In Australia the best term deposit rate I can find is 5.5%. This is a lot higher than you would be getting on US dollars (~0%) or the Euro (~2%) at the moment. With an inflation rate of 2.5% that looks like a real annual return of 3%, but a peculiarity in our income tax system means that tax is charged not just on the real 3% return as you might expect. Rather tax is charged on the full ‘nominal’ 5.5%.
As a result the real return I earn after tax is under 1.4%. If I were to jump up to the next income tax bracket I would be earning about 0.8%. In a year with inflation on the higher end of the Australian target, the real return would be roughly nothing. The interest I would earn on cash savings are a tiny fraction of the interest I would be charged on cash borrowings – about 15%.
The household saving rate in Australia has gone from 0% to 10% of national income since the 2008 financial crisis and a lot of those funds have gone into bank accounts. I can’t imagine the desire to earn interest has anything to do with it.
Hi! I am a young Australian man ostensibly interested in the truth and maximising the total number of preferences that are ever satisfied, weighted by their intensity. I also enjoy reading and writing about the topics listed above. If you share my interests, friend me on 
1 comment
Comments feed for this article
May 14, 2012 at 2:33 pm
Brian Tomasik
I read your post with interest. (Well, about 5.5% interest, anyway.)
Capital markets have nominal annual returns of 8-12%, right? And in the US, long-term capital gains have lower tax rates than interest income.