Interest rates and taxes
A thought occurred to me today. The redistribution of wealth due to direct taxation and spending really doesn't matter as much as the redistribution related factors in the rules of society themselves.
Really, one of the most powerful observations is just how effective we can be at maintaining things a certain way. I think it's probably unsurprising that a certain group can be systematically held in poverty indefinitely. You just need a set of rules that can accomplish that. Rules are cheap.
I wanted to do the depreciation and effective tax rate thing. Assume that you're paying capital gains. So you start off with a certain value, and in the extreme just assume that you're paying a certain fraction of the final value regardless of principle. You have two rates, that of inflation and the real return on your investment. Your final value before tax will then be:
P*(1+r1+r2)^n
You will pay a fixed tax rate on this, meaning a fraction of the value. So you'll get:
P*e*(1+r1+r2)^n
But this is pointless to look at. We really want to look at the real return as opposed to the nominal return. Looking at just the final value we have this:
P*e*(1+r1+r2)^n/(1+r1)^n = P*e*(1+r2/(1+r1))^n
The first question is if your future value is greater than your present value. What set of assumptions could cause this?
F=P
P*e*(1+r2/(1+r1))^n = P
1+r2/(1+r1) = e^(-1/n)
r2 > (e^(-1/n) - 1) * (1+r1)
This is the breakeven rate of return that you need. If n goes to infinity, then you need only slightly more than 0% return on your capital. If the time frame is 0, then you need infinite return rate.
Really, one of the most powerful observations is just how effective we can be at maintaining things a certain way. I think it's probably unsurprising that a certain group can be systematically held in poverty indefinitely. You just need a set of rules that can accomplish that. Rules are cheap.
I wanted to do the depreciation and effective tax rate thing. Assume that you're paying capital gains. So you start off with a certain value, and in the extreme just assume that you're paying a certain fraction of the final value regardless of principle. You have two rates, that of inflation and the real return on your investment. Your final value before tax will then be:
P*(1+r1+r2)^n
You will pay a fixed tax rate on this, meaning a fraction of the value. So you'll get:
P*e*(1+r1+r2)^n
But this is pointless to look at. We really want to look at the real return as opposed to the nominal return. Looking at just the final value we have this:
P*e*(1+r1+r2)^n/(1+r1)^n = P*e*(1+r2/(1+r1))^n
The first question is if your future value is greater than your present value. What set of assumptions could cause this?
F=P
P*e*(1+r2/(1+r1))^n = P
1+r2/(1+r1) = e^(-1/n)
r2 > (e^(-1/n) - 1) * (1+r1)
This is the breakeven rate of return that you need. If n goes to infinity, then you need only slightly more than 0% return on your capital. If the time frame is 0, then you need infinite return rate.