Going off topic for a bit, my major financial goal has always been financial independence, as defined by having enough passive income to exceed my monthly expenses. Or put in another way, income from rents, leases, royalties, dividends ... subscription fees from web apps ... etc. stuff I don't have to trade time for pays for all of my expenses. Now, whether that means I have extra money to purchase luxuries is a different set of metrics. However, at that stage, I have time to pursue things, whether they are life-long passions, or a startup, or investing full-time.
That's why your typical middle-class earning $100,000 or more have difficulty building up the net-worth; that income is earned income, it is taxed much higher than passive income, and there's not enough time. I find it ridiculous to go for a 2 hour commute -- that is 4 hours each day, 5 days a week, or 20 hours. 20 hours of time spent in a car -- that's a part time job. A part time job you spend money, waste time and get nothing. (Even if you like driving, do you really enjoy driving during rush hour?) It gets worse when both couples in the family work, as now you're adding in greater expenses for working (a second car, clothes, lunches, and so forth). But the wage earners of families commute because they want their kids in good, suburban schools. Without time, there are very few investment vehicles available.
Contrast that with someone who have income-generating assets (high net worth -- primary residence is not an income-generating asset, and neither is the car, the SUV, or the boat) that meets/exceed expenses. If you don't want to stop working, you can keep working. Until your boss pisses you off, or you're asked to do something unethical. You don't have to commute unless you want to. If you want to go into real-estate as a landlord, you can focus on that without having to worry about meeting the next month's living expenses. If you want to do a software startup, you don't have to worry as much as burn rate -- just start coding. This appears to reinforce the cliche, "it takes money to make money", but it isn't. As mentioned in the previous paragraph, having money but little time means you're not going to be able to build up your net-worth.
And if you're pursuing a life-long passion, it doesn't matter if it is "active" leisure or "passive" leisure. It doesn't matter if it is stressful or not. The basic living expenses are covered. The lower parts of Maslow's heirarchy of needs are covered. The fact is, you're pursuing a dream. That's wealth to my eyes. That's liberty and pursuit of happiness, right there.
Could you elaborate on this a little bit? The passive/active divide is a little fuzzy to me, especially since you apparently include "subscription fees from web apps" in the "passive" category. It seems to me that such fees will either be taxed as ordinary income (if they're coming into a pass-through entity such as an S-corp or some LLCs) or 'double-taxed', first at a corporate rate, and then at a 2nd personal rate when you transfer them from the company to yourself. (The combined effective tax rate generally seems higher than the pass-through rate.)
I can see the lower effective rate being justified a couple of ways: considering the effects of FICA/Medicare taxes, restricting consideration to cap gains (e.g. appreciation in publicly-traded stocks) or tax-free securities, etc. But I'd be interested in where you draw the line between "earned" and "passive" income, and how you conclude that "passive" is taxed at a "much" lower rate.
Another investment vehicle is owning a share in a LP/LLLP -- limited liability limited partnership. They're usually formed to own real estate or a chunk of infrastructure, such as a cell phone tower, or an offshore oil rig. As a limited power, you have no say in the active management of the company ... but you're also protected from liability. A general partner, usually a corporation, manages the asset and sends you money every so often. You get a K-1 and you report the income alongside with your LLCs and other passive income. And if the asset generates a loss, you apply the loss to your other passive income http://www.wwwebtax.com/deductions_z_other/passive_activity_...
As far as I know, venture funds are often structured this way, but don't quote me on that. I didn't really investigate it to thoroughly.
"Passive income" for me is defined in terms of how much time I have to spend for the income. If I have to spend a lot of time, that's active income.
My statement, "it is taxed much higher than passive income" is a broad generalization, something I shouldn't have written. I put in the internet subscription fee in there because I don't have to trade time for it, and I assumed it would flow through a sensible business entity. If so, legitimate business expenses are deducted before they hit the personal tax returns.
Going to a job and taking a salary on a W-2, the costs for earning the salary includes a car (usually car payments), automobile insurance, car maintenaince, fuel, toll fees (if applicable), parking fees (if applicable), lunches, daycare (sometimes), business-appropriate attire, grooming supplies, etc. Few employers will reimburse an employee for those expenses, so all of that it is coming out of pocket, money after earned income taxes.
In contrast, the costs for obtaining the internet subscription fees includes server hosting, development equipment, office supplies, books, sometimes travel/commute ... and just to make sure this isn't merely a rosy picture -- accounting fees, legal fees, state fees, state taxes, county taxes, health care, amortized office furniture, office leases ... you get the idea. A number of these expenses can be paid straight out of the income generated from internet subscription fees. You're taxed on what's left over, meaning that your personal income from the business is lower, you're taxed on a lower tax-bracket than you otherwise would have, even though you can do a lot more with the money. As a disclaimer, I'm not describing or encouraging a "tax shelter"; it isn't sensible to sacrifice profits just to be able to cut the amount of taxes you have to pay.
You're right about the corporate double-tax. If you're not actively involved in the corporation, then a dividend is not bad considering the time spend in it, even if it is double-taxed. I'm sure you're also aware that if the corporation compensates you through a W-2, say as a director or as a consultant, then there isn't a double-tax. You just have to spend more time.
So to conclude this, I shouldn't have said that earned income is taxed much higher than passive income. Instead, I should've said that bigger chunks of your earned income gets taken away than from your passive income. But my guess is that you already know this. The important thing about passive income is the time you free up, not the taxes you may or may not save.
That's why your typical middle-class earning $100,000 or more have difficulty building up the net-worth; that income is earned income, it is taxed much higher than passive income, and there's not enough time. I find it ridiculous to go for a 2 hour commute -- that is 4 hours each day, 5 days a week, or 20 hours. 20 hours of time spent in a car -- that's a part time job. A part time job you spend money, waste time and get nothing. (Even if you like driving, do you really enjoy driving during rush hour?) It gets worse when both couples in the family work, as now you're adding in greater expenses for working (a second car, clothes, lunches, and so forth). But the wage earners of families commute because they want their kids in good, suburban schools. Without time, there are very few investment vehicles available.
Contrast that with someone who have income-generating assets (high net worth -- primary residence is not an income-generating asset, and neither is the car, the SUV, or the boat) that meets/exceed expenses. If you don't want to stop working, you can keep working. Until your boss pisses you off, or you're asked to do something unethical. You don't have to commute unless you want to. If you want to go into real-estate as a landlord, you can focus on that without having to worry about meeting the next month's living expenses. If you want to do a software startup, you don't have to worry as much as burn rate -- just start coding. This appears to reinforce the cliche, "it takes money to make money", but it isn't. As mentioned in the previous paragraph, having money but little time means you're not going to be able to build up your net-worth.
And if you're pursuing a life-long passion, it doesn't matter if it is "active" leisure or "passive" leisure. It doesn't matter if it is stressful or not. The basic living expenses are covered. The lower parts of Maslow's heirarchy of needs are covered. The fact is, you're pursuing a dream. That's wealth to my eyes. That's liberty and pursuit of happiness, right there.