I want to talk for a second about passive income. I considered posting this in the tax discrimination thread, but income inequality seems like a better fit. I've still not seen anyone explain to me why income inequality is a problem in and of itself, the problem always ends up being something else (crony capitalism caused by government overreach). But I do want to talk about the income inequality that is created by wealth inequality for a moment.
Money is highly non-linear. It takes an insanely long amount of time to accumulate your first million dollars compared to your second. And the third comes faster still. The reason is because money itself can produce value. You can lend it to someone who is the enabled, via the resources, to create far more wealth. As a result, the lending is valuable in and of itself. The is one of the fundamental ways economies grow. The same is true if the money buys a resource which itself is in demand. For example, if oil is in demand but is expensive to get to, it can be worthwhile to spend money extracting it and sell it for profit. Money can build a house which is in demand to be rented. There are many ways that money does its own literal production. It can be left alone to do almost no producing, but often it is invested in something that yields a profit. In fact, as you accumulate money, it becomes something of a focus to leverage it and generate passive income (ie: your money makes money without your labor).
Wealth inequality therefore leads to income inequality. Because the wealthy can leverage their assets to generate income, and it's not particularly hard for money to produce more than many people can. Consider this, do you produce more than $1M produces? At a reasonable rate of return, say 6%, $1M produces $60,000 per year. If you make less than that, a million dollars can out-earn you. Just about all of us have some level at which money can out-earn us. $10M at that same rate can earn $600,000 per year. Who among us can directly generate that level of production? Maybe a handful of gtplaneteers. I'm not one of them.
Passive income is fundamentally different from active income in at least one respect. You didn't directly labor to produce it (by definition). Your property essentially performed the labor to produce it, and of course it is your property, and so you own the fruits of the labor of your property. But it is fundamentally a step removed from your labor. It is your property's property, owned by you because of the transitive properties of property rather than the inherent properties of labor. If your money makes money, your labor did not directly generate that wealth, it indirectly generated it. The link is still there, but there is an extra step.
I think it makes sense to recognize this fundamental difference when it comes to taxation. If you labor to produce $3M. And then you stop laboring and live off of the first million at $60k per year and reinvest the rest, in 10 years you have almost $5M. At that point, you could live off of the first $3M at $180k per year and reinvest the rest to the tune of net worth of $7M in another 10 years. Rinse, repeat. After 20 years, you have generated a net wealth of ~$7M, but what did you actually do yourself? Less than half. Your property has generated the majority of your wealth passively.
The tax rate for this type of income is not as directly, viscerally, harmful.
If we're not going to move to a sales tax model, which would be my preference, we could at least move toward a flat tax model for direct income with a separate, higher flat tax model for passive income. At some point for personal wealth, it becomes nearly pointless to try to labor to produce wealth. You simply cannot out earn your money, at least for many people. This results in people shutting down labor, which is not necessarily a good thing. Better to keep the tax rate low for labor and high for passive income. Balance wealth a little more toward labor and a little less toward investment. The result should be more labor by more people, and greater upward mobility and overall production. Investment will likely not slow down significantly either. Sure, the riskiest investments might not be worthwhile anymore, but solid investments are worthwhile even at a lower effective rate. We've seen that a lot over the last decade.
