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And, so? And so if I consume immediately, I get $80 worth of consumption for every $100 I earn, whereas if I invest I consume only $77.2 of consumption for eve
by yummyfajitas 11y ago
And, so?
And so if I consume immediately, I get $80 worth of consumption for every $100 I earn, whereas if I invest I consume only $77.2 of consumption for every $100 I earn. That's the core of Sumner's argument.
Do you have any argument beyond playing with definitions and arbitrary divisions of wealth as to why a person who invests should consume only $77.2 while a person who consumes immediately should consume $80.0?
- dragonwriter 11y ago> And so if I consume immediately, I get $80 worth of consumption for every $100 I earn, whereas if I invest I consume only $77.2 of consumption for every $100 I earn. That's the core of Sumner's argument. With the numbers you gave, the first number was correct ($80 of consumption on $100 in pre-tax labor income), but with investment the actual number is $88.75 on $110 of pre-tax labor and capital income, or $80.68 per $100 of income.
- grinnbearit 11y agoNo, yummyfajitas' numbers are right, given a 25% tax rate on capital gains and a 2.8% discount rate consuming immediately gives you 80% of income assuming you invested all of it, 80$ and made back 10$ which was then taxed at 25%, you're left with 87.5$ out of 110$ in total income. consuming after a year gives you 87.5/110 = 79.5% of income, 1 year in the future. After discounting at 2.8%, you're left with only 77.38% of income. In that case, you'd rather splurge than invest.
- yummyfajitas 11y agoThe NPV of $88.75 in future consumption is $77.2 (assuming the investment achieved average returns, which the average investment will). Comparing dollar values of money in the future to dollar values of money in the present is simply incorrect.