Minor Tax Equation Difference

The only difference between annual accrual taxation and annual wealth taxation is half of a parenthesis )

Why and how do you remember this miniscule difference?

Wealth taxes are assessed on total wealth, which includes principal. Annual accrual taxes are assessed on gains. So, by making the equation (1+.05)*(1-.01) if returns are 5% and wealth tax is 1%, the wealth tax is assessed against the principal as well, which is represented by the 1 in the (1+.05). This makes total wealth get taxed, not just the .05 of gains, but the 1.0 of principal as well. Annual accrual taxes are only assessed against gains, which is why they are only assessed on the .05 in the (1+.05), making it (1+(.05*(1-.1)) if the accrual tax is 10.0% and returns are 5%.

Make sense?

Wow! What an awesome way to explain it. Thanks! I was going over EOCs on Wednesday and tripped up on this exact issue.