How do we define wealth? Some would say it’s your salary. Yet others would tell you it’s your winnings on the casino floor or regular poker rounds. And a few might even claim it’s how much you can stuff under your mattress or the number of digits attached to your bank balance. At the end of the day, wealth is basically measured by your standard of living: your net income - after the government and the tax man reach into your pockets and take what they claim is theirs. Let’s not fool ourselves into thinking that income taxes are fairly distributed across the board. The rich are the ones who eventually influence and dictate policies, so it is only natural that the tax system works in their favour. If you look at the overall picture - and the four sectors of employment - it becomes clear why the rich are able to get richer and the rest live from pay cheque to pay cheque.
Sector 1: The Employee
The employee is the one who works 9 to 5. This is the category of the lowest prosperity. You might make $10/hour, but then the tax man goes in and takes back a healthy portion of your income. It’s a pretty simple formula: the more you make, the more he takes. Despite the healthy gross income, no one is ever impressed by the amount withheld in their ‘deductions’ columns. You get paid, pay taxes, and then you get to spend.
Sector 2: The Self-Employed
Being your own boss has its perks, but you’d better be prepared to work your butt off, occasionally having your ‘job’ spill into your personal life. The first benefit of the self-employed is that they are allowed to pay taxes at the end of the year. And any economics major can tell you the importance of the ‘time value of money:’ a dollar today is worth more than a dollar tomorrow. Another perk: tax deductions on everything from the lease of a new vehicle to the purchase of office furniture. The benefit to being self-employed is that you get to increase your standard of living by spending your hard earned money on daily life requirements while reducing the amount of income tax you pay. Get paid, spend and then pay taxes - minus the deductables.
Sector 3: The Business Owner
I’m going to differentiate the business owner from the self-employed in the following way: he/she is not required for the business’ daily operations. Your tax benefits are still the same as the self-employed, but your tax deductions are increased due to factors such as employee salaries, cost of operations or increased working space. You do not have to be in the office from 9 to 5, but rather have a stream of income that generates through out the day without the need for you at its beck and call. This leaves you free to pursue other interests or spend more time with your loved ones - and after all, time is money!
Sector 4: The Investor
This is the category with the most benefits and if played well the most income prosperity for the least amount of time and effort. The investor is the one that has the best economic benefits when it comes to taxation. Rather than accumulating wealth through income alone, profit for the investor can come as either ‘income’ (the stream of money) or ‘capital gains’ (the increase in the value of the investment). The government only requires you to pay taxes on half of your capital gains. So, taxable income generates a profit prior to taxation and only a portion of this profit is taxed!
‘The rich get richer’ is not just a saying, but an actuality of our tax system. The more benefits you receive free of charge and the less taxes you pay, the more efficiently your wealth is working for you. It doesn’t mean we should all go out and quit our day jobs though! The best strategy is to spread yourself across multiple categories. Money isn’t everything in the world, but making the most of what you earn will increase your standard of living in the present and help you save for the future.
- Gajanan Kuganesan