4 ms·

I think it's an exaggeration to say you'd be losing money after taxes.. it's still at least 3x, but point taken.

mlyle 3y ago
Say I open a 1 year CD at 5% interest with $100. Say inflation is 3%. I will get $5 of interest. The original $100 would be worth $103. I'd better pay less than $2 of taxes on that $5, or I'd be losing money in absolute terms. If my total marginal tax rate is 30%, then I'll pay $1.50 in taxes, and yield .5%; after 100 years then you'd have 1.6x the money. If my total marginal tax rate is 40% -- say 32% federal + 8% California-- then I'm breaking even. The same logic holds for longer term CDs, as you're paying taxes on interest accrued each year.
- kasey_junk 3y ago
  A 30% marginal tax rate across 100 years would be extremely abnormal as it implies you are mostly getting taxed at income tax rates at a very high rate.
  - mlyle 3y ago
    > getting taxed at income tax rates Interest is taxed at income tax rates. It is a pretty high rate; but people who are excited to lock up $100k for 100 years probably have high incomes. Not everyone can structure all of their earnings and other income as capital gains. For a single person in California, it's 24% + 9.3% at ~$89,000 per year, and 32% + 9.3% at ~$170k per year, and goes up from there. So, here: 2.86% average inflation for past 100 years. (10^(log(16.785)/100) = 1.0286...). 4.75% APR. At ~89k/year, APR-after-marginal-taxes in California is 3.26%; or a real yield of 0.4%. You'll have 1.9x the principal after 100 years. At $170k-single-equivalent/year, there's an after-marginal-tax yield of 2.78%, or an after inflation real yield of -.007%. After 100 years, you'll have about half the principal in real money.
    - kasey_junk 3y ago
      Presumably a 100 year cd would largely be used like an annuity, as a retirement vehicle. Which you’d expect to happen at low income tax levels. I suppose if you are the beneficiary of the cd gift you could be taxed at that rate but at that point you have lots of options including donating it to a dag and it kicking off tax advantages to you for years and years.

Say I open a 1 year CD at 5% interest with $100. Say inflation is 3%. I will get $5 of interest. The original $100 would be worth $103. I'd better pay less than $2 of taxes on that $5, or I'd be losing money in absolute terms. If my total marginal tax rate is 30%, then I'll pay $1.50 in taxes, and yield .5%; after 100 years then you'd have 1.6x the money. If my total marginal tax rate is 40% -- say 32% federal + 8% California-- then I'm breaking even. The same logic holds for longer term CDs, as you're paying taxes on interest accrued each year.

kasey_junk 3y ago
A 30% marginal tax rate across 100 years would be extremely abnormal as it implies you are mostly getting taxed at income tax rates at a very high rate.
- mlyle 3y ago
  > getting taxed at income tax rates Interest is taxed at income tax rates. It is a pretty high rate; but people who are excited to lock up $100k for 100 years probably have high incomes. Not everyone can structure all of their earnings and other income as capital gains. For a single person in California, it's 24% + 9.3% at ~$89,000 per year, and 32% + 9.3% at ~$170k per year, and goes up from there. So, here: 2.86% average inflation for past 100 years. (10^(log(16.785)/100) = 1.0286...). 4.75% APR. At ~89k/year, APR-after-marginal-taxes in California is 3.26%; or a real yield of 0.4%. You'll have 1.9x the principal after 100 years. At $170k-single-equivalent/year, there's an after-marginal-tax yield of 2.78%, or an after inflation real yield of -.007%. After 100 years, you'll have about half the principal in real money.
  - kasey_junk 3y ago
    Presumably a 100 year cd would largely be used like an annuity, as a retirement vehicle. Which you’d expect to happen at low income tax levels. I suppose if you are the beneficiary of the cd gift you could be taxed at that rate but at that point you have lots of options including donating it to a dag and it kicking off tax advantages to you for years and years.