The Insidious Impact Tax Has On Your Earning Potential
Tax Are The Number Tool Used To Keep People In Poverty
That is a pretty bold statement, but lets face it. Taxation is theft, otherwise it would be a voluntary payment. The only reason why governments get away with it is they have a monopoly on violence and will gladly put you in jail.
But how do taxes keep people in poverty?
By minimizing the effects of one of the worlds greatest powers, compound interest.
Compound Interest
Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest. Wiki
The power of compound interest come from earning more earnings from your prior earnings. This help you build that earnings tidal wave, Eventually you can be earning more in interest than your original investment amount.
This is a basic financial concept that I hope is still taught in schools, but I fear it may not be anymore. The higher the interest rate and the more frequent the compounding - the bigger the effect.
Magic Penny Example -
Lets start with the concept most of has heard at least once. Would you pick $1,000,000 USD or a penny that will double in value every day - for 31 days.
Most who hear this the first time - will assume incorrectly and pick the $1M, While the magic penny manages to reach over $10.7M on the 31st day. Impressive but nothing new.
Lets see how tax rates impact your earnings. The Chart will show rates for 10-15-25-35% Taxes on the Earnings Only!
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0% Tax $10.7M
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10% Tax $2.3M
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15% Tax $1M
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25% Tax $195k
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35% Tax $33k
Thoughts - Taxes Prevent Real Wealth Generation
Look at those numbers - they speak volumes to the impact taxation has on wealth creation. While the magic penny does not exist, no matter the time frame, this example will hold true for any rate of return or time period.
Lets look at an invest of $10,000 for 31 years with a 10% rate of return
This paints the same picture - at 35% tax rates, almost 2/3 of your earning potential is lost. The bigger your assumed rate of return and time period, the bigger the impact to your earning potential
Find Ways To Minimize taxation.
I know many in the crypto world are against paying taxes, I choose to pay my best effort of the taxes I owe. I am sure in a few years, when all blockchain data can be analyzed by a quantum computer, they can find my mistakes. Until then - I do my best to avoid taxes. Tax evasion is illegal, tax avoidance is prudent. Most of the tax code written is not what you owe, but how you can get out of owing it.
Using accounts that shelter your investments until you withdraw - will let you grow at the same rate, and only pay your taxes once. This allows the compound interest to work its magic, and while you will still pay a heft tax amount, it will be on the biggest number possible.
This is also why I am such of fan of accounts like Roth 401k, Roth IRA, HSA - where there is never a tax liability generated from your investment gains. Build the base as quickly as possible and then let the compounding work its magic.
sincerely, @cluelessinvestor - aka a random nobody on the internet spewing nonsense
This post NOT financial advise, it contains my personal opinion and experience and is intended for educational purposes. Perform your own research and analysis prior to making investment decisions.
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