Increasingly personal income in the U.S. is about owning, while income from working is slowly declining. Labor income is still our largest source of personal income but has loosely detached from general economic conditions, dropping as the economy grows. Weaker unions, technology, and tax policy speed this shift.
Asset income is defined as capital gains, dividends, interest, rents, and royalties. The term passive income is sometimes used but can be misleading. For example, capital gains often derive from not just holding as asset but buying and selling those assets – hardly passive. Farmers understand this instinctively when paying land rents or watching desirable tracts or used tractors sell. While they can decline in value, they have been lucrative for buy-and-hold investors.
WEALTH VERSUS WORK
This slow income change stands in stark opposition to the cherished belief that people achieve wealth by working hard. Along with an indifferent employment model with few long-term commitments to workers asset income from churning stocks to flipping houses has captured the financial imagination of many for good reasons.
Asset income is a reasonable and moral way to attain and retain wealth. It is now about one-fifth of total U.S. personal income and also probably understated (read: undertaxed), as we have learned from Swiss Dakota. Meanwhile, income from wages – labor income – provides less of our living and fewer ways to improve.
The ascendence of asset income chips away at iconic elements of the American mythos, like the stock boy-to-CEO examples used to demonstrate what is now a vanishing economic mobility. Already, the hired-hand-to successful farmer model is rare, after being unexceptional a generation before. The spotlight those few successes receive in ag media disguise their rarity. Hard work alone does not compete well with birthright assets or even access to the right ladders to exploit individual initiative.
Like soil erosion, asset income creep alters our calculations of good fortune. When effort meant a reasonable opportunity toward wealth, the odds of a lottery, injury lawsuit, or unexpected payout seemed laughable. Today a startling number of Americans include such chance windfalls as an important part of their retirement plan. Instinctively, if not logically, we can sense work is not how wealth happens.
WHERE THE MONEY IS
None of this information immediately affects the price of corn, but the most recent farmer outrage – taxing capital gains at death the same as in life (basis step-up elimination) and adding more wealth taxes like estate taxes are receiving increased scrutiny from legislators simply because of Sutton’s Law – that’s where the money is.
Taxing wealth has historically been the simplest and most efficient. From the Roman empire until about the 20th century, wealth taxes and tariffs were essentially the only reliable sources of income needed to pay for (essentially) the soldiers needed to “acquire” more assets. We are also marching toward a wealth distribution more lopsided than any since that ancient empire. Squeezing more from income and sales taxes, for examples, can be counterproductive, harm an economy, and prompt even more shifting to asset income. One example: stock options for executives instead of salary.
It can be argued that cash rent demonstrates how ownership is better than enterprise. Unless rents are negotiated by special circumstances like kin or history, renters soon learn the old 50-50 split was based on relative labor shortages, not fairness. Rent competition is a race to the profit bottom shifting less risk and more reward to owners. Those rents enjoy favorable tax status as well.
The indignation at wealth redistribution is intense, but the consequences of merely hoping for a return more widespread prosperity are clearer every day. This is why wealth distribution matters. Failing to rethink tax policy will speed the shift to higher income or consumption taxes in a vicious cycle. Highly publicized “investments” in cryptocurrency or meme stocks are evidence for many that ownership beats employment.
We are an astonishingly wealthy country, but like so many nations, our national wealth is increasingly earned by a fortunate few.
John Phipps, a farmer from Chrisman, Ill., is the on-farm “U.S. Farm Report” commentator.
