Last Wednesday’s Reuters Chart of the Day was from Margaret Jacobsen and Filippo Occhino of the Cleveland Fed. It commented on labor’s declining share of income and rising inequality. According to the commentary:
Household income comes in two types: labor income, which includes wages, salaries, and other work-related compensation (such as pension and insurance benefits and incentive-based compensation), and capital income, which includes interest, dividends, and other realized investment returns (such as capital gains). During the last three decades, labor’s share of total income has declined in favor of capital income.
Reuters writer Felix Salmon explains that disbelief truly sets in when you “think of capital income as the money flowing to ‘job creators.’” The chart shows a very clear path of widening disparities in economic inequality:
Of course, as the Cleveland Fed paper shows, a lot of the story here is about rising inequality. But the more powerful, if less obvious, story, is just how entrenched capital income has become in the US economy. As recently as 2000, it was at levels more or less in line with the historical average. And then, something big happened. During the Great Moderation — when yields fell on all capital asset classes — capital income went up sharply. Then the crisis happened, a classic case of a dog not barking: you’d expect capital income to have fallen enormously, at least for a year or two, but it didn’t, it just stopped rising. Most recently, in the wake of the financial crisis, capital income has been soaring again.
There’s a big lesson here for anybody serious about fiscal policy, too. (Paul Ryan, I’m looking at you.) As the labor share of income goes down and the capital share of income goes up, the only way that we can stop tax revenues from plunging disastrously is to tax capital income at least as much as we tax labor income. By contrast, the Ryan plan proposes taxing capital income at zero — putting ever more of a burden on working Americans, while giving unearned income a massive tax break the rich really don’t need.