Written by Steven Hansen
This past week I had a discussion with my daughter concerning investment for a business venture. She put together a big spreadsheet showing how much could be made.
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My response was: Did you consider you were spending after tax monies for the investment, and the income would be taxable at the highest Federal tax rate (as it would be on top of existing income) combined with self employment tax? And did she realize that this did not include state taxes? The government would easily take half of her profit for this particular business venture. Yes, the venture would likely make money – but much less after-tax income than she was expecting. On top of that, this particular venture could not be scaled up to increase income.
There is little incentive to pursue many business ideas. Think about it – most small businesses fail because the after-tax income is significantly less than anticipated.
The average Joe hands over 20% of his pay to the federal government, between 5% and 10% to their state governments for income taxes – and another 5% to 10% to their state governments for sales taxes when he spends the after-income-tax money.
An interesting assertion from the American Monetary Institute‘s Facebook page [you can click on the image below to play the video]:
What is rent seeking?
Rentier capitalism is a Marxist term currently used to describe the belief in economic practices of monopolization of access to any (physical, financial, intellectual, etc.) kind of property, and gaining significant amounts of profit without contribution to society. – Wikipedia
I have difficulty getting getting to the 50% of national income. The table below uses after tax dollars.
| total | rental units | owned residences | |
| home ownership rate | 36.4 % | 63.6 % | |
| number of households | 125,819,000 | 45,798,116 | 80,020,884 |
| median home rental price per month | $1416 | ||
| mortgage debt outstanding | $11,544 billion | ||
| rent paid per year / residence mortgages | $780 billion | $700 billion | |
| average home mortgage payment | $1,030* | ||
| average property tax collected per month | $180 | ||
| percent of national income | > 9.6 % ?? | 4.5 % | 5.1 % |
* author’s calculations based on the average residential loan at 5% compounded with 70.7% of all homes having a mortgage
Even in the worst case where half your money was taken by taxes – you would need less than 20% of one’s gross income for rent. Of course, I did not consider the hidden rent portion of the goods and services prices one pays. And I also did not consider the broader definition of rentier income which includes all forms of passive income, inferred from the Merriam-Webster definition of rentier: “a person who lives on income from property or securities“.
Considering this latter definition, how does one distinguish between (1) a person who collects rents from a property they own (with or without a mortgage) that they manage and maintain and (2) a person who collects rent from properties that are managed and maintained by someone else (investing in a syndicate or a REIT, for example). Is the second person a rentier and the first person not?
Regardless of what definition is used and whether or not rent seeking is nearly 50% of national income under any definition, this is an interesting discussion and food for thought. For example, you might start an ideological war by asking the question: Should income from active investing be tax-favored over income from passive investing?
Other Economic News this Week:
The Econintersect Economic Index for July 2017 continues to forecast strengthening economic fundamentals – with the index showing normal growth for the third month in a row. Six-month employment growth forecast indicates modest improvement in the rate of growth.
Bankruptcies this Week from bankruptcydata.com: Quadrant 4 System, Privately-held True Religion Apparel, Cecil Bancorp
