Wealth, or What Can Be Taxed?

The government taxes wealth in its various forms; sometimes through property (Property Tax), sometimes through wages (Payroll Tax), sometimes through spending (Spending Tax). In order to understand what the government can tax, we have to understand the two sides of wealth. The first side is the acquisition of wealth and the second is the uses of the wealth.

Ways of Considering Wealth

In order to understand what can be taxed, we must first consider how people make and use wealth.

Amount of wealth from Sources = amount of wealth put to use

This is just to say that, at the end of any given day, month, or year, the amount of wealth any given person gains must be the same as the amount of wealth that they put to use in some way.

Sources of Money and Wealth

Sources of wealth are far and varied, but they all have one thing in common: they increase the wealth you have to use. They result in wealth coming into your pockets (so to speak), so we usually just call them income.

Sources (or income) = wages + Profits in a business + Interest on Investments + inheritance + etc

The most common source of wealth is money paid through wages, which are payments for employment. People also earn wealth as interest on investments that they have made, whether they are mutual funds or bonds or a savings account in the bank. Wealth is also earned as profits in a business or proceeds from a sale of something. Wealth can come from an inheritance or gift. You get the idea. Sources are anything that give you wealth.

Different people tend to have different sources of wealth. An engineer or a doctor probably makes most of their wealth from their salary, which are wages. A self-employed mechanic gets a paycheck but also relies on the increase of their business’ value, which makes their sources of wealth a mixture of wages and profits in their business. An heir or heiress might have the sole source of their wealth coming from a trust fund.

uses of money and wealth

Uses of money can be put into two basic categories. All money is either spent or not spent. That is,

Uses = spending + saving

Money is spent in many different ways. Everybody buys food. Everybody buys clothes. But not everybody buys a yacht. Things like groceries can be thought of the purest version of spending; people spend their money on the object and then use the object until they have to throw it away. They spend money never expecting to get any money back from that object.

All of the money that is not spent is saved. The simplest way is in cash, or by depositing that cash into a checking or savings account. These are nice because they give you easy access to your money for buying groceries or gas or a rainy day fund (if you want to sound fancy, you say this is “liquid”); these are usually short-term savings. These are the purest form of saving, as things like groceries are to spending. You aren’t getting anything for your money, you are just putting it into a corner so that you still have access to it.

Then there are other things, which are a kind of spending/saving hybrid. This is because most things either appreciate in value or depreciate, which just means that you can expect to sell them for more money (appreciates) or less money (depreciates) than you paid for them down the line. A car, for example, is the perfect example of something that depreciates, since the owner has just lost a couple of thousand dollars the second the odometer goes from 000000 to 000001 miles. If you spend your money on a car, you can usually get a good chunk of money back, but it will nearly always be less than you paid. A car should never be described as an investment unless you are laundering money. A mutual fund (which is just a bundle of stocks), at the opposite end, usually appreciates over time, earning interest on the principle investment (known as dividends, embodied in a greater number of shares owned) as well as gaining value in the principle with the growth of the economy (an increase in value of the shares themselves). You have to spend money on a mutual fund, but you can nearly always sell it for more than you spent if it is held for enough time, so most people consider this a type of savings. Further, because these things reliably gain in value, they are considered a better savings than just a checking account and the focus of most retirement planning. Finally, there are things like gold or a house that are in the middle; they appreciate at a similar rate to inflation and are low-risk, but they rarely provide a significant increase in your wealth.

Taxation Policy

Because our income must be equal to our spending plus our saving, they are actually two ways of measuring the same thing. If we want to tax income but give exceptions for money that is saved, then we are really taxing spending, because spending is everything we gain minus what we saved. Taxing wealth effectively is done either when the wealth is acquired from a source or when the wealth is used on things; a hybrid system focusing on some sources and some uses is patchy and liable to leaving loopholes.