How Wealth Acts Independently from Income

I often ask people who argue against taking steps to equalize income through taxation this question: How can a person worth $1 billion this year earn $25 million and be worth $1.1 billion next year?

To make the concept easier to understand, I will reduce it to something more easily understandable. I’ll use the example of a person who owns a house worth $300,000, owns a project car worth $10,000, has $10,000 in savings, and has a retirement plan worth $50,000. The person is worth $370,000. Let’s say the person earns $60,000 over the next year. 

The following year, the house is worth $350,000 due to market increases, the project car is completed and worth $30,000, he has $8,000 in savings because some of it was used for whatever it was used for, and his retirement plan is now worth $57,000 with pre-tax contributions matched by the employer and growth. Despite earning only $60,000, and using most of it for living, the person is now worth $445,000. 

Income is subject to taxation; growth in wealth is not.

A Question About Income; A Response About Wealth

My Friend Robert

Robert and I work for the same company. We don’t see each other often, but I truly enjoy it when our paths do cross. We both enjoy discussing politics and economics. We see things quite differently and spend most of the time trying to convince each other that we are correct in our thinking. It doesn’t work very well. What I like best about Robert is that we both get to talk, we both get to listen, and we part ways agreeing to disagree rather than thinking the other person is some sort of ogre for not agreeing.

One of our discussions and disagreements was about taxation. Robert thinks the wealthy pay as much in taxes as they should pay. I disagreed. I think the wealthy should pay more in taxes. Robert disagreed.

Robert posed a question to me about income. The answer I gave had him thinking. I don’t think it changed his mind, but I could tell he was thinking about it.

Flat Tax Plans: Unfair, Complicated, and Unproductive

The flat tax plans I've heard are faulty. The first thing most people offer is "there would be no deductions." I offer that two people who each make $100,000 a year would pay the same amount. They agree. I then offer that one earned his in wages, and the other spent $30,000 on materials to make his money.

The inequity of both paying the same amount in taxes is obvious. However, they most often agree that materials would be deductible. 

You've now got a hole that can't be plugged. We already have a tax structure that allows deductions, so all you're really talking is tax rates and what would be deductions.