7 ms·
Not just dreaming and fantasy, there's some actual numerical sleight-of-hand going on here. He's taking advantage of people's misunderstanding of compound inte
by CoreDumpling 16y ago
Not just dreaming and fantasy, there's some actual numerical sleight-of-hand going on here. He's taking advantage of people's misunderstanding of compound interest.
Exponential growth will ultimately trump all other linear factors, even if the exponent is small. And that's also what makes small differences in that exponent so important (hence why computer scientists go through great pains to reduce complexity of matrix operations from O(2^2.51) to O(2^2.36)). Even if the investment only earned 1% per year, he can just sock it away in a 100-year trust fund:
>>> 1000 * (1.01 ** 100)
2704.8138294215287
>>> 523 * (1.005 ** 100) * .45
387.54342961962465
BAM - 85% "marginal" tax rate.
Plus, he has deliberately framed his scenario to take the maximum hit from taxes at every step. Corporate tax eats into his dividends? OK - invest in a growth stock instead of an income stock, and pay capital gains taxes when realizing the profits instead. Estate taxes steal most of the money from his heirs? How about he write a check to the university on behalf of his grandkids -- Uncle Sam won't see a dime of that.
- mikeryan 16y agoSince his whole plan is predicated on giving the income to his kids, he could just gift them the $1,000 as soon as its made and it never gets hit with estate takes. He can now do 12 of these gigs a year ($12,000 a year is the max you can gift without declaring it) and pass it entirely onto his kids.
- pg 16y agoYou have to pay estate tax on gifts too. Otherwise rich people could avoid estate tax by giving their assets to their kids before they died.
- pingswept 16y agoI believe that is not the case for amounts below $13k. See http://www.nolo.com/legal-encyclopedia/article-30095.html http://www.nolo.com/legal-encyclopedia/article-30095.html A less comprehensible explanation is available from the IRS here: http://www.irs.gov/businesses/small/article/0,,id=108139,00.html http://www.irs.gov/businesses/small/article/0,,id=108139,00....
- pg 16y agoYes, there's an exemption. I'm talking about a marginal dollar, as he is.
- pingswept 16y agoIf by "he," you mean Mankiw, I agree. But I think you probably mean mikeryan. I don't think he was talking about a marginal dollar. His point was that the first $12k ($13k in 2010) gifted are taxed differently than dollars beyond that threshold. I suppose the real question is the relative importance of the behavior at the margin versus the behavior for the first dollar. For the ultra-rich, $13k is obviously irrelevant, but for someone near the $250k annual income threshold like Mankiw, I don't think it is. The present value of $12k per year given every year for 30 years is substantially larger than the same amount invested and then hit by estate tax at year 30.
- pg 16y agoI mean Mankiw.
- lotharbot 16y agoIt's $13k per person (giver and receiver) per year. Additionally, there's a $1 million lifetime exemption (for the giver) which is only cut into once you pass the $13k/year limit.
- ivankirigin 16y agoFun fact: that $13K limit can actually be a lot bigger. That is the limit from one person to another. Mom gives daughter $13K, mom gives son-in-law $13K, Mom gives kid #1 $13K, dad gives daughter... Not a good way to rid yourself of millions, obviously.
- deleted 16y ago[deleted]