Which tax break is best for you?
Feb 27, 2017 12:17PM
● By Neighbors Magazines
by Steve Ciaccio, MBA, CPA, CFP®
There is talk in Washington about the possibility of lowering taxes. Which type of tax break would be best for you? Considering two simple examples can help answer this question.
You have likely heard of bubble up and trickle down. They are simple concepts with the potential to have a significant impact on our economy if the government gives a tax break. With bubble up, the government gives tax breaks to people with lower and middle incomes. Those people often use the tax savings to purchase things like clothes, cars, home improvements, and many other items. Buying those items creates profits for the local economy as well as the companies that manufacture those items. In a sense, the benefit starts with the lower and middle income classes and “bubbles up” to large businesses.
With trickle down, the government gives tax breaks to companies so that they will invest in new manufacturing facilities or office buildings, etc. The companies purchase materials and hire people to build and operate the facilities. Those suppliers and workers benefit and from the companies’ tax break and also use their new income to buy goods and services. So, the tax break given to the companies eventually “trickles down” to people in the lower to middle income brackets.
Which is best for you? If you pay income taxes and receive an immediate benefit of having more money in your wallet from a larger tax refund check or less withholding from your paycheck, it might feel better than waiting for the benefit of someone else’s tax break to eventually reach you. If you are unemployed and looking for work, the trickle down effect might create a job for you more quickly than the other scenario. How you are impacted and which one is best for you depends on your personal circumstances. The tax reform that is currently being discussed in Washington seems to include both some bubble up and some trickle down.
Trickling water and rising bubbles both create ripples in the pool. Each of the ripples might move back and forth across the pool several times. Let’s say that you have $30 to spend. You spend that $30 on a haircut or hair style. Then, the barber or hair stylist uses the $30 to purchase fruits and other goods at the local farmer’s market. The farmer turns around and spends the $30 at a local restaurant. In this very simple example, the $30 that was placed into the economy was used three times and had a triple effect on the economy. The technical word for this effect is called the velocity of money. In this example, the $30 has a velocity of three with a total of $90 added to domestic commerce.
In reality, some of the money from the transactions in the above example would normally ripple back to the federal, state, and local governments in the form of various taxes. Some might end up in a savings account. Also, in a real situation, some foreign made products would possibly be purchased, thus rippling some of the benefit to other countries as well. Overall, the effect of lowering taxes can sometimes have a good effect on the economy. How the government would adjust spending or fully recover the reduced taxes could be the subject for another article.
Understanding these concepts can strengthen the base of knowledge that you use for many decisions that you make throughout your life. Knowledge and the ability to use it can often give you a firmer control of your situation.
All the best to you!
Steve Ciaccio, MBA, Certified Public Accountant, CERTIFIED FINANCIAL PLANNERTM is the founder of Ciaccio Wealth Management, Ltd., located at 232 S. Batavia Ave., Batavia. He can be reached at 630-454-4599, Steve.Ciaccio@LPL.com. The opinions voiced in this article are for general information only and are not intended to provide specific investment or tax advice or recommendations for any individual or business.
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. Copyright Steve Ciaccio 2017