How Can We Prove a 15% Flat Tax is the Most Efficient?
Let’s use a Cash Flow Calculator from www.truthconcepts.com to tell the whole truth about what happens to an account when it gets taxed. We’ll put in $20 in 1913, the year the tax system started. We’ll show the account earning 20% per year. We can see below that the account has $798,784,476 (that’s $798 million) in it. This assumes no taxes or management fees were taken out during this time. If we adjusted the account for inflation, assuming a 4% annual rate, it would have $18,502,442 ($18 million) in it assuming no taxes or management fees. It’s interesting to note that this income tax was intended to be temporary when it started, was only at 8%, and affected only the upper income earners. The person who owned this account was in a 50% average tax bracket over those 96 years, using the table below as a guide. So, applying the 50% tax bracket to the $798 million account would cut it in half, right? NO, it brings it down to $188,247. Notice below in the government only gets $188,227. How is that? It’s due to the fact that taxes are predatory or confiscating in nature. Every time taxes are taken out of the account, those tax dollars can no longer earn the 20% rate of return the account is earning. This is also known as opportunity cost since the tax dollars lose the opportunity to earn interest. Now, let’s see what dropping the tax to 40% would do. Watch both the End of Year Account Value on the far right and the Tax Payment in red next to it to see how to increase both the owner of the account’s estate and the government’s take as well. Lowering taxes to 40% shows the owner at $1,061,598 and the government at $707,719. Lowering taxes to 30% shows the owner at $5,806,250 and the government at $2,448,384. Lowering taxes to 20% shows the owner at $30,831,664 and the government at $7,707,911. Lowering taxes to 10% shows the owner at $159,111,913 and the government at $17,679,099. Lowering taxes to 5% shows the owner at $357,715,937 and the government at $18,827,154 If we really want the government to get the most, we’ll try 6.65%. So we could surmise that if one is talking about 20% rates of return, a 6.65% tax bracket is the most efficient. According to our studies, if we are talking about a 9% rate of return, a 15% rate of taxation is the most efficient. So now that you know the whole truth about the matter, what do you do with this information? Focus on accounts that do not get eroded by taxes and/or implement strategies that mitigate the taxation on these types of accounts such as taking dividends, interest and capital gains in cash instead of re-investing them.