|Minyan Mailbag:The Difference Between Being Rich and Wealthy|
By John Succo SEP 15, 2005 10:00 AM
Editor's Note: Minyanville is a community of people who share an interest in fiscal literacy. As perspective is an important aspect of our daily routine, we share this exchange with hopes that it adds balance to your process.
Regarding your 1:52 p.m. Buzz & Banter post yesterday, I believe you are correct.
In my mind, there is a difference between being rich and being wealthy. One is rich when one has enough capital to possess most everything one wants today and will need in the future. One is wealthy when one possesses enough capital to posses everything one would want today, and everything one will need in the future, and still have a great deal left over.
Obviously, the criteria for rich and wealthy are different for all people.
For my wealthy clients, there is no need, nor any desire, to grow their capital (read: assume risk). They are merely interested in preserving what they have. The wise ones amongst the rich have the same approach.
If the government insists on cutting taxes, prudence would dictate that they do so in the tax bracket that has the highest ratio of liabilities to assets, assuming the aforementioned class has a high marginal propensity to save. This would allow them to pay down debt. Of course, this is a catch-22, since a high ratio of liabilities to assets indicates a high marginal propensity to consume. (Overly simplistic, yes, but an argument that I believe to have some merit)
If they cut taxes for a class with a high marginal propensity to consume, it does nothing except stimulate demand in the short-run and further increase debt in the long-run. (Also simplistic, I know)
The government is stuck.
At these levels in the economy it has the perverse effect of increasing risk for the poor/middle class and decreasing it for the wealthy.
In general, I believe in small government and low taxes. Our current government attempting stimulation at a severe point in the cycle/structure of the economy that may not have the desired effect, if that is the desire. We can’t have big government and big spending and tax cuts. Even Reagan knew this; remember he relented and raised taxes.