Let's assume you are an everyday guy who has saved 10,000 and buys a savings bond paying 7% interest compounded annually. Your bond would be worth $19,671.51 after 10 years. Your taxes on capital gains of $9,671.51, if you live in Nebraska with 7% capital gains plus 15% federal, would be $2,127.73 leaving you a net gain of $7,543.78 in currency.
Now lets assume inflation (amount of money the federal reserve was creating for the bankers) was at 5% over those 10 years. The amount of money needed to buy the same goods as 10 years ago when you made your investment would be $16,288.95 in currency.
That reduces your actual gain in buying power to $3,382.57 in today's currency. If we subtract the capital gains taxes paid from the actual gain in buying power, your gain was only $1,254.83 and your actual capital gains tax rate was more like 63% on actual gains.
Meanwhile, the banks are receiving federal reserve notes BEFORE the inflation rolls down hill to the pool of existing currency. Is it any wonder the divide between mega-rich and the average person is growing?
Added 12/5/10
The Fed creates all bubbles and inevitable bursting of all of the bubbles, by manipulating money supply & interest rate <<< pass it on.
Although we are all debt slaves to the Federal Reserve's ability to inflate, ballooning student loans-not forgiven by bankruptcy-may violate the Constitution. Many young adults after college are working in virtual 'involuntary servitude' to pay off loans--a clear violation of the 13th amendment. Why are college loans not challenged?
If the Supreme court ruled college loans violated the 13th, at first, fewer would go to college but very quickly colleges would recognize that market forces could put them on the street unless they tighten their belts so tuition could drop. Profs would take fewer paid trips, double up in offices again, and teach more hours. Also, many skills previously learned in technical high schools, might return meaning fewer community colleges classes needed. Think of the productivity from two years of work rather than two years of classes.
Added 1/11/11 A video explanation of paper money.
Just want to understand your math here...
ReplyDeleteYour "actual gain in buying power... in today's currency" would be $9671, or $7543 net taxes. I think you meant to say in "10 years ago currency."
Another way to look at it is that inflation affects your real rate of return, in that RealReturn = NominalReturn - InflationRate. So in your example, the real rate of return is 7% - 5% = 2%.
And yes, you pay taxes on that 2% of real gain.
Invested Inflation
ReplyDelete10,000.00 10,000.00
1 700.00 10,700.00 500.00 10,500.00
2 749.00 11,449.00 525.00 11,025.00
3 801.43 12,250.43 551.25 11,576.25
4 857.53 13,107.96 578.81 12,155.06
5 917.56 14,025.52 607.75 12,762.82
6 981.79 15,007.30 638.14 13,400.96
7 1,050.51 16,057.81 670.05 14,071.00
8 1,124.05 17,181.86 703.55 14,774.55
9 1,202.73 18,384.59 738.73 15,513.28
10 1,286.92 19,671.51 775.66 16,288.95
Gain for taxes = 9,671.51 but a $10,000 car 10 years ago, now costs 16,288.95 so my gain in actual buying power was only 3,382.57
I'm not paying taxes on my real gain (buying power) which is only $3,382.
I think I'm with you now. You'd be taxed on the $9671 gain, yes. But is that subject to cap gains? I thought interest would be taxed like ordinary income.
ReplyDeleteBut in any case, yes. If that car you want to buy has risen at a steady 5%, then (9671 - tax_on_9671 - 6288) is your increase in buying power. Too bad it's not higher? Yup. Inflation hurts savers? Yup. Have to risk money to get real net returns? Yup.
I still don't understand the "banks get money first" argument, though I understand the "banks get money at essentially zero (for now) and loan it back to the gov't risk-free and get *rents* for that." That sucks.