Saturday, November 27, 2010

The Real Cost Of Taxes

A friend and I were discussing the extremely high taxes in Maine (Maine has the highest taxes per capita of any state). Normally, I try to avoid such discussions, particularly because they are such a sore spot with me. Typically, the states with the highest taxes have the least to show for it. They have bad roads, old bridges, few worthwhile services. It seems the more money the tax-and-spend crowd takes, they less we get for it. Just across the border, in New Hampshire, there are very few taxes. Yet NH has good roads, bridges, schools and many services.

Back to the point of this missive - the REAL cost of taxes. My friend said, "What's the big deal? You must make over $200,000 a year. What's $10,000 or so compared to that? It's nothing!"

Of course, I could have stopped him right there by saying, "OK, George, if $10,000 is nothing, how about paying it for me. After all, what's 'nothing' between friends?" But I opted for something more substantial.

I showed George how money, earning 10% per year, would double every 7 years. "So what", was his response. I then told him that if I were able to keep that $10,000, I could invest it, and double it every 7 years. In 28 years it would accumulate to $160,000. Multiply that by each year that Maine takes that $10K (28 years in this case), and before you know it, your family's future has been deprived of millions of dollars over time.

Let's say a person only earns $80K per year, and their state taxes them a paltry 5%. That person pays $4,000/year. If this begins at age 21 until retirement at 65, the state has taken a total of $176,000. That, alone, is a healthy sum. But if the taxpayer had invested that at an average return of 10%, that $176,000 would have grown to $1,770,370 in just the first 40 years.

That individual, paying his state $4,000 per year, loses close to two million dollars over the course of his working life.

And that, George, is the REAL cost of taxes. Every $1,000 a person pays in taxes is over $45,000 lost in 40 years. More important, this same thing goes for money a person spends today. For every $1000 you spend unnecessarily this year, your net worth could be decreasing by $45,000 over your working life. Buy a $5,000 snowmobile, it costs you $225,000 over your working life. Buy an $80,000 Mercedes instead of a $25,000 Ford, and it costs you almost 2.5 million. That certainly is one expensive set of wheels! Think about that the next time you are tempted to spend money unnecessarily...


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