You Need a PHD in Economics to be this Stupid - Part I
I think I know why the richest country in the world has their economy in the toilet. It might have something to do with the fact that their economists are, well, incredibly stupid.
It starts with Mr. Greg Mankiw; who is sadly actually teaching children about money.
The Flawed Example
First of all Mankiw seems to think you pay every type of tax on every dollar you earn. He gives the example of a $1 yearly income… to make his math easier or something.
First, I pay the combined income and payroll tax on the dollar earned. Second, I pay the corporate tax rate while the money is invested in a firm. Third, I pay the dividend and capital gains rate as I receive that return. And fourth, I pay the estate tax when I leave what has accumulated to my kids.
See Mankiw lives in a world where apparently you are given your salary with no taxes taken off in payroll so you can place 100% of it into random investments. Finally you manage to live your life spending absolutely nothing until you die, which is of course after your spouse kicks the bucket and apply the “death” tax to all this money that you have earned.
I have a real problem with this simplification issue because it creates a situation that is highly misleading. As Mankiw asserts that he will loose 83% of everything under McCain and 93% of everything under Obama.
Let’s see how these numbers really suss out.
Who is the kind of person who is paying all of these taxes?
Well first of all you have to be someone who is making $357,701 a year on payroll to qualify for the highest income tax. Yeah I bet you already feel sorry for the poor bastard. They must be recieving $32,551 a year or over in capital gains and or dividends. They must also be a corporation that generates more than 10 million dollars, more on that one later.
So lets make this really easy for Greg the Professor, he’s not so smart so he never makes any write-offs or expenses, and he’s a bit of an ass so he certainly never donates to charities. I like simpler numbers too, but I also like them rooted in reality. Let’s say Greg the Professor makes $360,000 dollars a year on payroll and to make it simple Greg only has stocks and they pay him $35,000 a year before taxes. So combined income that is $395,000 before taxes.
The Math
Alright so under current conditions, Greg will pay 35% in income tax, leaving him with a paltry $234,000 every year; poor thing. On his stock investments returning $35,000 he will actually pocket $29,750. Combined take-home equals $263,750. Now of course to follow the Mankiw example professor Greg can never buy anything with this money and never invest anymore than he already has. Also Greg never plans to retire as he works for the rest of his 35 years. At the end of this life he will have accumulated $9,231,250.
Now if Greg were a typical male his wife* would inherit all of his property holdings without any interference from the government, but by sheer will power, he has outlived her. We don’t know how many kids he has but let’s assume he’s pretty much the statistical average with two and they both stayed in his favour. So he gives the 50% or $4,615,625 to each. This qualifies for the highest estate tax rate of 45%, however the estate tax is not just a simple rate. First they pay a variable tax of $555,800 for the first 1,500,000 and then 45% of everything thereafter. Not surprisingly Mankiw glosses over these little variations. After all is said and done each child will walk away with $2,346,231 or $4,692,462.50 total.
Now if Greg the Professor never paid any taxes he would be in possession of $13,825,000 at the end of his life, now you can certainly see that Mankiw is way off. My math grades were far from spectacular but I can just look at those numbers and see that you aren’t losing 80% or more of your money to the government. Greg’s children will receive 34% of Greg’s life earnings in this super simple model. No lie 66% making it’s way to the government is hefty, but also a lot less then the 83% under Mankiw’s idea of the McCain plan. Add to the fact that McCain plans to lower the Estate Tax to less than half than it’s current value and you can see the numbers are definitely skewed.
What Do You Mean He’s a Corporation ?
The main reason for these extraordinarily ridiculous numbers is the Greg is double taxing himself both the Corporate tax and the Capital gains tax on any of his investment earnings. This double taxation on the money does exist but placing the “burden” of both on the investor is again, disingenuous. The corporation is the one responsible for paying that tax and then it is divided up into shareholder possessions. Honestly I won’t argue either way whether this “double taxation” is fair or unfair; but you can’t remove this tax off of your returns when you are not the one paying the tax.
*Women tend to outlive men what can I say. Also I have to say wife because Greg is a man and this exemption only applies to “marriages”.
Similar Posts:
