The key of course is that real wealth has been discovered and created.
The compounding exercise really demonstrates how the stealth tax works for the gov't.
e.g. create 5% inflation for 100 years. Say banks pay 5% interest on savings (or other taxable investments).
Start with 1,000,000 of family assets in 1909, a pretty good estate. Earnings taxed annually at the historically low rate of say 28%.
So the net income is 72% of 5%, or 3.6%. But that's a loss in real terms of 1.4% per year (the taxed amount).
So in 2009:
1 million dollars * (0.986) ^ 100 = 244,169 in 1909 dollars -- 24% as much.
In 2009 dollars, it looks like you are still doing amazingly well -- you have
1 million dollars * (1.036) ^ 100 = 34.35 million 2009 dollars.
Wow, 34 million dollars now, but you've lost 75% of your buying power! In real life, it's actually been worse as the dollar has lost about 94-95% of it's purchasing power since 1913.
In real life, taxes might have been deferred (rather than compounded annually) or they might have paid more tax overall.
This also explains why, in an old Dickens novel, if somebody had an income of 1000 Pounds per year, they could live like a king. |
