1.04.2009

A penny saved is two pennies earned

A penny saved is most decidedly not a penny earned. Thanks to the miracle of assrapedly high tax rates, it's almost two pennies.

Consider the marginal taxes of Joe, a middle-income earner (single making $34000+ or married making $68000+):

25% Federal income tax
6.2% Social Security tax
1.45% Medicare tax

Now put our unfortunate Joe in the socialist state of California, and add:

9.3% California income tax
1.1% State disability tax

That makes a marginal tax rate of 43.05%. It would be even worse if Joe was self-employed, having to pay both sides of Social Security and Medicare taxes, for a total marginal tax rate of 50.7%, but for now we'll assume his employer is eating that part.

Let's say Joe wants to buy a $100 pair of jeans. California sales tax is generally 7.75% to 8.25%, varying by county and city. So that $100 pair of jeans will cost Joe $108. And how much did Joe have to earn to take home that $108? The 43.05% marginal tax rate means Joe takes home 56.95% of his pay. $108 divided by 56.95% is $190, meaning Joe has to earn $190 to pay for a $100 pair of jeans. $100 saved is $190 earned.

Cut your spending by $100 a week, and it's equivalent to giving yourself at least a $150 per week raise, even if you're in a much better state than California. And in the coming depression, it's going to be a lot easier to cut your spending $100 than raise your income $150.

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