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Taxing Wealth and Income

Richard Rahn, a senior fellow at the Cato Insttute, writes, “Many politicians and media people confuse taxable income with disposable and in-kind income,” in a recent column (here at Cato and here at the Washington Times). After describing two illustrative families, one rich in income and one rich in wealth writes:

“many in the U.S. Congress, including Sen. Barack Obama, want to increase taxes on the first (and poorer) family and not on the wealthier family. They have mis-defined "rich" by confusing a flow (income) with a stock (real net assets), and thus come to the wrong conclusion. They want to tax those (who make more than $250,000 a year) who are trying to become rich, while preserving the status for those who already have wealth.”

He also writes about taxable income and so-called in-kind income:

“Many politicians and media people confuse taxable income with disposable and in-kind income. Because of the highly progressive income tax system, (97 percent of income taxes are paid by the top 50 percent of income earners and the top 1 percent pays 40 percent of the tax, despite having only 20 percent of the income), the difference in high-income and low-income families in after-tax income is far less than pre-tax income. In addition, there are many government welfare and subsidy programs for low-income people that are not included in many of the standard definitions of income.”

And explains thus:

“Those who want the "rich" to pay more or "give back" not only confuse income with wealth, but also fail to understand life cycle mobility, and the effects of taxation and income redistribution programs on "disposable income."

Rahn provides a useful tutorial explaining the differences between wealth and income, and summarizes thus:

“Those who confuse taxable income with wealth are guilty of both sloppy use of language and sloppy thinking. Is it prudent to trust the writing of the tax code to a group of sloppy thinkers?”

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