By Dennis O'Keefe on Apr 19, 2018

I had an interesting incident last weekend.  My son, William, was playing one of his video games on our PlayStation gaming system.  He had just received his allowance and wanted to buy some “upgrades” to his character.

In order to purchase upgrades, you need to buy some in-game tokens or coins and then use them within the game to purchase whatever you need; from weapons to vehicles to costumes to tools.  

We settled on spending $15 since he had just received his allowance, and we proceeded to buy coins in his account online.  There was no option to add $15 worth of coins so we added $9.99 worth and $4.99 worth – and the lesser purchase actually came with a free costume for his character.

A few minutes later, I received the receipts in my inbox for the purchases.   One charge of $9.99. And another for $5.31.

Hold it!  They charged me income tax on the transaction!

It was then that I recalled a change to the Sales Tax laws in Massachusetts several years ago.  The Commonwealth, being concerned they might not receive the pound of flesh if someone bought a game online versus in a store such as Wal-Mart or GameStop, decided to tax purchases through online gaming systems such as the PlayStation and Xbox.  

Strangely, the $9.99 transaction wasn’t taxed.

Why?  It turns out that the $9.99 purchase wasn’t really a purchase.  In the eyes of the Commonwealth, I was exchanging dollars for another currency, albeit a virtual currency only usable within the game William was playing.  

But the $4.99 purchase included a free costume, making it purchase of virtual “goods.” The free costume cost me 32 cents!
 

The whole experience got me thinking about the various taxes we are subject to and how complicated they can be.  We are currently in a very new and different federal income tax system.

I don’t watch cable news much, but what I do see from clips on Facebook and online is that there is a lot of misinformation and half-truth floating around regarding this latest tax reform.  I’m hoping I can dispel some myths, prepare you for your 2019 tax season and shine some light on aspects of the new law that will affect just about everybody.

I’m not going to take any time to discuss how this tax cut might affect the deficit.  Any tax cut, without a commensurate cut in spending, will lead to larger deficits and a larger national debt.  I think most of us believe there is a considerable amount of waste within government yet our politicians value their careers more than the financial success of the nation.  Spending reform is not an issue they prefer to tackle.

Corporate Income Tax Cut

There has been a considerable amount of rhetoric regarding the corporate income tax cut.  Depending on which cable news station you listen to, it is the economic panacea we’ve been waiting almost a decade for or the death knell of the US economy foisted on the backs of the working man.

The truth is somewhere in the middle.  

First let’s tackle the least important aspect, tax-wise, to this plan:  The Corporate Tax Cut. Again, if you listen to certain sources, this was done as some fat-cat move to help Trump’s buddies.

That just isn’t the truth.  

The US has been hindered by a high corporate tax for decades.  Thirty years ago, a 35% corporate tax bracket was the norm worldwide.  In the intervening years, virtually every single other country lowered their corporate tax rate in order to entice business to domicile in their country

Countless American jobs have migrated to foreign lands in the last ten years.  The reduction of the corporate tax rate was done to level the playing field for US corporations.

The second truth is:  Corporations don’t pay income taxes.  

“What???” you think.  “Of course they do!“

No.  They don’t.  Corporations don’t pay taxes.  In most cases, the shareholders of corporations. . . . . don’t pay the taxes either.  Customers pay income taxes.  

Think of it this way:  If McDonald’s was required to some sort of tax penalty that amounted to either $1 a share in reduced dividends or a 30-cent increase in the price of a Big Mac, what do you think management would do?

The same thing happens in reverse.  A reduction in taxes will lead to lower prices for consumers.

Sure, in the short run, shareholders may benefit from these tax reductions.  (And that includes you and me and just about every Ma and Pa Resident in America – when stocks go up, everyone’s net worth rises.)   Ultimately, competition will force either price reductions or will slow expected price increases. There is always a competitor that will try and beat you on price no matter who you are.  

The last truth regarding corporate income taxes is this:  Corporate income taxes account for about 9% of the revenue collected by the federal government.  Uncle Sam collects about $297 billion from corporations and about $2.7 trillion from individuals and families.  (fiscal 2017, Whitehouse.gov) While $297 billion is a lot of money, it is a small portion of federal collections.

That’s enough information in your brain for one week.  Next blog, we will talk about the changes to our individual income taxes and how we can save more money in 2018 and beyond.  

Thank you for your time this week.  If you have any questions or concerns, please don’t hesitate to email us at info@successfulmoney.com or call us at (800) 453-3209.  If you don’t already have a copy of my book, The Biggest Financial Mistakes Retirees Make, you can order it on Amazon or click here and we will get a copy out to you, free of charge!  

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This blog is the opinion of Successful Money Strategies, Inc. and is provided for informational purposes only and is not intended to provide any investment advice or service.  Statistics and other figures are accurate at the time of original publishing.  Any advice herein should not be acted upon without obtaining specific advice from a licensed professional regarding the readers own situation or concerns.  Always count your change.