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A 90 Percent Tax???

28 Mar
Is it worth saving for the future?

Is it worth saving for the future?

Steve Landsburg, at his blog, tells a little fairy tale about taxes. His conclusion is that because some income gets taxed several times, a dollar earned today might be taxed at a rate of 95% before it gets used. A valid criticism of his parable is that it only applies to the uber-rich in the USA. Well, I decided to see how the fairy story would play out under different circumstances. Specifically,

  • Instead of taking place in the USA, the story below happens in Australia.
  • Instead of happening to one of the wealthiest of the wealthy, it happens to family on a mid-range income – a typical “Aussie Battler” as one Prime Minister Past was fond of saying.

So….

The fairy story :

One day, a man decides to do some extra work, to save up some money for his kids to inherit. He puts in some overtime, and earns an extra $1000. He uses this money to buy shares in a company. The shares earn a dividend of $50 (5%) per year. Over time, the dividend rises to $100, and so the share price also doubles. He sells the shares for $2000, and puts the money in the bank. When he passes on, his kids inherit this money. They buy back the shares, and enjoy (collectively) a nice dividend of $100 per year which they use to pay some bills and buy nice Christmas presents for the man’s grandchildren.

So much for fairy stories, what actually happens in real life for middle-income Australians?

One day, a man decides to do some extra work, to save up some money for his kids to inherit. He puts in some overtime, and earns an extra $1000. He’s taxed at a marginal rate of 37%, plus the extra income reduces his eligibility for the family tax benefit by $300. After counting all this, the $1000 extra earnings only puts an extra $330 in his pocket. He uses this money to buy shares in a company. The shares earn a dividend of $16.50 (5%) per year. Over time, the dividend rises to $33, and so the share price also doubles. He sells the shares for $660. He pays tax at 37% on $165 (half the capital gains), and again his family tax benefit is reduced by 30c in the dollar, or $49.50. This means the $660 only puts $605.55 in his pocket. He puts this money in the bank. When he passes on, his kids inherit this money. They buy back the shares, and enjoy (collectively) a nice dividend of $30.28 per year. This dividend, of course, is taxed (the government takes $11.20), and reduces their own family tax benefit (the government gives $9.08 less), so they end up with only $9.99 extra in their pocket. They use this to pay late penalties on their bills, and to buy nice Christmas cards for the man’s grandchildren.

How did $100 become $9.99? How is it that a middle-income “Aussie battlers” can suffer what is, in effect (if not in name), a tax rate of over 90%? Is this really how we think this group of people should be treated?

 

 

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