The Wise Investor
things he said, and absorbing the concepts he was trying to
"That covers income tax, in a very basic way. Income
tax is a percentage of your 'net income', which is your
income minus your expenses.
The income is your wages, rent from properties,
dividends from shares and any other payments you receive.
Expenses are costs that directly relate to operating your
investments, and the depreciation in value of your income
producing investment assets.
The details of tax are extremely complex, but this is the
basic principle. Now, as I said before, there are two ways to
increase your wealth. First, you can receive income, as we
have just discussed. Second, you can own an asset that
increases in value. As the value of the asset rises each year,
there is no tax to pay, and so the increase in your wealth
belongs entirely to you. In order to combat this, some
countries have a 'capital gains' tax.
This tax applies when you sell an asset. Again, this is
extremely complex, but the basic idea is that you pay tax on
the profit, which is the increase in the price of the asset from
when you bought it to when you sold it.
Overall, though, you will find that this tax is far more
gentle than income tax over a long period of time.
Investments and wealth stored in the form of assets that
increase in value are subject to far less tax than income.
Thus, income based investments such as fixed interest
investments and deposits are subject to harsh tax treatment,
as well as being subject to reduced value from inflation.
There are many different taxes, Kate, and governments tax
just about everything they can think of.
Some taxes are little more than fees for performing
certain actions or buying certain products, whereas the two
fundamental taxes, income tax and capital gains tax, apply to
the true increase in a person's wealth.
There is also the issue of tax on companies and trusts,
and this is an area that you should also develop a general