Today I’d like to talk about taxes. It’s a topic that often receives little attention in our community even though it is an integral part of our lives, especially if you’re trying to achieve financial independence like most of us are. I know that taxation is a tricky issue for many of you, mainly among my Northern-American and UK readership, but hear me out why I enjoy paying taxes.
Now, don’t think that I hand over a large chunk of my income and investing returns to the tax man with a smile as big as the Cheshire Cat, absolutely not. Having your paycheck cut in half isn’t any more fun for me than it is for you. However, I’ve shown before that facing exuberant taxes doesn’t matter all that much in the grand scheme of financial independence. Yet many of my readers constantly point out the high tax burden I face.
Dividend Gremlin recently mentioned that “those taxes […] are brutal“, a view that Dividend Drive also took in the comment section of my latest dividend income report: “The tax cost is pretty painful.” Canadian investor Tawcan agreed with the other commenters too by stating that “the 25% income tax [on dividends] gotta hurt“. And they’re right, it hurts my performance quite a bit.
That’s probably one of the reasons why I receive heaps of e-mails from European investors asking me what they should do to reduce their tax burden. Many European countries don’t offer tax-advantaged or tax-deferred accounts like Canada, the United Kingdom, or the United States do, so we’re left to our own devices on the old continent.
What’s weird though, is how many of the people that message me view taxation as an absolute evil. They’re unnecessary, they don’t provide citizenry with any real value, and they’re only there to pay for an excessive, even obese public administration. The general train of thought seems to be in line with one of Winston Churchill’s more famous quotes:
We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.
Against the socialist and communist ideals of the time, Churchill’s words make a lot of sense, yet there seems to be a lingering sentiment of what he meant even today. I believe that even though a nation definitely can’t tax itself into prosperity, it can use taxes to redistribute wealth and thus increase overall prosperity by providing more people the chance to climb the social ladder.
That’s exactly what happened in the Western-European welfare state since the end of the second World War. Governments used redistributive policies to build a social safety net and to bring health care to the masses. My own country is the best example of this phenomenon. Yes, I pay a lot of taxes, but I also receive a lot in return, even though I might not need all government services at this point in time.
This thinking closely resembles the ideas behind a speech on the topic of tax evasion that Franklin D. Roosevelt gave in 1937:
Mr. Justice [Oliver Wendell] Holmes said “Taxes are what we pay for civilized society.” Too many indiduals, however, want the civilization at a discount.
With just one sentence Roosevelt illustrates what is at the core of the problem: each individual want as much (civilization) as possible for as little (taxes) as possible. And that’s a fair point to make, because efficient usage of government funds is essential to a modern society. However, it doesn’t mean taxes and your nation’s tax authority are the devil.
You should be happy that you enjoy the privilege of taxation. Even the American revolution is built on this principle with its “no taxation without representation” mantra. You now get to enjoy a well-functioning and warm society in return for contributing to it through taxes. Being in a position to give back to society because you are well-off or even wealthy in some way or another is a beautiful position to be in – it’s quite possibly the best first world problem.
A couple of weeks ago The Frugalwoods household wrote a very humble and down-to-earth post on what they believe is the privilege of pursuing financial independence. Just like being able to seek financial independence is a privilege, paying taxes is a privilege. If you enjoy financial freedom, you might as well enjoy taxes because they’re the result of the same root cause: you enjoy a good life.
Most countries even built their tax system based on this principle by making taxes progressive. The more you make or own, the more you must contribute to the national income. People who have nothing contribute very little or nothing at all, but that’s not a good position to be in. Would you rather not have anything? I don’t.
Of course, there’s no reason to just throw your money out of the window or at your government. There’s no shame in trying to legally optimize your taxes as much as possible. Those optimization routes are there for a reason. Furthermore, I’m the first to admit that I buy the British shares of Unilever (LON:ULVR or AMS:UNA) instead of the Dutch ones simply because I don’t want to pay the 15% foreign withholding tax in the Netherlands.
However, when there’s no other option than to simply pay taxes, you should do so happily. You are fortunate enough to contribute to society and civilization. Your progress towards financial independence might slow down a little, but maybe there will be a day that you’re happy the government services that you payed for all these years are there when you need them.
Oh, and before I forget, I am an overly motivated civil servant, so this article obviously has “bias” written all over it. I nevertheless hope that you see where I’m coming from and that you won’t mind filling out your tax form next time it lands in your mailbox. Do you enjoy paying taxes?