Difference between wealth, income and the value of money

THERE ARE TWO lessons everyone should understand: first is that money has no value unless you spend it; second is that wealth and income are completely different and totally unrelated to one another!

I point this out because of a misleading and, in my view, alarmist report that appeared in the media early last week. It came with the catchy heading that eight men own the same wealth as half of the world population. I downloaded the original document published by Oxfam GB and came to the conclusion that the authors do not understand the two lessons cited above.

Money has no value; the value is in what you spend it on. Thus, keeping money in the bank (or under the mattress) is a very bad idea! You should only keep a small amount for emergencies. The Oxfam report creates the impression that the eight wealthiest people in the world keep their billions of dollars in banks in so-called tax-haven countries.

INCOME TAXES

This is simply not true! Bill Gates’ wealth is predominantly held in the shares he owns in Microsoft Inc. Warren Buffet’s is in Berkshire Hathaway Inc. Mark Zuckerberg’s is in Facebook Inc. And so on and so forth.

All those companies are listed on the leading stock markets of the world and, as long as other investors believe that these are worthy investments, their value (and hence the wealth of the principal shareholders) will continue to increase.

Interestingly, the companies do not have to be profitable to attract investors! The case of our very own KQ provides a good illustration. Over the last three years, it has made big losses that have eaten away all its assets but people are still willing to pay serious money for its shares.

The company’s annual report of March 31, 2016 shows that Mr Mike Maina Kamau owns 41 million shares in KQ. On that date, the price of one share at the NSE was Sh4.45 making Mr Kamau’s wealth Sh182 million.

Today, the price has increased to Sh5.50 and so Mr Kamau’s wealth in the company is Sh226 million. It has gone up by Sh41 million yet Mr Kamau has not earned any money from that investment; if anything, he has lost through the losses that the company continues to make!

Indeed, by my estimation, Mr Kamau is unlikely to get any income from Kenya Airways in the coming five years. This clearly illustrates the point that wealth and income are not related at all.

But taxes are paid on income, not on wealth. So, even if the price of Kenya Airways share rose ten-fold to Sh55, thereby increasing Mr Kamau’s wealth to Sh2.255 billion, he cannot be asked to pay any tax because he has not made any income.

This is the fundamental point that the Oxfam GB report missed. For that reason, it comes off as just another alarmist document meant to whip up emotions against the wealthy people in society.