#economics #personal-finance

Cost Of Saving

There are may reasons people save far less than is optimal, but one is that our society is set up to discourage savings. Here are some of the ways this plays out:

  • The government taxes capital gains at rates up to 20%. The SP500 averages 8.1% real returns; when you add 2% inflation, that 20% tax rate is an implied wealth tax of ~2.0% per year.
  • Moreover, the government taxes corporate profits by about 17% on average Table 6.17D Table 6.18D. The (after-tax) P/E ratio is typically around 20, which implies a tax of "wealth" of ~1.0%.
  • All? welfare programs are means-tested on income and many are also likewise means-tested based on assets. For instance, 41 states have asset limits on TANF recipients less than $9,000 Do Limits on Family Assets Affect Participation in, Costs of TANF?. Housing vouchers and medicaid have no asset limits, but their definition of income includes asset income Exhibit 5-2: Assets Medicaid, which is similar.
  • Expected parental contribution to college for their child is 12% of their non-exempt assets per year. For a single child, that adds up to an effective one-time tax of ~40% assuming 4 years of college Federal Student Aid: Need Analysis Formulas and Expected Family Contribution.
  • If you are sued, the amount you pay typically increases dramatically with how much you own. This imposes an implied cost on wealth of around 0.01% Huneck.
Table 6.17D. Corporate Profits Before Tax by industry. The Bureau of Economic Analysis. https://apps.bea.gov/iTable/index_nipa.cfm Table 6.18D. Taxes on Corporate Profits by industry. The Bureau of Economic Analysis. https://apps.bea.gov/iTable/index_nipa.cfm Congressional Research Service. (2016). Federal Student Aid: Need Analysis Formulas and Expected Family Contribution. https://fas.org/sgp/crs/misc/R44503.pdf Pew Trust. (2016). Do Limits on Family Assets Affect Participation in, Costs of TANF?. https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2016/07/do-limits-on-family-assets-affect-participation-in-costs-of-tanf#:~:text=States'%20asset%20thresholds%20range%20from%20%241%2C000%20to%20%2410%2C000.&text=(See%20Figure%201.),limit%20between%20%243%2C000%20and%20%249%2C000. Department of Housing and Urban Development. Exhibit 5-2: Assets. https://www.hud.gov/sites/documents/DOC_35701.PDF Medicaid. Eligibility. https://www.medicaid.gov/medicaid/eligibility/index.html Huneck, J. (2020).Determining Umbrella Insurance Cost. https://www.trustedchoice.com/umbrella-insurance/coverage-rate-cost/