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Defining “Rich”

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.

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4 Responses to Defining “Rich”

  1. Bobbie Munroe June 6, 2011 at 7:49 am #

    You can earn $250K and spend MORE for a negative net worth. I saw a wonderful documentary (on streaming netflix) this weekend: “One Percent.” It was made by the grandson of the founder of Johnson and Johnson. Very revealing and I can promise “those” people laugh when we call any of these definitions rich. They are certainly who I mean when I say tax the rich more. Two other things:
    1. It referred to the efforts of the Mars family (individual members have net worths of up to 10 billion) to try and repeal the “death tax” which is how all of that started in the late 90s.
    2. It showed an old taxi driver who said his family was very rich: in love, in patience, in understanding, in acceptance which allowed you to love someone for who they were and not who you wanted them to be. Contrast that with the very real conflict you saw in the families of the ultrarich (conflict which I acknowledge is part of every family but…)

  2. T June 6, 2011 at 10:14 am #

    “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”

    Since when did asking the rich (high income earners) to pay their fair share become known as “vilifying and penalizing”? especially when they are already paying a historically low rate of 35%.

    I have NEVER heard anyone say “I would like to be rich but they pay too high of tax rate so it is not for me”. Sounds like you have some of your own political money scripts you need to address Mr. Kahler.

  3. Gene June 6, 2011 at 6:52 pm #

    How about a percentage of what is earned or even better what is spent, no deductions, no credits just pay everytime a purchase is made
    or a payment is received? Oh wait!!! That won’t work, I want the other guy to pay, Not ME!!! 🙂

  4. Bob N. June 13, 2011 at 1:32 am #

    The argument over defining who is rich will never end. The government needs to get out of the business of being the arbiter. The result is a complex tax code that is 70,000 pages and growing. The FairTax would go a long way towards ending this nonsense. Before anyone parrots the politicians and special interest group’s argument that it would “hurt the poor,” they should take the time to learn about the FairTax first. In reality, it would be absolutely wonderful for the poor and middle class.