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Give Workers a Fighting Chance

At a time when businesses are awash in technologies capable of replacing human labor, the US tax code is encouraging them to embrace excessive levels of automation – even to the point where it is no longer efficient to do so. Rarely before has the deck been stacked so fully against workers.

CAMBRIDGE – The first months of US President Joe Biden’s administration will be defined by the efforts to contain COVID-19 and deliver vaccinations on a mass scale. Over the medium term, however, the economy will determine the administration’s success. Here, Biden has indicated that tax reform will be a high priority, and he has released plans to address long-running fiscal problems such as federal government revenue shortfalls and the tax system’s loss of progressivity. But these proposals do not yet go far enough to address a major fault line in the tax code: the excessively favorable treatment of capital income (profits and returns on financial assets and savings).

Capital has always been taxed more lightly than labor has in the United States. In my own research with MIT’s Andrea Manera and Pascual Restrepo of Boston University, we estimate that the effective tax on labor (accounting for payroll and federal-income taxes) in the 1980s and 1990s was about 25%, which meant that it cost $1.25 to pay an employee $1. By contrast, the effective tax on capital was only around 15%.

The situation has only worsened since then, as effective taxes on capital have declined. Following the Republicans’ 2017 tax cuts, capital such as equipment and software faced a tax rate of about 5%, while the effective tax on labor remained largely unchanged.