The Effect of Tax on Savings

Now that you understand the power of compounding and saving early from my earlier article, we can dive a little deeper and look at how much the government is actually taking from us on top of the 15-49% (in BC) tax they take from our pay cheques, the sales tax from our purchases, and property taxes on our land.

The best way to illustrate this is to use a VERY simplified example.

Suppose you find $1 on the ground outside a casino. You decide to try your luck on the roulette table inside. You place it on your lucky colour, red. The wheel is spun and the ball lands on red and you double your money. Since it isn’t your money to begin with, you leave the winnings and the original bet on red, for a total of $2. The ball lands on red and now you have $4. You keep repeating this for 20 times and end up with $1,048,576 (a probability of 3.23428E-7 chance of happening, but that’s not the point). The table below summarizes the winnings.

Now suppose that every time you won, the government takes 34% of your winnings. For example, you bet $1 and you win $1, so the government will take $0.34 of that, leaving you with $1.66 to bet with the next round. How much will you have left after doubling up 20 times with the government taking 34% of your winnings each time? Take a guess before you scroll down. I’ll give you a hint: it’s less than half of the amount above. Scroll down to the table after you have made a guess.

















As you can see from the table, the government has taken over $1,000,000 from you! Of course this is an extreme example as you can never get a 100% return every year for 20 years, but it gives you an idea of how much the government takes from our investments and limits the compounding effect of money. In my next finance article, I’ll be going over RRSPs and how they can help with this tax problem. Check back soon!