Monday, May 09, 2005

Krugman's New Article

Krugman compares the tax cuts for certain incomes (60,000 per year vs. 1 million per year) and he fails to put things in present value terms. I understand his reluctance to lay out a lot of assumptions about interest rates and life expectancies. However, I am getting that such things make a big difference when I calculate- I have a person who invests their entire tax cut at a rate over about 4.2% better off even with the S.S. cuts. We can, of course, argue about whether 4.2% is feasible, but putting things in to present value would help. Here are the numbers:

Person making 60,000, interest at 4.2%, tax cut of 1000 for 40 years (I would like to meet the 25 year old making 60k, but still). This person would get a social security cut of 6500, I assume they live another 25 years from retirement (until 90). I get:
PV of tax cut = (1000/.042)*(1-(1.042)^-40) = 19217 ish
PV of S.S. cut = (6500/.042)*((1-(1.042)^-25)*(1.042^-40) = 19178 ish

So under these assumptions above the person is better off if they invest the 1000. Will they do so? I don't know. Is the person making a million bucks a year even better off under the above interest rate assumptions with the tax cuts and benefit cuts proposed? Of course they are, I don't deny that Bush's policies help rich people a whole lot (look at the guy's background, what do you expect!?!) I just think that Krugman should note that his 1000/yr tax cut vs. 6500/yr S.S. benefit cut does not necessarily mean that the $60k/yr middle income person will end up worse off.


Anonymous Anonymous said...


the 1000 a year tax cut for the people making 60k may be a good deal for those who are good investors, but most americans are not good investors.

most americans are interested in spending time with their friends and families, engaging in their hobbies, making enough money to pay their rent or mortgage, going on some nice vacations if they can afford it.

i would argue that most people would take the 1000 and just spend it on something. maybe something fun, or maybe something necessary.
(car repair, dental work, college tuition for a child, etc.).

many people would get screwed by the 6500 per year benefit cut in s.s. because they will have spent all those 1000 checks during their working years rather than save them.

it is possible that some people will do well with private accounts.
but i'd say the majority of americans would do worse. look at the amount of credit card debt in this country. look at how many people have interest only mortgages on homes they can barely afford.

all the sudden everyone is going to start saving and investing these tax rebate checks? all the sudden everyone is going to take an interest in the stock market and start investing for themselves? i doubt it.

social security works the best for the largest percentage of people.

those who have an interst in investing will do so regardless of their 1000 tax rebate check or lack therof.

May 16, 2005 at 1:31 AM  
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