Old Order Amish & technology?

[Ken]

None of that changes the amount of payroll, sales, or property taxes that poor people owe. Even by one cent.

As I just documented, they don’t owe 1¢.

No, they still owe every dime of payroll taxes (FICA, Medicaid etc.) and they still owe sales taxes on every taxable item they purchase. And direct or indirect property tax payments. They just simply get back more in Federal benefits than they pay in Federal income taxes.

The same exact thing can be said for thousands of corn, soybean, wheat, rice, and cotton farmers in this country who get back more in Federal farm subsidies than they pay in Federal taxes and wind up every year with a big check from the government. Or any of millions of other American citizens and corporations who receive more in government benefits than they pay in taxes. Including large numbers of extremely wealthy people as well.

None of this is even new. From Catch-22, written in the 1950s:

“Major Major's father was a sober God-fearing man whose idea of a good joke was to lie about his age. He was a long-limbed farmer, a God-fearing, freedom-loving, law-abiding rugged individualist who held that federal aid to anyone but farmers was creeping socialism. He advocated thrift and hard work and disapproved of loose women who turned him down. His specialty was alfalfa, and he made a good thing out of not growing any. The government paid him well for every bushel of alfalfa he did not grow. The more alfalfa he did not grow, the more money the government gave him, and he spent every penny he didn't earn on new land to increase the amount of alfalfa he did not produce. Major Major's father worked without rest at not growing alfalfa. On long winter evenings he remained indoors and did not mend harness, and he sprang out of bed at the crack of noon every day just to make certain that the chores would not be done. He invested in land wisely and soon was not growing more alfalfa than any other man in the county. Neighbors sought him out for advice on all subjects, for he had made much money and was therefore wise. “As ye sow, so shall ye reap,” he counseled one and all, and everyone said, “Amen.”

[Josh]

I’ll repeat myself.

When you get more back on your federal tax return then you pay in every tax for the entire year… you aren’t paying any taxes.

[mike]

But that only applies to federal income tax. People also pay FICA, Medicare, State and local income taxes, sales taxes, and property taxes (directly or indirectly).

So does it or doesn’t it? I ask because it matters. I’m pretty sure that the federal tax credits I got back in those years were more than all the taxes of all kinds combined that I paid in, including state and local and property. There were years I got $7-10K in credits.

Even if you get a income tax refund due to the EITC (which is just a form of Federal welfare through the tax system) that doesn't affect all the other different taxes that you owe by one single penny. They are all still deducted from your paycheck.

The only point I was making, which Josh has illustrated, is that considering the total taxes and credits, all kinds, many low-income people pay NEGATIVE taxes. And especially considering other forms of welfare, what they pay in sales tax or real estate tax is far more than offset. They are being PAID to work and especially to have kids. The more you have, the more credits and benefits you get.

[Josh]

I don't actually believe this is a bad policy goal, but I do think we should be upfront about it that that is what is actually happening.

One good thing is that the current system really is generous to a two-parent married couple where dad works and mom stays at home. Benefits are a lot less generous for single moms (and basically are paid out of child support collected from the unmarried dad). Single people with no kids don't get a very good deal at all.

There is a certain irony that many Amish & Mennonites would make an absolute killing off of state benefits. First of all, many self-employed people and business owners "adjust" their income so they don't make too much. So instead of paying themselves a big bonus, they will buy a new piece of equipment, put up a new building, hire more employees, etc. instead of having a big bonus to pay a lot of taxes on.

And then many of them have large families - some very large. Government benefits are very generous to someone with 10 kids. In my state, the income threshold for Medicaid for a family with 10 kids is $106k household income.

Things like EBT/SNAP food stamps likewise go based on family size - same dollar amount regardless of how old (or young) the kid is. So a family of 10 kids would be getting about $2,400 a month in food stamps. That's a lot of groceries - especially for thrifty plain people, since SNAP can be used to buy fruit trees, seeds, and other things for growing food in a garden.

But most Amish and Mennonites shun such benefits and prefer to pay their own way. They don't need to be subsidised or be paid to have a large family. Nor do they need to be paid by the government to work and hold down a job.

[mike]

There is a certain irony that many Amish & Mennonites would make an absolute killing off of state benefits. First of all, many self-employed people and business owners "adjust" their income so they don't make too much. So instead of paying themselves a big bonus, they will buy a new piece of equipment, put up a new building, hire more employees, etc. instead of having a big bonus to pay a lot of taxes on.

I constantly buy new equipment, but not as a way to adjust income, but because I need it. My accountant decides whether it is best to Section 109 it as an deduction for that tax year, or whether to depreciate it over time. Overusing equipment purchases as a way to decrease tax liability for the year would be a definite red flag for an audit. Plus it only works in the short term anyway. What are you going to use for tax deductions next year? And it doesn't make sense to buy equipment ONLY as a tax deduction if it's not going to help your business in the long term. It seems like a stupid strategy. Now, does it ever make sense in a particularly profitable year to move up a big purchase you were going to make anyway? Maybe so.

[Josh]

I constantly buy new equipment, but not as a way to adjust income, but because I need it. My accountant decides whether it is best to Section 109 it as an deduction for that tax year, or whether to depreciate it over time. Overusing equipment purchases as a way to decrease tax liability for the year would be a definite red flag for an audit. Plus it only works in the short term anyway. What are you going to use for tax deductions next year? And it doesn't make sense to buy equipment ONLY as a tax deduction if it's not going to help your business in the long term. It seems like a stupid strategy. Now, does it ever make sense in a particularly profitable year to move up a big purchase you were going to make anyway? Maybe so.

Well, I would say the purchases certainly make sense - quite a few businesspeople I now buy a new truck every year or two. It is more convenient to have a new truck and then just sell your old one or trade it in after a year or two when it has some miles on it and not worry about repairs, rust, etc. But the tax benefits of doing so make it even more of a good idea.

When big profits roll in, that's when all the big purchases they've been wanting to make anyway happen. And yes, this is done on the advice of accountants who say what purchases are a good idea right now. But the net effect is that many farmers, etc. often don't have a gigantic income on paper - instead, they accumulate a great deal of capital. That's what the tax code incentivises them to do.

[mike]

I constantly buy new equipment, but not as a way to adjust income, but because I need it. My accountant decides whether it is best to Section 109 it as an deduction for that tax year, or whether to depreciate it over time. Overusing equipment purchases as a way to decrease tax liability for the year would be a definite red flag for an audit. Plus it only works in the short term anyway. What are you going to use for tax deductions next year? And it doesn't make sense to buy equipment ONLY as a tax deduction if it's not going to help your business in the long term. It seems like a stupid strategy. Now, does it ever make sense in a particularly profitable year to move up a big purchase you were going to make anyway? Maybe so.

Well, I would say the purchases certainly make sense - quite a few businesspeople I now buy a new truck every year or two. It is more convenient to have a new truck and then just sell your old one or trade it in after a year or two when it has some miles on it and not worry about repairs, rust, etc. But the tax benefits of doing so make it even more of a good idea.

When big profits roll in, that's when all the big purchases they've been wanting to make anyway happen. And yes, this is done on the advice of accountants who say what purchases are a good idea right now. But the net effect is that many farmers, etc. often don't have a gigantic income on paper - instead, they accumulate a great deal of capital. That's what the tax code incentivises them to do.

Because capital gains rates are less than income tax rates.

So these people that replace trucks every year or two are basically just doing it as a convenience because they are making enough money that they don't need to deal with the inconvenience of running older vehicles. I wear my vehicles out, and when I need one, I buy one and take the tax benefit in whatever way my accountant chooses. But I'm glad some people flip them after a couple years, because that's the kind of vehicle I will likely buy.

[Josh]

Because capital gains rates are less than income tax rates.

Yes, although I don't think anyone's trucks have been gaining in value...

So these people that replace trucks every year or two are basically just doing it as a convenience because they are making enough money that they don't need to deal with the inconvenience of running older vehicles. I wear my vehicles out, and when I need one, I buy one and take the tax benefit in whatever way my accountant chooses. But I'm glad some people flip them after a couple years, because that's the kind of vehicle I will likely buy.

These people have good and bad years. In the good years, they have a lot of extra income they don't want to get taxed on. So they go and replace their 1 or 2 year old vehicles. Since they do this regularly, they seem to be able to find very generous deals on both the tradein and the new vehicle, so it doesn't even cost them that much. If they have a bad year, they skip doing that this year.

Medical expenses are getting pretty brutal and it's not that hard to qualify for Medicaid (you'll recall my example that a family with income of $103k and 10 kids completely qualifies for Medicaid in my state; you can make quite a bit more and the children, but not parents, will qualify). I am aware of some farmers and other businessmen who "manage" their income to make sure they stay qualifying for state aid. This is entirely legal. But it does cause some resentment in the congregation where wageearners are scraping by, driving old vehicles, and not getting any state aid, whilst wealthy farmers are "poor" on paper because they're driving around new trucks every year.

To use my earlier example... a farmer with 4 kids who had an option of paying himself $13/hr or a $100k/yr salary would be in the same situation, disposable income and benefits wise, on either option. Yet if he pays himself $26k/yr instead of $100k/yr, that extra $74k can go to hiring more employees, buying more equipment, replacing old trucks and equipment, and so on. I've not heard of anyone being quite that cynical to set it that low, but the paragraph above I have certainly confirmed is happening.

[mike]

At some point having high amounts of revenue but low amounts of profit year after year is going to trigger an audit. Any good accountant will tell you that. And once you get in the crosshairs, be prepared for repeat audits.

I have a very laid back accountant whose philosophy and favorite word seems to be "reasonable." I hear of other businesses who struggle with audits and are constantly trying to figure out how to reduce their tax burden legally. One of my business acquaintances for instance went out and bought a souped-up brand new pickup truck which was basically for personal use, and added NOTHING to the value of his business, during 2020 when he made extra income due to the pandemic. I'm glad I make enough money to be able to pay a reasonable share of tax, and that's what I think I'm paying. A reasonable amount. Am I open to reasonable deductions? Sure. But I'm not stupid enough to try and make my income disappear on paper. Maybe if some of these business owners would put as much creative effort into their businesses as they do into avoiding taxes, they would make enough to be able to comfortably pay a reasonable tax rate.

[mike]

And here's another reason that reducing one's income on paper is unwise. If you ever want to sell your business, it may likely be less valuable to the buyer.