Wealth has been so successfully kept out of the political debate until recently that there wasn’t even an agreed-upon definition of what constitutes rich. And by that I don’t mean how much wealth, but rather what kind: assets or income? Though related, there’s a crucial, often overlooked distinction between the two, a gap in which stagnant wealth can easily hide.
For most people, from paperboys to CEO’s, financial success is measured by income—how much you make a year. Government follows suit by basing taxes and benefits largely on income. (There are exceptions, such as real estate levies and eligibility criteria for certain public assistance programs.) So it’s not surprising that the current struggle over high-end tax rates focuses exclusively on the income of the taxpayer. Should rates rise for those making over $250,000 a year, or only those making over a million?
But there are wealthy taxpayers who are never included in such debates, whose contribution to the public coffers is never increased by higher rates on income. It’s not loopholes or high-priced tax lawyers that spare them—it’s the form of their wealth. They have a lot of assets but relatively modest income.
I know because I’m one of them. Call us the “stealthy wealthy.”
Assets are not the exclusive domain of the rich. Everyone who owns a house or car whose value exceeds any loan against it has assets. A savings account is an asset. So is a table you can sell for $5 on Craig’s List. And it’s no mystery how assets are originally created. They are in the first instance income saved.
But it’s remarkable how difficult it is to build up substantial assets through savings alone, even with a high income and prudent money management. That’s why most asset growth occurs from investment in vehicles like the stock market that tend to grow in value with time.
Time is a crucial element; compound interest has been called the eighth wonder of the world. Since all our lives are time-limited, the best way to build up assets is to have an ancestor start the process for you—that is, inherit the money. That’s how I, and millions of other lucky folks like me, have done it over the years.
But just as high income doesn’t necessarily lead to large assets, large assets don’t necessarily translate into high income—or high income taxes. The term “land poor” refers to having substantial real estate holdings that generate little or no income. Unlike with real estate, however, it’s impossible to plead poverty of any kind if your substantial wealth is invested in liquid assets like stocks, bonds and good-old-fashioned cash.
That’s because with cash, or assets easily transformed into cash, you can always spend some of your wealth if the income it generates proves insufficient. And yet that transformed wealth is either not taxed at all (in the case of cash) or taxed more lightly than wage income (if there are capital gains realized from a sale of securities).
The tax code is very kind to people like me. By assets, I’m in the top 3-5% of all American households. But by income, most years I’m solidly middle class and taxed accordingly.
How to make sure the tax code addresses both kinds of wealth? Tax capital gains and dividends at the same rate as wage income, or if anything higher not lower. Don’t abolish the inheritance tax. And don’t let anyone tell you America is broke. There is a lot of wealth out here that you’ll never see reflected in the lists of the highest-paid actors and athletes — don’t forget that. Many of the stealthy wealthy are banking that you will.