By John Ballard
Income is easy to understand. Either you have it or you don't. And in most cases, no matter how much it is it always seems inadequate for what you want. Like the circus clown with big shoes that kicks his hat away just as he reaches for it, as income goes up, it always seems just short of whatever the appetite wants next.
Taxes are everyone's specialty. Everyone knows what they are and that they are as much a part of life as the weather. More about that later.
But if you ask most people about net worth you are apt to get a blank stare. Business people and bankers know about net worth and keep up with it -- theirs and those with whom they do businss -- as faithfully as they pay utility bills. But most peple do not run businesses. They work for them. And unless they dabble in investing, most people never do the arithmetic unless buying something big, like a car or house, in which case they usually are asked to furnish an accounting of their assets -- how much cash, savings, investments and other assets do you have? And balancing that (which is why it's called a balance sheet) how much do you owe, to whom and with what terms?
Taxes are not all the same but we tend to speak of "taxes" as one big generic burden. But in reality we pay a variety of taxes, all different.
- Payroll Taxes for Social Security and Medicare
- Income Tax, Federal and in (many) States
- Inheritance Tax (when applicable)
- Excise Tax
- Ad Valorem Tax (auto and some other)
- Property Tax
- State Sales Tax and
- Miscellaneous fees which we can call taxes on air travel, phone bills, tolls, etc.
Question: How does all this talk about taxes go together with net worth?
Answer: We have been taught not to think about net worth because unlike other countries, America has historically not taxed the total net worth of its citizens. Other countries have and continue to do so. But thanks to two hundred-plus years of mostly uninterrupted rising prosperity, America has never had to worry about how much collective net worth we have been accumulating. Our net worth has been growing throughout most of our history, sometimes passed from one generation to the next. **
When we say we are the richest country in the world that is no exaggeration. Our per capita wealth is not the highest (We fall fourth behind Switzerland, Denmak and Sweden) but the total national wealth is by far the greatest.
In 2007 the richest 1% of the American population owned 34.6% of the country's total wealth, and the next 19% owned 50.5%. Thus, the top 20% of Americans owned 85% of the country's wealth and the bottom 80% of the population owned 15%.
And during the last four years the spread has become even more dramatic.
But this post is not about wealth distribution.
This post is about wealth and taxes.
Wealth distribution is important, though because Wealth is a way of describing net worth. And net worth is important in regard to income.
For those with a negative net worth, income over what is consumed reduces that personal deficit.
For those with a positive net worth, income over what is consumed is added to net worth.
I came across a great aphorism years ago.
You are either green and growing or ripe and rotting.
As far as I can tell, that top layer of wealthy Americans, despite already owning the largest part of the national wealth, is still green and growing. Those at the very top, that famous One Percent, are not only growing but accruing so much additional annual wealth that what's left over is nearly too small to measure when divided among the rest.
But guess what? At some point down the line a large number of people are not yet to the green and growing stage. Their net worth is below zero. They are not ripe and rotting simply because they never got to the point where they can be called "ripe." They are like the hard little buds who might one day become part of the harvest. But without sun, rain and nutrients, and a little attention from the gardner or farmer, they will never get to that stage of development. They will dry up and die on the vine instead.
Is this the population from which we expect an economic recovery? I think not. Until those with negative net worth are able to rise at least to zero, there is no reason to imagine that any newly-generated wealth will be forthcoming from that group. As BJ pointed out in a comment elsewhere, newly minted college graduates with horrendous school loans are beginning their working life way behind in terms of net worth. many of them will be in their Thirties before their school debts are liquidated and by then many will have replaced that debt with another in the form of a home mortgage (and whatever credit card debts that may be building), all of which means they may not hit the positive net worth mark until halfway through their working life.
Income tax is progressive for a reason. It is to protect those with low incomes, most of whom have negative net worth, against falling even further behind in life so that when they reach a time when they are no longer able to be productive they will have accumulated enough net worth to cover expenses in their final years. Building net worth is everyone's safety net for the future. The more you have, the less likely I will need to divide mine.
Income tax is not a tax on net worth. Income tax only concerns the most recent twelve months of new wealth. A reduction of income for any tax year still allows an addition to one's net worth.
A few people (including, believe it or not, Donald Trump) have advocated a net worth tax. Rather than my parsing the idea, here are a few links to consider. I have included those critical of the notion. But whatever else Mr Trump might have said or done, he has floated an idea that needs to start getting into the Overton Window. ***
Trump .. is proposing a onetime net worth tax on individuals and trusts worth $10 million or more. By Trumps calculations, his proposed 14.25% levy on such net worth would raise $5.7 trillion and wipe out the debt in one full swoop. ... Trump would exempt the value of an individuals principal home from the net worth total.
**I was in conversation many years ago with a Korean school teacher. We discussed many subjects, including how poor his country was and how devestated the landscape looked without any big trees. (Woodlands in Korea, what there were of them, were virtually annihilated during and after the Korean Conflict. Trees that were not destroyed by the war were used for fuel over the following years, especially during Winter months. By the time I was there, 1965, Arbor Day had become an important national observance and there were strict laws forbidding the cutting of trees.) When I mentioned how the US is almost covered by trees except for some parts of the West, the teacher said the population density of Korea was one of the most concentrated on earth, and he politely reminded me that when Columbus discovered the New World, Seoul was already two thousand years old.
***Do not confuse the concept of the Overton Window with Glen Beck's book of the same name. I have no problem with Beck using the term but like so many voices at the nether edge of popular thinking, he tends to slip into nutcase territory. It seems in times of social or economic stress we hear a lot of crazy ideas. And this year seems to have produced a bumper crop. The GOP slate of presidential hopefuls make Ross Perot and Ralph Nader look positively old-fashioned.