The Difference between Income and Wealth

Years ago, while comparing various economic systems, I learned that one indication of the economic values in a culture is the reaction of a person seeing someone else driving a Mercedes sedan. An American wonders how he can afford one someday. The Soviet wonders how he can take it away. The Englishman wonders how to tax it. Today, as I listen to the pundits ruminate about the 1% of the U.S. population controlling most of the wealth in the U.S., it strikes me that we need to clarify what kind of culture we want to create.

I asked Fareed Zakaria, host of CNN's international affair program, why he and his guests frequently confuse individuals earning income and societies distributing wealth. He acknowledged that a distinction should be made. So, I am offering a simple distinction. Earning income occurs when someone works, provides a service or product and is paid by an employer, customer or borrower. Distributing wealth occurs when the government takes someone's earned income either through taxes or usage fees and gives it to another person. Using the terms "income" and "wealth" interchangeably obfuscates the logic for assessing how the economy really works.