Income isn’t wealth, but try convincing this to a politician or mainstream journalist. Many people confuse this issue and become caught up in the class warfare that plagues the political parties.
Income, loosely defined, is a flow. Contrast this with wealth, which are assets, or a stock. Assets normally generate income (think municipal bonds), but they don’t have to (think an expensive piece of art). But again, income, even high income, doesn’t necessarily translate to rich.
Suppose a freshly minted doctor opens his own practice, and earns an annual income of $265,000. Let’s also say this doctor bought a home worth $300,000, and put 20% as a down payment. And let’s say the doctor borrowed $200,000 to attend medical school. Is this guy rich? Well, let’s analyze his net worth.
His assets (house) are worth $300,000 but his liabilities are $440,000 (student loan of $200,000 + mortgage of $240,000). He has owner’s equity of $60,000 in his home. So, while his income looks high at $265,000, he is far from wealthy. Subjecting our doctor to higher tax rates based on the false premise that he’s rich is bad policy.
So, the next time you hear a pol talk about taxing the rich, ask them to define rich.