Let's talk about "corporate greed", the "working man" and class warfare. But let's do it in a roundabout way. First, let's agree that highly skilled or educated workers using modern equipment are more productive and hence earn higher pay than their less skilled and educated counterparts. If you accept this relatively undebatable fact, then we can go to the next step - the acquisition of that equipment that makes people more productive, is what economists call physical capital.
In order to have capital, somebody must invest. Expected returns influence the amount people are willing to invest. Under current tax law, each $100 of corporate profit is taxed 35 percent, leaving $65. Corporate shareholders pay an additional tax of up to 39.6 percent on dividend income. Ignoring state and local taxes, the federal tax bite leaves the private sector $39 out of the original $100 profit - that's a 61 percent tax.
One simple conclusion is that if people were able to keep more of their investment return, they'd do more investing. If they did more investing, there'd be more physical capital thereby making more workers more productive and earn higher wages. Thus, given the connection between investment, productivity and wages, there is little conflict between people who invest in equipment and those who use it.
Investment doesn't just materialize out of thin air; there must first be saving. But what influences the amount saved? If you said, "the return on savings", go to the head of the class. Saving done outside of IRA, Keogh and 401K plans faces a marginal tax rate of up to 39.6 percent. American saving incentive is weakened because it's taxed so heavily. Lower savings means fewer resources to fuel investment. As a result growth in both worker productivity and earning are lower than they would be otherwise.
Politicians demagogue about wage stagnation. Dr. Alan Reynolds, an economist at the Indianapolis-based Hudson Institute says, "The statistics provide no evidence at all that employee compensation has declined significantly as a share of national income, nor that the share going to profits has increased more than should be expected during a cyclical recovery. Instead, we find that the share of personal income going to both workers and savers has declined since 1990, because the share going to government transfer payments has increased." In other words, Congress is reaching into worker paychecks to finance programs like Social Security, Medicare and Medicaid. Dr. Reynolds shows it's the handout explosion, and resulting slower economic growth, explains wage growth stagnation.
The recovery that we've seen over the past five years or so is about the slowest in our post-WWII history. What's needed to escalate the weak rate of growth in American living standards is not one of those "stimulus packages" that politicians talk about. Instead, Congress should get out of the way of more rapid economic growth. They should eliminate the corporate profit tax charade. After all only people pay taxes; corporations are simply the government's tax collectors. Another way is for Congress to eliminate the capital gains tax and the sometimes double or triple taxation of investment returns. More important than anything else is for Americans to wise up to class warfare demagoguery and reject the politics of envy. There is no conflict between those who save and invest and "workers." In fact, very often they are the same people (51 million Americans own stock). Class warfare only serves the interests of tax and spend politicians and other hustlers.
Walter E. Williams
July 2, 1998