Michael Hicks: Worker problems fueled by tax incentives for capital
Thursday, April 07, 2016 10:42 AM
MUNCIE – Countless issues fuel the populist wave that animate this election cycle. Many of the concerns are easily refutable by facts, but there is one issue that is the main policy contribution to the lagging labor markets, the rising wealth inequality and the unease among so many workers. It is the very unequal way we treat workers and investors.
Workers and investors contribute labor and capital to the economy, accounting for about 85 percent of the input share of GDP. Entrepreneurs pull them together to make a profit. Industries use labor, capital, and entrepreneurship in different proportions. Over time, technology change, cost and relative productivity cause businesses to change their mix of workers and capital.
Typically the shifting mix of capital and labor is slow, giving workers years if not decades to adjust. But, since the rocky 1970’s federal, state and local governments have increasingly subsidized capital investment, while increasing the cost of labor.
At the federal level, taxation strongly favors capital, both in the general tax schedule and more painfully in the raft of government giveaways; think Solyndra, Tesla and GE. At the state level, Indiana is a prudent actor, although many states (e.g. New York) feature hefty capital giveaways. At the local level, property tax abatements are stunningly heavy. Here in Indiana, roughly $8 billion per year in new capital (more than $2,500 per family) is abated from local property taxes. This trims the typical new factory’s property tax bill to less than 1 percent over its lifetime.
In contrast, labor gets walloped. Payroll taxes shave $1 out of every $7 off of take home pay, and mandated health care payments are more than $6 an hour. All sorts of policies simply make it more expensive to hire people than to buy equipment to replace them. The effects are beginning to show.
Since 1990, the ratio of capital to labor has doubled and the demand for labor in many industries has declined. Nearly all GDP growth since 1990 is caused by capital investment. This is partially fueled by tax incentives, creating stagnant wages, especially among low income workers. On the flip side, the benefit of higher demand for capital accrues to those who invest and those who transact capital investment.
The sum of this is that labor income as a share of the economy is down over the past 25 years, while wealth inequality has been fueled by huge capital gains. Those who work on these capital transactions, from local developers to bond attorneys, are also outsized beneficiaries. That is why so many peddle rampant untruths about the benefits of tax incentives.
These concerns aren’t repackaged Marxism or latent populism. I hold neither in high regard. Simply put, market economies should not value capital over labor, or vice versa. The huge web of tax incentives and abatements we now have is a prime source of worker unease and wealth inequality. The initially well-meaning subsidies for capital investment have been corrupted beyond recognition. It is time to rethink them at every level of government.
Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University.