of earnings. So in 1952, for example, when the top marginal tax rate was 92 percent, that was the tax rate owed on a person’s income over $300,000. That person would owe 20 percent on the first $2,000 of income; 21 percent on the next $2,000 in income; 24 percent on the next $2,000 and graduated up to the highest rate. A person making $400,000 in 1944 would owe $191,411 (47.9%) of their income in federal taxes.

One cannot argue that war creates jobs for the defense industry and military personnel, but it also places an enormous financial burden on tax payers. During the first two world wars, the United States government ran an aggressive campaign to get private investors to invest in government bonds since they knew taxes alone could not finance the war. The following is a breakdown of the cost of the three of the most expensive wars in US history:

  • WWI – $32 billion – (roughly $471.8 billion in today’s dollars)
  • WWII – $304 billion (roughly $3 Trillion in today’s dollars)
  • Iraq, Pakistan, Afghanistan $3.2 Trillion

During each WWI and WWII, the marginal tax rate increased significantly to help finance them. Although the wars in Iraq, Pakistan, and Afghanistan were very expensive, the marginal tax rate did not increase to cover the increased debt. As we examine the marginal tax rate and its connection to war, it is evident that the highest marginal tax rates in history occurred as a result of war. Why did the marginal tax rate stay relatively level during these wars?

I would like the marginal tax rate to stay low because that means less money out of my pocket. That said, I would also like world peace and harmony among all nations so there is no need for war, but unfortunately we cannot have everything we want. As the nation’s debt keeps getting pushed further and further into the future, it keeps growing like a cancer. We are going to be forced to have surgery, which will hurt really bad and it will set us back for a while. The only other alternative is to let the cancer continue to grow. If that is in fact, the case, this malignant financial cancer will eventually take over and then we will not be able to do anything about it.

Before we discuss a solution and of course an action, we must identify life insurance third and fourth snipers: Instant Gratification and Procrastination.