Selling Manhattan: Bad investments, swindles, or only taxes?

Did Peter Minuit swindle the Lenape Tribe? Or has civilization just ignored the devastating effect of taxes?

WASHINGTON, March 24, 2012 – Manhattan Island’s 1626 purchase, by Dutchman Peter Minuit for the traditional 60 guilders ($24) worth of beads was not a swindle by the Europeans.

It was a voluntary transaction; Minuit forced no one to accept his terms. Still, I would like to argue, as have many before, that the Lenape Indians did not have luck or finance going their way.

If the “$24” were invested at a steady compounded rate of just 6% and not taxed along the way, by November 2011, the transactions 385th anniversary, that money would have piled up to $132+ billion.

But if the Lenape could have gotten a more-optimistic 8%, they could have had a fat $177+ trillion dollars today, enough to cover the value of all the land, infrastructure, and improvements of the Lower 48 today.

If, however, the 8% rate held and the Lenape tribe had been forced to pay a 35% income tax each year, and 35% estate taxes every 20 years, the pot would have grown to a mere $1.5 million. (At 5%, the ending pot would have been just $1275!)

Of course, small incomes in our hypothetical fiefdom would probably not have hit the 35% tax bracket that most rich folks pay today, and the estate tax would likewise not have kicked in on small amounts – but if Congress and the IRS assume that it’s fair for “the rich” to pay 35%, why would some hypothetical tyrant not think it fair for “everyone” to pay 35%?

The model is easy to construct and easy to adjust. The lesson to be learned is that interest rates mean a lot, as do tax rates.

The funny thing is that, even as the taxes kept the Lenape from becoming trillionaires, the government would not get the bulk of the money, either.

By taking away a little chunk at every turn, the government simply gets little chunks. Most of the potential wealth… couldn’t benefit anybody.

It simply didn’t happen.

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Tim Kern

Tim Kern taught economics for fifteen years, and discovered that understanding life is easy; it’s recognizing reality that takes practice. He holds a music degree, and later earned an MBA in finance from Northwestern University. He has lived across the US, and now makes his home in Anderson, Indiana.

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