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Wages are subject to income tax. Money in your account (besides accrued interest) already having income tax deducted, isn't. You aren't supposed to pay for money that's already been paid for. Sounds simple enough. I know that if you make more, you pay more, but do those who have more, not make more, pay higher income tax?

Here's a scenario. 2 people of average wealth with similar situations have the same job with equal pay. After 5 years, their situations haven't changed and they still earn equal pay, but now one has $40,000 in their account and the other $9,000. Does one now pay higher income tax because he has more in his account or does he pay the same because he makes the same?

MikeP
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Dom
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    In what country? Not in the US, but when I lived in Switzerland, there was a tax on wealth beyond a certain level - 100K CHF IIRC. Though it's a tax on wealth, separate from the income tax - you'd pay it even if you had no income (at least as I understood the law - I didn't have that much in Swiss accounts). – jamesqf Oct 22 '17 at 04:56
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    In most countries you pay tax on income you earn not on the amount of money you have. – Victor Oct 22 '17 at 06:26
  • At the end of your question, you ask "Does one now pay higher income tax". By "higher" do you mean a higher rate, or a higher total amount? As RonJohn's answer notes, the interest counts as income, so a person earning more interest will pay more tax (all else being equal), although the rate may stay the same. – BrenBarn Oct 24 '17 at 05:46

3 Answers3

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I know that if you make more, you pay more, but do those who have more, not make more, pay higher income tax?

In general, no.

In most locales, income tax is based on income, not on wealth.

I am retired. I have little income but a fair amount of wealth. I play very little income tax. (But I do pay other kinds of taxes.)

Here's a scenario. 2 people of average wealth with similar situations have the same job with equal pay. After 5 years, their situations haven't changed and they still earn equal pay, but now one has $40,000 in their account and the other $9,000. Does one now pay higher income tax because he has more in his account or does he pay the same because he makes the same?

In most locales, you pay income tax on everything that is counted as income.

Your salary is income. In some cases, earned interest is income.

But aside from the earned interest from your bank accounts, neither the $40,000 nor the $9,000 is income. Your huge mansion isn't income. Your expensive car isn't income. The huge amount of land you own isn't income. The pricey artwork on your walls isn't income. You don't pay income tax on any of these, but your local may impose other taxes on these (such as property tax, etc.)

[Note: consult the tax laws of your specific locale if you want to know details.]

Joe Strazzere
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besides accrued interest

But that's important.

one has $40,000 in their account and the other $9,000. Does one now pay higher income tax because he has more in his account or does he pay the same because he makes the same?

If they are interest bearing accounts, then yes the guy with the $40K balance will pay a little more* income tax than the guy with $9K.

* If the account earns 1%/ann and the $40K and $9K have been in there all year, then the big account will earn $401.84 interest, and the smaller will earn $90.41.

RonJohn
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    OP hasn't provided a country. Your answer may be great, useless, or anything in between, until we know. – JTP - Apologise to Monica Oct 22 '17 at 11:01
  • But (assuming this is the US) both will probally pay the same amount of tax, since the tax tables go by $50 intervals IIRC. So the actual tax would change only if that extra $1.43 is enough to bump one into a different interva./ – jamesqf Oct 22 '17 at 17:25
  • @jamesqf eh? $401.84 - $90.41 = $311.43. https://www.irs.gov/pub/irs-pdf/i1040tt.pdf If they're single and their "pre-interest" Taxable income is $50,000 then the $9K guy would pay an extra $12 in taxes (from $8278 to $8290), and the $40K guy would pay an extra $100 in taxes (from $8278 to $8378). – RonJohn Oct 22 '17 at 18:37
  • I don't think this is the best way of looking at things - you are talking about a difference in income, not a strict difference in 'wealth'. – Grade 'Eh' Bacon Oct 23 '17 at 17:42
  • @Grade'Eh'Bacon well... the question is about income tax. Explicitly so, in fact: "Does one now pay higher income tax* because...*" No mention at all of wealth taxes. – RonJohn Oct 23 '17 at 17:56
  • @RonJohn I see what you're saying, but I think that's more on account of ignorance of terminology on the OP's part, rather than specificity. – Grade 'Eh' Bacon Oct 23 '17 at 18:09
  • @Grade'Eh'Bacon that's assuming he's referring to a wealth tax instead of income tax. You should clarify that with him before making comments and answers which assume that he doesn't know what he's talking about. – RonJohn Oct 23 '17 at 18:15
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    Your answer is correct that the person would pay a higher amount of taxes, but they wouldn't pay a higher rate (unless the interest amount itself was enough to push them into the next bracket). The question is ambiguous about which is meant, although the title seems to indicate it's asking about rate, not actual tax amount. – BrenBarn Oct 24 '17 at 05:47
  • @BrenBarn correct, the title and the body say different things. – RonJohn Oct 24 '17 at 07:15
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You can call what you're asking about a 'wealth tax', or 'capital tax'.

These are taxes not based on income you earned in a year, but some measure of how much you own. Some countries (Italy I believe is a prime example) tax ownership of foreign land. Some countries tax amounts owned by corporations [Canada did this until ~5-10 years ago depending on province]. Some countries strictly tax your wealth above a certain level (Switzerland, as has been mentioned, does this).

One form of what you are referring to that does exist in the US is the 'Estate Tax'. This is a tax on the amount of wealth that a person owns, at the time they die. The threshold for when this tax applies has been very volatile over the last 20 years, but it is generally in the multi-millions, and I believe sits somewhere around $5M.

If these taxes start to crop up more and more (and I believe they will), don't be shocked at the initial 'sticker price'. Theoretically a wealth tax could replace some of the current income tax regime in many countries without creating a strict increased tax burden on their people. ie: if you owe $10k in income tax this year, but a $2k capital tax is instituted next year, then you are still in the same position as long as your income tax is reduced to $8k.

Whether these taxes are effective/preferable or not is really a question of economics, not personal finance, so I will not belabour that point.

Note: if the money you have saved earns money (interest, or dividends, or maybe rent from a condo you own), then those earnings are typically taxed alongside your wage income. Any 'wealth/capital tax' as I've described it above would be in addition to income tax on investment earnings.

Grade 'Eh' Bacon
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