Workers now pay higher tax rate than investors

WASHINGTON — Most Americans have to work to earn a living. But the rich are different: They get most of their income not from labor but from what they own — companies, stocks, real estate and the like.

These income-generating assets are what economists call capital. And because capital is heavily concentrated among the rich, the U.S. government taxed earnings derived from capital at a higher rate than earnings made through labor for the entirety of the 20th century.

But that’s no longer the case, according to economists Emmanuel Saez and Gabriel Zucman of the University of California, Berkeley.

In their new book, “The Triumph of Injustice,” they present data showing that in 2018, labor income was taxed at a higher rate than capital income for the first time in modern U.S. history.

The proximate cause of the shift was the 2017 Tax Cuts and Jobs Act (TCJA), which dramatically slashed taxes on corporate profits and on estates — both forms of capital income — according to their analysis.

But Saez and Zucman also note that the trend has been decades in the making, driven in large part by the same forces that have pushed billionaires’ tax rates below those of the working class.

“From the 1940s to the 1980s, the average tax rate on capital exceeded 40%, while labor paid less than 25%,” they write. “Since its peak of the 1950s, however, the average capital tax rate has been cut by twenty percentage points. At the same time, labor taxation has risen more than ten points, driven by the upsurge in payroll taxes.”

The debate over Saez and Zucman’s findings underscores that much of our understanding of how the economy works is based on formulas and models built by economists.