Thomas Hungerford, Senior Economist and Director of Tax and Budget Policy at Economic Policy Institute, claims that taxing capital income will decrease the income inequality. According to him, the income gap between the different income groups is increasing because the capital owners are getting a relatively higher share from the generated income in the economy. Therefore, increasing the taxes on the capital incomes can decline the capital income. I strongly disagree with Hungerford.
Graph 1: Global Labor Share
It is true that the labor share in the income is decreasing all around the world. Karabarbounis and Neiman (2013) indicate this reality in their NBER research paper. The graph above is an important proof of the decrease in the share of labor. Especially after 1980s, the decrease has increased.
The graph explicitly proves the decrease and checking the same statistics for the developed countries, we observe the similar tendency. Therefore, almost all the countries are experiencing the same problem.
Graph 2: Productivity vs. Family Income
The graph 2 adds relatively more drama to the story of the decreasing share of labor in GDP. The workers are working comparatively more productive while they do not receive an increasing payment parallel to their increasing productivity.
The story explained in the previous paragraphs sounds very dramatic; however, it is not possible that this story can be true. Taking the story to infinity, we might conclude that the capital owners do not want to share anything with the workers and even they want to push the workers into poverty. Up to a certain limit, that might be possible; however, it is impossible at the infinity because the capital owners cannot earn without the workers.
The relatively better way for developing an understanding, it is essential to remember that the workers and the capital owners are two main agents in the economy and they exist interdependently. Also, considering that the number of workers in the world population is much higher than the number of the capital owners, and then the capital owners need the workers as customers because the products and the services produced by the capital owners’ business have to be sold. The workers do not have the necessary capital, or they are not willing to run a business and they need the capital owners.
Consequently, taxing the capital income will not be a solution to decrease the income inequality in the short run or the long run. I would suggest developing a new economic policy for the redistribution of income. For instance, if the government designs some new promotion and incentive programs for the new entrepreneurs, every individual can find relatively better opportunities to develop their businesses and become a capital owner. Taxing capital income might decrease the number of business in the economy. Promoting entrepreneurship would increase the number of business in the economy.
Hungerford, Thomas L. 'Why Taxing Capital Income Makes Sense'. Economic Policy Institute. 2015. Web. 20 Apr. 2015.
Karabarbounis, Loukas, and Brent Neiman. 'The Global Decline Of The Labor Share.' Chicago Booth University. 2015. Web. 20 Apr. 2015.