Thursday, February 17, 2011

Financially Unfair

Life is financially unfair because the capital gains tax is so low and income taxes and social security taxes are relatively high. Warren buffet pays less than 18% in tax while I pay over a quarter. Not only is income tax where those without investments are hurt, and let's be serious no one has investments unless they make a decent living, but other taxes like gas and food taxes require a greater portion of poorer people's money.

For example, regarding food and gas take three people: A makes $2,000 a month, B makes $5,000 a month and C makes $20,000 a month. Each one drives the same number of miles each month but their cars are not as fuel efficient as each other's. A gets 30 mpg, B gets 25 mpg, and C gets 15 mpg. Assuming each one drives 1000 miles per month with a national gas tax rate of $0.184 per gallon and Wisconsin tax rate of $0.321 per gallon for a total of $0.505 per gallon then A pays $16.83, B pays $20.20, C pays $33.67 in gas tax each month. Percentage wise A pays 0.84%, B pays 0.40%, and C pays 0.17% of their monthly income to the gas tax.

Okay, I know there are problems with that example. No one has to drive. I am not figuring in the price of the gas or the car or any other factors. The point is that at the end of the month person A after paying for taxes, social security, gas, gas tax, food, food tax, electricity, gas, and water, is out a much larger percentage of the initial income than person B or C while having a more fuel efficient car.

You can only eat so much food. You can only drive so many miles. You can only take so many showers. As those daily costs become a smaller percentage of income increasing income tax rates do not really keep up. Even if they do keep the overall tax rate the same once a person becomes affluent enough and starts to make significant money from investments the capital gains tax takes over and the overall tax rate goes down again.

What does this mean? It means that you can make a whole lot of money. It also means that it is harder to save money when you start from the financial bottom. What advice do I have? Get 2-3 degrees in investment banking and go live on Manhattan for a decade.

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