How the American tax code has swung against workers, and why it matters
Old-fashioned class theory is making a comeback.
What I mean by class theory here is a focus on how income is divided between capital and labor. In 21st-century U.S. political debate, even suggesting that this is an important topic will get one attacked as a Marxist. But even before the advent of Karl Marx, classical economists like Adam Smith were extremely interested in how a nation’s income was distributed among workers, capitalists, and landowners.
Yet when inequality began rising around 1980, many economists (myself included), initially downplayed concerns about the factor distribution of income — that is, how national income is distributed among different factors of production. In the modern economy, the main distinction is how much income accrues to capital (i.e., shareholders) and how much accrues to labor (workers). Instead, most economists emphasized the personal distribution of income — that is, relative individual incomes, whatever their source. At the time, this focus made sense because growing disparities in paychecks, not a shift of income from labor and to capital, were the main cause of soaring inequality. Between 1979 and 2000, the share of total income going to labor as opposed to capital was basically unchanged. But while the typical worker’s income, adjusted for inflation, barely increased over that period, the average real labor income of the highest earning 1 percent, such as top executives, nearly tripled.
Since 2000, however, an entirely different dynamic has emerged: the share of labor compensation in total income has declined sharply. In other words, the share of national income going to workers, including highly paid workers, has plunged while the share going to the owners of capital has soared. Furthermore, the rise of AI, which appears to reduce the need for workers while requiring huge capital investments both in software and in physical assets such as datacenters, power supplies, and advanced chips, may cause a further large shift in income from labor to capital.
The major motivation for this latest series of primers is the rise of America’s new oligarchy. Billionaires now exert vast and growing influence over our politics as a result of the income and wealth they accrue from their ownership of vast amounts of capital. It’s crucial to understand that policy — both regulatory policy and tax policy — can play a key role in either reversing or exacerbating this historic shift against labor.
Today’s primer will be devoted to a discussion of the role tax policy plays in the factor distribution of income. In particular I will discuss how a huge shift in the American tax code, mostly occurring since the 1970s, in favor of capital and against workers has increased inequality. Moreover, I will cover how the tilt of the tax code in favor of capital will worsen the consequences of AI for American workers. Finally, I will discuss why it will be necessary for policymakers and elected officials to reverse this tilt of the tax code in order to break the tightening grip of oligarchy.
Beyond the paywall I will address the following:
1. Why a higher capital share of national income increases inequality
2. The great shift in the American code against labor and in favor of capital
3. How that tax shift affected income and wealth inequality
4. How the pro-capital tilt in tax policy is likely to worsen the impact of AI on American workers
5. Why we need to reverse the tax bias against labor