That active income is taxed at a higher rate than passive income is one of the great puzzles of neoliberal thinking, and yet those who rely entirely or mostly on active income to survive keep going out of their way to keep it that way.
In last week’s US election, California’s Proposition 40, which would have put a one-time five percent wealth tax on the roughly 250 individuals in the state with a net worth exceeding $1 billion, was defeated at the ballot box. As Christopher Armitage explains in detail, 80 of those individuals spent over $300 million to ensure that outcome — and pass a counter-proposition, #42, which would ban the state from ever imposing a wealth tax right in the state’s constitution.
It is yet another example of how the ludicrously wealthy manipulate the democratic process with money, undermining the very purpose and function of democracy. It should not be possible for 80 individuals to spend $300 million on a referendum question, regardless of the content or intent of that question.
It is not even the most egregious outlay of cash by the plutocratic oligarchs in the United States. Elon Musk alone is reported to have spent approximately $450 million in this election cycle, although with considerably less success than his California counterparts.
All of this should be moot. Private money does not belong in the election and referendum process if we want it to be fair and in keeping with the concept of democracy. One’s ability to donate or to fundraise has nothing to do with their ability to govern or make an objective decision.
What we have today is no longer democracy, if it ever truly was. The root of true power has far less to do with the people than it does with their ability to pay for their representation and for their representatives. We use terms like plutocrats to describe the extremely wealthy, and oligarchy to describe the system of government they pursue.
The reality is that what we have is a chrimacracy. The word democracy is derived from the Greek “demo” — the people — and “cracy” — governance. Chrima is the Greek word for money, and so governance by money seems to be a far more accurate description of what we have. The term already seems to have been coined by Avik Chattopadhyay in Chrimacracy & The Lazy Indian.
To get from the chrimacracy that we have developed toward the democracy we want to have, specific wealth taxes should not be required because our tax system should already assess those taxes based on each individual and corporation’s ability to pay, across the board, fairly and without loopholes.
The definition of wealth, I was once told, is when you transition from working for your money to your money working for you. Someone who has a billion dollars will invest that money and live off the revenue. That revenue comes from somewhere. Dig down enough layers, and someone is using active labour to create that revenue and pass it upstream.
Tenants in rental properties are working to pay their rent. The rent is passive income to the owner, but active income to the resident. Dividends as passive income are the product of the active work and sales of the people in the company. The sales are paid through the active work of those making those purchases. The more money you have, the more money you collect from those who do the work.
Unrealised gains in assets and stock value, against which investors can borrow and avoid taxes altogether, are based on demand for that same asset, whether or not it is ever sold. In our system, that money is not real but can somehow still be spent.
Cutting capital gains taxes to promote investment may be a very effective wealth-building tool for those who are already wealthy, but imagining that this necessarily translates into a stronger working class is the root philosophy of trickle-down economics. Taxing the outcome of successful investment is not attacking investors, it is asking them to contribute back to the society that allowed their investment to succeed.
A tax system that taxes active labour at a higher rate than unrealised gains or passive income is a system that taxes and promotes poverty, that further empowers those who already have money, and one that is built not to have any limits on that vicious circle. If we are going to base our system on income taxes, all income must be treated equally, and taxed progressively. The more you earn, regardless of source, the more of it you contribute back to the society whose collective active labour allowed you to earn it.
California’s proposition 40 would not have solved the problem over the long term. A one-time wealth tax makes a point and would have been a good first step, but it does not fix a system that is built around protecting money rather than people. The ability of the billionaires to fund the opposition to that proposition including a counter-proposition that bans any such consideration ever again should never be possible.
Before we can solve this structural problem in the economy, we have to solve the structural problem in our democracy that allows money to influence political outcome in the first place. We have to end the chrimacracy.