Pondering The American Dream, Part I

More often than not in this space on Sundays we talk about poverty, or at the very least, economic inequality.  In this brief post, let’s think about the difference between income and wealth.

It’s easy to mistake income inequality for wealth inequality.  The traditional media conflates the two regularly, and for most of us who aren’t financial managers, we often don’t make the distinction.  That’s a serious error on our part. Let’s be clear on terms and then we’ll talk about why they matter.

“Income” is how much money an individual – let’s say, you, earn.  For kicks, let’s say in a year.  Income is, for most of America, a paycheck.  Maybe you have some investments that earn you a little passive income, but more than likely, your income is that what you deposit in the bank on Friday.  It’s also where most of your taxes come from, because that’s what we’ve decided as a nation (for some reason) is the most necessary thing to tax.

“Wealth” is what you have if you manage to put some of that income aside to grow.  It’s what happens if you’re lucky enough to not be “upside-down” on a home mortgage and can build equity in your home.  It’s your 401K, etc.  It’s what happens when your Uncle Scrooge McDuck dies and names you in his will.  It’s what we mean when we talk about what someone is “worth.” As in, “Alice Walton is worth seven-gazillion dollars.”

Here’s where it gets tricky:  There are folks in America who are “worth” many hundreds of times what you are, but can tell you with a straight face that they relate to you because they aren’t making much either.  The “I’m retired and on a fixed income” people who still manage to own (and use) two vacation homes.  Through a variety of tax tricks (some of which are depressingly straightforward) they’re actually paying lower taxes (and certainly at a lower rate) than you.

If their “income” is coming from something that can be classified as long-term capital gains, for instance, they’re only paying a tax rate of 15% … no matter what their income is.  And they’re not paying a Social Security contribution.  I probably don’t need to tell you that your paycheck is taking a bigger hit than 15%.

So right up front, you can see that we have chosen to value wealth as more important than work as a nation (because, after all, our tax code does not lie about our national will – it is an honest reflection of our priorities).

With that understanding under our belts, I submit that we stop talking about “income inequality.”  It’s not a relevant issue.  Alice Walton and her army of accountants could easily decide she has no “income” in any given year, and if we use income as a relevant gauge of personal economics, you and I would be better off than Alice Walton.

Let’s keep the focus on wealth inequality.

In Part II next week, we’ll talk about that wealth gap and why it is killing the dream and growing poverty in America.

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