Part 3: Greater Risk-Greater Reward

If you didn't catch Part 2 then read it here.

Another common claim for lower rates on capital income is the argument that the risk associated with capital income is greater than the risk associated with wage income.

First off, risk is obviously relative to the person experiencing it. I'll use myself as an example because 1) most of my net worth is invested in the stock and bond markets so I obviously care about capital income and 2) my wage income comes from a job that has been and still is in very high demand within this country. Point being: I probably have one of the most risk-free jobs in the nation.

Having said that, I can tell you that I have far greater stress from risk associated with my job (wage income) than I do from my investments (capital income). Here's why:

- If I don't perform technically well at my job then there's a significant risk that I will be let go for performance reasons -- we lose people in similar positions for similar reasons within my company all of the time.

- If I don't "click" with my boss then I run the risk of getting forced out -- I actually had this issue last year.

- If my sales rep and I don't meet our quota, for whatever reason (e.g., my accounts just have a bad year), then I run the risk of being let go for performance reasons. 

- If my company merges with another company, something that happens a lot in my industry, then I run the risk of getting laid off due to a reduction-in-force (RIF).

If I'm let go, forced out, laid off, or whatever, then I have to address how I'm going to get and pay for health insurance for my family and that's highly stressful. Clearly, I could go on and provide more examples of risk through wage income.

Bottom line, the risk I feel based on my dependence on wage income is far greater than the risk I feel based on any potential losses I might experience with my investments. Now, you might say that someone who receives most of their annual earnings from capital will feel differently. Sure, they probably would. Keep in mind, I lost ~40% of my net worth in 2008 so I fully understand the risk and pain of losing money on your investments. However, if you were to ask me, "Where would you apply preferential tax treatment (wage income vs capital income) if the decision had to be based solely on risk?" then I'd say, "wage income."

So, why is their risk more important than my risk? More importantly, why does their risk justify preferential tax treatment and mine doesn't? If your answer is: Because capital is more important to the economy than wages, then hold that thought and wait for my next blog post.

Next up: The Importance of Investment