For wealth-base taxes, can anyone explain briefly why 1. as Investment horizon increases => Tax drag increases 2. as Investment return increases => Tax drag decreases Thanks
Measure of Wealth = (1+R)^N the ending wealth is much higher, (you should be able to do similar calculations as above) but the tax applied is a much smaller proportion of the ending wealth.
Thanks, I totally forget how to calculate tax drag. TaxDrag_w(TD_w)=(G_BT-G_AT)/G_BT=1-([(1+R)(1-tw)]^N-1)/((1+R)^N-1) The above will look much neater on paper, so no worry. Here is a trick I got today: no need to memorize anything, as long as we know TD%. 1). as Investment horizon increases => Tax drag increases? – set N=large number, then TD_w ¡Ö 1-(1-tw)^N ==> TD_w increases as N increases. 2). as Investment return increases => Tax drag decreases? – set N=1, then TD_w = tw+tw/R ==> TD_w decreases as R increases. I tried the partial derivative approach, it’s just not worth it.
It’s “TD_w roughly equals to 1-(1-tw)^N”
You guys have a trick for remembering the relationship between tax drag and horizon/return among the different types of taxes? without having to do the calcs. I realize that it is due to principal being/not being taxed…
Thanx, jmac01. That’s a real one. This tw used to mess up my memory, but not any more.