Happy Bastille Day! Let’s look at the likelihood of kids being able to afford that trip to Paris…
Taxes weren’t a factor in our decision to relocate to Florida, but it is interesting to look at how a parental move to Florida can affect the wealth of children. I built a spreadsheet positing an already-sort-of-rich Massachusetts resident who moves to Florida 30 years prior to his/her/zir/their death (e.g., will live in Florida from 52 until 82, the median age at death of a COVID-19 victim here in Maskachusetts). The assumption is that this person will pay the top rates for any progressive taxation scheme. Since big numbers are tough to work with, I looked at the effect on the margin. The parent decides not to buy a $100,000 C8 Corvette (marked up from the $60,000 list price in our “no-inflation society” (TM)) and instead invests the money in the stock of a standard C corporation, to be saved for the benefit of the children. Keep in mind that this is a post-tax $100,000, which might have required earning $200,000 pre-tax (or, for those who prefer not to work, having sex with someone who earns a reasonably high income; see Real World Divorce for state-by-state child support profit calculations).
I started by assuming that the government isn’t lying to us and therefore use an inflation rate of 3 percent. If we assume real profits of 4 percent, that gives us a nominal return of 7 percent. The company pays 24.6 percent state and federal corporate income tax (Tax Foundation/OECD). We assume that these dividends are qualified and therefore a federal tax of 23.8 percent is due (20% plus Obamacare surtax). Maskachusetts income tax is 5 percent vs. 0 percent in FL. [2023 update: the MA tax rate on successful people was bumped to 9 percent via an amendment to the state constitution in 2022. The wealth difference would be larger for high-income people, therefore.] We assume that there is some way to invest these dividends and get a 5 percent annual return. When the 82-year-old is killed by Delta Epsilon Zeta variant COVID, Massachusetts estate tax takes 16 percent of the accumulated total while the Feds take 40 percent. Florida has no estate tax. Thanks partly to the miracle of compound interest and partly to the miracle of inflation, the $100,000 invested would have turned into $956,012 in a no-tax environment. In the Florida environment, however, it turns into $391,526 at death. In the Massachusetts environment, $275,287. Children end up 42 percent richer if the parent moves.
[As noted above, for children of the successful, the difference would now be larger due to the 5 percent income tax rate having become 9 percent. I redid the spreadsheet. The MA net goes down to $265,821, so the children of the FL resident become 47 percent richer.]
(You can check my calculations in this Google spreadsheet (downloads in Excel format; also available as a Web page).)
What’s the effective tax rate? In “I Can Afford Higher Taxes. But They’ll Make Me Work Less.” (NYT, 2010), Harvard professor Greg Mankiw calculated the total marginal tax rate on additional earnings for him was 90 percent (assuming that his goal was to help out his children). If we look the profits in nominal terms, subtracting the original $100,000 investment, we find that there was $291,526 profit in Florida compared to $856,012 in the no-tax case. Florida didn’t take anything, but the Feds and maybe some states via corporate income tax took 66 percent. In MA, the nominal profit was $175,287, resulting in a tax rate of 80 percent. What if we look at this in real terms, though. The $100,000 would have grown to $242,726 just from inflation alone. If we subtract this from the MA net of $275,287, the result is a total tax rate of 95 percent, since the real after-tax profit was only $32,561. The tax rate for the Florida residency case comes up to 79 percent of real after-tax profits (again, because of Federal taxation, not because Florida has an income or estate tax).
What if we assume the same real return on investment for corporations, but set inflation at 8 percent and therefore nominal earnings are 12 percent? The effective tax rate for a Floridian is remarkably stable, moving up to only 81 percent (from 79 percent). The effective tax rate for the person who lives and dies in Massachusetts, however, is 98.6 percent. (See revised spreadsheet (or as a Web page).)
What if the parent is a genius at picking stocks and he/she/ze/they selects only those with 8 percent real earnings (11 percent nominal)? The numbers are fairly stable, with the Florida corpse being worth 43 percent more. The Massachusetts real tax rate falls to 88.5 percent (from 95 percent).
Loosely related, a statue celebrating the “world’s first commercial airline flight,” which operated from St. Petersburg to Tampa beginning in 1914. The airline was started by Thomas W. Benoist, who died in an accident in 1917… stepping off a streetcar.
Wikipedia says that the signs should be amended to read “first fixed-wing scheduled airline” because the Germans were operating Zeppelins earlier. (The photo is from the St. Petersburg Pier, June 2021.)
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