Wealth, or What Can Be Taxed?

The Two Sides of Wealth

The government can tax the wealth of private citizens. In order to understand what can be taxed, then, 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 Wealth

Sources of wealth are far and varied, but they ultimately are just anything that increase the wealth that you have. 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

Sources of wealth are split into three categories; active income, passive income, and capital. Active Income is by far the most common source of wealth. It is wealth that is gained from something that frequent effort goes into, like a job. Passive Income is wealth that is directly gained that doesn’t require significant effort. This is like rent on a second property or an inheritance. Capital, finally, is the increase in value of things that are owned. This is like a house that is worth more now than when it was first purchased or an index fund (a bundle of stocks) that is more valuable with the rising market.

Different people tend to have different sources of wealth. People who live paycheck to paycheck (this is most Americans) will rely exclusively on their wages, which is active income. A well-established professional might rely primarily on their wages but also get a supplemental income from renting out a second property. An heir or heiress might rely exclusively on capital through the increase in value of their investments.

uses of wealth

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

Uses = spending + saving

Wealth is spent (as money) 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 wealth on the object and then use the object until they have to throw it away. They spend wealth never expecting to get any money back from that object. Wealth can also be spent on things that depreciate, losing value over time, like a car. A car is considered spending because you will nearly always get less money back than you paid for it. A car is only a good investment if you are laundering money.

All of the wealth 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 provide easy access to the wealth 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. Wealth can also be saved by buying assets that appreciate, or gain value; this is advised for long-term savings because you get more when you eventually sell your assets.

Next: Read What Do We Tax?