The illusion of money. Happy Tax Day!

[^_^ 5,021]

Tax day is upon us, so it’s a perfect time to contemplate a few aspects of taxes.

...

I want to talk about the fact that the US tax system makes it very difficult for us to understand how much money we make and how this may actually lead us to spend more money than we really have.

...

In many other countries, the tax code does not allow for the same level of deductions we have, and because of that for most people the whole amount of taxes is automatically deducted from their paycheck – and this is it. Now, in this situation when you ask people how much they earn they will tell you their net monthly income – the amount of money that they get to take home at the end of each month. How do they know? Well, it is the number that is printed in bold letters on their paystub.

Contrast this to the US. In the US, we all know the gross amount that we make a year, but it’s not as clear what our net income is. It’s actually very complex because we get our salary, some of which the employer withholds, and we have no idea what we’ll get back when tax day comes around. We can get back some money (depending on our expenses/deductibles), trends in our stock market portfolio, health care, etc. And we don’t figure this out until April 15th (if not later) of the following year!

And what are the consequences of knowing our gross yearly income and not much else? I think it causes us to feel richer than we really are and spend accordingly. Why would this be the case? There’s a phenomenon we call the “illusion of money,” which is the idea that we typically pay attention to nominal amounts of money rather than real amounts. For example, the illusion of money means that if inflation is 8%, and you get a 10% raise, you would feel better than if there was no inflation and you got a 3-4% raise. The basic idea is that we pay attention to the nominal amount rather than the purchasing power, and don’t realize what our money is really worth.

In terms of our tax code, this suggests that in the US we focus on our gross yearly income, feel richer than we really are, and consequently end up spending more money. If this is right, it means that changing the structure of deductions could be one way to help people understand how much money they actually have and how they can save more.

http://danariely.com/2011/04/15/can-the-tax-code-cause-us-to-spend-too-much/

[Jenn! 918]

...be thankful I don't take it all

[^_^ 5,021]

...be thankful I don't take it all

What? Did you quit your job and go to work for the IRS??

[웃 910]

For example, the illusion of money means that if inflation is 8%, and you get a 10% raise, you would feel better than if there was no inflation and you got a 3-4% raise.

I would probably take a 10% raise in salary with 8% inflation over a 3% raise with 0% inflation

[Ban Hammer 13,489]

What? Did you quit your job and go to work for the IRS??

scatter, she can't audit all of us if we split up!

[^_^ 5,021]

I would probably take a 10% raise in salary with 8% inflation over a 3% raise with 0% inflation

Why?

[웃 910]

Why?

Lets just pretend I made $200,000 per year.

I would rather take $20,000 permanent increase with 8% inflation over a $6,000 increase with 0 inflation.

Maybe next year it will readjust and I will be working with $14,000 more than if I chose 0 inflation...

**we are pretending on the salary by a long ways btw

Edited April 19, 2011 by Lord Infamous

[mawilson 2,133]

I would probably take a 10% raise in salary with 8% inflation over a 3% raise with 0% inflation

Why?

[웃 910]

Why?

See above. Is that a bad answer?

[^_^ 5,021]

Lets just pretend I made $200,000 per year.

I would rather take $20,000 permanent increase with 8% inflation over a $6,000 increase with 0 inflation.

Maybe next year it will readjust and I will be working with $14,000 more than if I chose 0 inflation...

What will readjust?

[mawilson 2,133]

Lets just pretend I made $200,000 per year.

I would rather take $20,000 permanent increase with 8% inflation over a $6,000 increase with 0 inflation.

Maybe next year it will readjust and I will be working with $14,000 more than if I chose 0 inflation...

Well if you have a lot of disposable income, it doesn't matter because you can always hedge it against inflation.

If you don't and you actually spend close to $200,000 per year, then $16,000 out of your $20,000 will be eaten away by inflation, leaving you with $4,000 - so you'd be better off taking a $6,000 raise and zero inflation.

[Mr. Big Dog 10,747]

I would probably take a 10% raise in salary with 8% inflation over a 3% raise with 0% inflation

So you owe more than you own. Inflation is good for those with net debt. The savers are the ones that get fcuked.

[웃 910]

So you owe more than you own. Inflation is good for those with net debt. The savers are the ones that get fcuked.

Why would it be good for someone with debt if prices go even higher? You saying they will *lol* at the fact that the $10,000 in clothes they purchased last year {on credit} and the $20,000 car now cost $11,000 and $22,000?

Edited April 19, 2011 by Lord Infamous

[^_^ 5,021]

Wages increase at higher rates when inflation is high. If I make $100,000 today and the interest+principal payment on my mortgage is a fixed $2,000 a month, am I better off in 10 years if my wages are now $300,000 (major inflation) or if my wages are $115,000 (little inflation)?

[I AM NOT THAT GUY 5,715]

Greenback movement

( c. 1868–88), in U.S. history, the campaign, largely by persons with agrarian interests, to maintain or increase the amount of paper money in circulation. Between 1862 and 1865, the U.S. government issued more than $450,000,000 in paper money not backed by gold (greenbacks) to help finance the Union cause in the American Civil War. After the war, fiscal conservatives demanded that the government retire the greenbacks, but farmers and others who wished to maintain high prices opposed that move. In 1868 the Democrats gave partial support to the Greenback movement by endorsing a plan that called for the redemption of certain war bonds by the issuance of new greenbacks.

The Panic of 1873 and the subsequent depression polarized the nation on the issue of money, with farmers and others demanding the issuance of additional greenbacks or the unlimited coinage of silver. In 1874 champions of an expanded currency formed the Greenback-Labor Party, which drew most of its support from the Midwest; and after Congress, in 1875, passed the Resumption Act, which provided that greenbacks could be redeemed in gold beginning Jan. 1, 1879, the new party made repeal of that act its first objective. The 45th Congress (1877–79), which was almost evenly divided between friends and opponents of an expanded currency, agreed in 1878 to a compromise that included retention of the Resumption Act, the expansion of paper money redeemable in gold, and enactment of the Bland–Allison Act, which provided for a limited resumption of the coinage of silver dollars. In the midterm elections of 1878, the Greenback-Labor Party elected 14 members of Congress and in 1880 its candidate for president polled more than 300,000 votes, but after 1878 most champions of an expanded currency judged that their best chance of success was the movement for the unlimited coinage of silver.

http://www.history.com/topics/greenback-movement