Thursday, February 15, 2007

Tax Cuts (don't) Make You Rich!

The Wealth Gap is tearing this nation apart! The government has got to do something about it. We are on the verge of class warfare with people falling on each other in the streets like wild animals. Joe Lunchbucket is going to beat Mortimer Whitecollar to death with a crowbar any minute now. For the love of God, we've got to change the tax code to deal with this!

I did a little experiment with Excel. I played around with 6 simplified scenarios. The first set is the wealth accumulation of a tradesman, Joe Lunchbucket. Joe gets a job at age 18 and makes $20K. His expenses are the same. His income rises at 4% and his expenses at 2%. He then either gets married at 22 or not to a tradeswoman who works outside the house and then either gets divorced or not at age 35. If he marries, they have two kids and their expenses rise commensurately. Here's what their accumulated wealth as a function of age looks like. Click on the image for a larger version.

Here are the charts for Mortimer Whitecollar. Mortimer gets a BA and enters the workforce at age 22. He starts at $60K. He has the same growth and constraints as Joe.

What happens when you get tax cuts? How about tax increases? Well, move Joe's graph up or down by a couple hundred bucks a year. Move Mortimer's up or down by a couple of thousand.

Whoop de do.

David Wessel, writing in the Wall Street Journal, has an interesting column on the effect of the tax cuts on the Wealth Gap. If you ignore all other effects, the tax cuts make a big difference. If you look at the real world, they don't.

Politicians want to seem like they have some kind of major influence on your lives. They debate and posture and pose and blather endlessly about how they will get the country moving again or their opponents will bring about a new Dark Ages. Short of a Hugo Chavez-style socialist implosion, they really don't have much of an effect at all.

In terms of the Wealth Gap, you can't change the tax code to eliminate the effects of education and divorce. Divorce and education have million to multi-million dollar effects on net worth. Tax cuts are orders of magnitude less.

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