A few weeks ago in this column I asked those who’ve declared war on the rich to define “the rich.” I gave four examples of people that might be viewed as rich. Some were high income earners with little net worth and others were low income earners with significant net worth.
To answer who “the rich” are in this context, we must determine whether wealth is a function of income or net worth. While we could agree you are rich if you have a high income and a high net worth, are you rich if you only have a high income or because you have a high net worth?
Most people give this distinction little thought. To many Americans, you are rich if you have either a high income or a high net worth. In a Gallup poll conducted in January 2003, the respondents defined “rich” as earning over $120,000 a year or having a net worth of over $1,000,000.
Most financial professionals contend that becoming rich is not synonymous with having a high income, but is a function of acquiring assets. While having a high income can give a person more opportunity to acquire wealth, it’s not a prerequisite. It’s what people do with their income that determines whether they will ever become rich. If they spend all they make and put nothing aside in savings or investments, they most likely will never be rich.
Most of the time, those who suggest we need to increase taxes on “the rich” and make them pay “their fair share” are talking about taxing people and corporations with high incomes. Whether those high earners are dirt poor or are exceedingly rich isn’t the issue.
I hear you wondering how someone with a high income could be dirt poor. You could earn $25,000 a year or $250,000 a year and spend every penny. Either way, you have a net worth of zero.
Certainly, if you make $250,000 a year you’ll have a higher lifestyle, even if you spend every dime. Plus you’ll certainly have more opportunity to build wealth than if you make $25,000. You are “rich” if we define that as having an above average life style rather than a high net worth.
But again, I know many people worth millions of dollars who are very comfortable spending $50,000 a year. They don’t have even an affluent lifestyle and in many cases their investments (like ranch land) don’t produce high income. I also know people who earn millions from their professions and have nothing to show for it. No investments, no real estate, no savings. Again I ask, who is rich? I contend it’s the person with the net worth and not the high income.
So, let’s be clear. Those who call for increasing taxes on “the rich” are using the wrong words. We need to refer to increasing taxes on “high income earners.” They may or may not be rich.
Not everyone has the ability or opportunity to earn a high income. Not everyone who earns a high income has the financial health and skills to become rich. Having a high income is no guarantee one will become rich, just as having a lower income is no guarantee a person is poor. There are people at all income levels who have the financial skills and discipline to manage their income so they do become rich.
We can choose to vilify and penalize high income earners. Or we can choose to return to an America where becoming rich is seen as a desirable goal and one potential reward of education, risk-taking, and hard work.