A Penny Saved is More than a Penny Earned

August 08, 2008

It makes sense - "A penny saved is a penny earned" - but don't forget about taxes.

Here's an example. If Joe charges me $15 to mow my grass, I could save $15 by doing myself. To keep it simple, lets say that both me and Joe pay 20% income tax. This means that to get the $15 dollars to pay Joe, I would have to earn $18.75. Joe then receives the $15 that I pay him, and then he pays $3.00 income tax, and keeps $12.

My $15 dollar lawn job ends up costing me $18.75, but Joe really only earns $12. It seems like nobody really came out very good on this except Uncle Sam.

Saving $15 dollars by mowing my own grass then really saves me $18.75, thus the claim - "A Penny Saved is More than a Penny Earned".

It's too bad our tax system is set up this way. It is a disincentive to a robust economy. It makes sense for me to do what I'm good at, and then earn money and pay Joe to do what he's good at. This increases the net productivity of an economy, but unfortuneatly our tax system is set up to incentivize me to mow my own grass, no matter how inefficient that is.

-- Greg