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When is a tax not a tax? When the taxpayer receives a valuable asset in exchange for those taxes, or receives
a service for which he/she would otherwise have had to purchase. The most common example of taxes that are
not taxes are real estate taxes that fund public education in suburban school districts. Up to 75% of the bill may
cover educational costs. If you have children of school age, this eliminates the need to pay for private school
tuition. If you’re an empty nester or choose to use private schools, it’s a tax. You don’t avoid any expenses. It
all depends on your individual circumstances.
The same issue faces people when they make decisions to continue working. Are Social Security withholdings
a tax, or are they an investment in a retirement annuity? If you have a lot of confidence that your contributions
will be returned in the form of benefits with an adequate rate of return, then this is an investment. If not, they
are a tax. As with real estate taxes, this depends on your individual circumstances (to be explained later in this
Edward Prescott, our most recent Nobel Laureate in economics, clearly frames this issue. To summarize his
findings, if a government punishes workers with high marginal income tax rates, they respond by working less
or working in the underground economy. In France this is evidenced by short workweeks and long vacations.
In Italy, workers retreat to the underground economy. The net result is that participation in the labor force in
Europe is 2/3 that of the United States. This has potentially disastrous consequences for funding retirement