Taxing the Intangible Economy

With a slowdown in productivity growth hurting Western governments' ability to deliver goods and services, new forms of revenue generation are needed. One possible solution is to tax capital gains at the same rate as other income.

LONDON – Some very clever people, including the president of the European Central Bank, Mario Draghi, and Andy Haldane, chief economist at the Bank of England, are expressing concerns over the slowdown in productivity growth. And, given that productivity (measured as GDP per hour worked) is the ultimate driver of increases in living standards, they are right to be worried.

For most people in the West, wages and living standards have stagnated for decades. If you were a factory worker in the north of England in 1970, for example, odds are good that your children will earn less in real terms than you did 50 years ago. The same is true for workers elsewhere in Europe and in the United States, an economic reality that is partly responsible for the rise of populist politics.

The trajectory has been trending down for years. As Figure 1 shows, average annual productivity growth in five OECD countries – France, Germany, Japan, the US, and the United Kingdom – was 2.4% in the 1970s. During the decade after 2005, it was 0.6% in those countries. And, although the “Great Recession” that started in 2007 contributed to the decline, the average had been falling well before the financial crisis began.