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Sunday, June 10, 2012

Time is Wealth

We tax people based on their wealth.  But who defines wealth?  How is it defined and is it fair?  A person may be wealthy or not wealthy depending on what you measure.

The common definition of wealth is similar to net worth, which is defined as assets minus liabilities.  Therefore, if a person has a lot of assets and few liabilities, the person has a high net worth or is wealthy.

What is normally defined as assets include cash, cash equivalents or something that can be easily converted to cash.  These include:
  • money
  • real estate
  • car
  • boat
  • stocks
  • gold
  • companies
  • etc.
The government uses the above definition of wealth to determine tax rates.  The majority of taxation is based on how much money people are making in income.

However, the above definition of assets is limiting.  Assets can be defined as having anything that provides value.  Other types of assets are never considered.  These include:
  • leisure/spare time
  • health
A person can be wealthy with time.  Time has value.  This is reflected in "overtime payment".  After working 40 hours in a week, the worker will value the 41st hour more than the 1st hour.  Therefore, the worker will demand a higher hourly rate for working any hour after 40 hours.  Similarly, a person, who has one hour of leisure time per week, will value his/her leisure hour much more highly than a person who has 20 hours of leisure time per week.  Conversely, a person who has 30 hours of leisure time is wealthier than a person who has 10 hours of leisure time.  This is true for anybody in the world.

Society and taxation systems do not include time in the calculation of wealth.

Let us assume that there are only two people in our entire country:
  • Jane works 40 hours a week
  • Tom works 40 hours a week
Let us suppose that Jane decides to increase her work hours to 60 hours a week, by working until 7 PM, getting to the office by 7 AM, or calling/entertaining more prospects to make more sales and commission.  If Jane works in a factory, let us suppose that Jane works overtime to make extra money.  Effectively, she has sacrificed and converted her leisure time to money.

Tom does not want to work more than 40 hours a week.  He rather spend that time watching TV, going to the beach, camping, picnicking, watching sports with his friends, visiting relatives, surfing the internet, going to the bar, watching movies with dates or playing video console games.  He gets enjoyment and value from these leisure activities.

In our taxation system, Jane will be taxed more but Tom will not.  The government thinks that Jane is wealthier without having made any sacrifices.  Do most people think that working 60 hours a week is not a sacrifice?

For simplicity, let us assume the following:
  • Each hour in the first 40 hours of the week is worth $10 to both Jane and Tom
  • Jane and Tom are paid $10 per hour worked in the first 40 hours, or $400.
  • Let us assume that each hour of leisure time after the first 40 hours worked is worth $15 per hour to both Jane and Tom.  Therefore, the next 20 hours is worth $300 to both Jane and Tom.  If either of them wants to work these overtime hours, they will be paid $15 per hour.
  • Let us assume that we have a flat tax system and that any income is taxed at 20%.
How much wealth do Jane and Tom have?  If we only count money in determining wealth, then Jane is wealthier:
  • Jane:  $560  ($700 - $140 of tax)
  • Tom:  $320  ($400 - $80 of tax)
If we include time in determining wealth, then Tom is wealthier:
  • Jane:  $560
  • Tom:  $620 ($320 of take home income + $300 of leisure time)
However, the above is using a flat tax system, which most countries do not use.  They use a progressive tax system.  Let us assume that the average tax rate is 40% for income above $400.  Therefore, here are the wealth of Jane and Tom:
  • Jane:  $420  ($700 - $280 of tax)
If we include time in determining wealth, then Tom is much wealthier:
  • Jane:  $420
  • Tom:  $620

When you add in time in calculating wealth, then those who you think are poor, are wealthy.

The situation gets even more distorted.  Governments take money from higher income earners and spend it on lower income earners.  If Jane and Tom are the only two people in our country, then this means that part of the money taxed from Jane will be spent on Tom.

For simplicity, let us assume the following:
  • The government will take half of the $280 of income tax that Jane paid, and spend it on Tom.
Therefore, Tom is wealthier whether we include time or not in our wealth calculations.  Here are Jane's and Tom's wealth when time is not included:
  • Jane:  $420
  • Tom:  $460 ($320 + $140 of government spending)
If we include time and government's distribution of wealth, then Tom is significantly wealthier:
  • Jane:  $420
  • Tom:  $760 ($320 of take home income + $300 of leisure time + $140 of government spending)
Is this fair?  Should we not include time in determining wealth?

Does our taxation system motivate or deter people from working harder?

If time was treated as an asset as well, then Tom's time should be taxed and part of that should be given to Jane.  Even though most people want a full-time job, there are some people that value leisure time so much, that they prefer to work less than 40 hours a week.  Should their time to be taxed and given to Jane?

Some may argue that very wealthy people, such as billionaires, should be taxed more.  We agree.  However, billionaires are still rare.  We are referring to the majority of workers and according to the New York Times90% of households make less than $140,000 per year.  Therefore, 90% of individuals make significantly less than $140,000 per year.  90% of individuals are like Jane and Tom.  Are we treating Jane and Tom fairly?

Entrepreneurs are the main source of (money related) wealth creation for any country in the world.  The average entrepreneur makes much bigger sacrifices, such as working more than 60 hours a week, spending his/her savings, making no income, taking huge risks such as borrowing money from his/her house or credit cards, risking his/her friends' and family's money, etc.  According to this blog about start-ups:
"I slept at work again last night; two and a half hours curled up in a quilt underneath my desk" 
"I have no life. I never see any of my non-work friends, and I’m wasting away my one and only youth.  I ought to be out doing fun things and active things, the kind of things I won’t be able to do when my mind and body finally decay.  But instead I’m stuck inside under fluorescent lights, pushing bits around inside a computer in ways that are only interesting to other nerds.  I glanced at a movie listing and there are movies out that I haven’t even heard of.  How did that happen?  That freaks me out."
"This job is destroying my body. This can’t be worth it."
"It’s a saturday night, and I’m in my cubicle" 
"I’m so f_cking burnt. Existence is suffering."
Not only do entrepreneurs sacrifice leisure time, they also sacrifice health according to this blog:
"Maximizing your chance for success means sacrificing health and family."
When these entrepreneurs fail, which the far majority do, they become much poorer compared to somebody who had a regular 9-5 job.  Nobody hears about them or from them.  When a tiny few entrepreneurs succeed, they become CEOs, building big companies and hiring thousands of people.  They become famous and rich due to their equity in their companies.  The rest of the population tend to think that it is unfair that these CEOs have so much money.  Society feels that we should have a progressive tax system to tax them at a higher percentage rate.  If we should do this, should we have taxed Tom's leisure time and health to give to these entrepreneurs?


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