How a $15 wage minimum would shrink capital's share of the pie

The Congressional Budget Office's analysis brings a pleasant surprise.

The share of national income devoted to labor (as opposed to capital) has been declining since 1947, which, perhaps not coincidentally, was the year that the anti-union Taft-Hartley Act passed Congress over President Harry Truman’s veto. When you focus just on the corporate sector and make a few other technical adjustments, the decline dates to the start of the 21st century, according to the left-leaning Economic Policy Institute. Either way, it’s a long-term decline in the economic power of labor relative to capital, one that accelerated in the 21st century. This decline, I’m sorry to report, supports my pessimistic thought experiment that 98 percent of the U.S. population doesn’t really participate in the U.S. economy.

Even as labor’s share of national income has been declining (and that of capital increasing), the tax rate on labor has been rising and the tax rate on capital has been declining. That makes no economic sense, but a great deal of political sense. The more powerful capital becomes as an engine of the economy, the better able its representatives in Washington are to restrict federal intrusion in the form of taxation, regulation, etc. According to the University of California Berkeley economists Emmanuel Saez and Gabriel Zucman, the 2017 Trump tax cut achieved an historic first in setting effective taxes on capital lower than effective taxes on labor. The lines crossed in 2018. It is perhaps the least-commented-on change in American norms that President Donald Trump achieved during his four years in office.

But help is on the way! The Raise the Wage Act of 2021 would, according to a Congressional Budget Office analysis, shift national income back a little bit from capital to labor—so much so that the bill would increase tax revenues overall. It would also, as major headlines in the business press noted, increase the budget deficit and increase unemployment, according to CBO, but not by very much, and the employment effect may be purely imaginary.

I’m not saying that an increase in the minimum wage from the current $7.25 to $15 would solve the problem of capital steamrolling labor as a driver of the economy. But reversing that trend even slightly would be an unexpected benefit, one that I discuss in my latest New Republic column.