Capitalists in the Twenty-First Century
https://www.nber.org/papers/w25442
Before we start complaining about the rich not paying their fair share, let’s note that the top 3% of taxpayers mostly “working rich” pay more than 50% of all income taxes. The top 1% paid 37% of all income tax collected.
It's important to distinguish the “working rich” from the Oligarch rich. The Oligarch rich collect passive, rentier income from the ownership of assets: stocks, bonds, real estate, etc. The “working rich” are owners of companies, and most of their income comes from human capital, meaning their knowledge, expertise and experience. According to the NBER authors’ research, when these “working rich” owners retire or die, business income tanks by 75%. In contrast, the passive income from financial/physical assets continues on unchanged even if the owner retires or dies.
The “working rich” are not tax cheats like the Global Super-Wealthy, they’re the ones doing the heavy lifting of paying most of the $1.7 trillion in income taxes (which doesn’t include the payroll taxes of Social Security and Medicare, with employees and employers each paying 7.65% of wages/salaries).
This is the key difference between employees and the “working rich”: the working rich, as business owners, can elect to pay themselves a salary but distribute most of their income as profits or long-term capital gains, which are taxed at 15% up to $425,800 and 20% on everything above that level.
Despite this advantage, the top 1% paid an effective tax rate of 26.9% compared to 15.6% for the top 50% of taxpayers while the top 5% paid 23.5%.
The other key finding of the NBER paper is that the “working rich” kept most of the gains earned by their enterprises: rather than distributing much of these gains to employees, the business owners increased their share of net profits, a trend which has fueled the income inequality so many of us have been scrutinizing.
Long experience no longer pays dividends. In a commoditized labor force, paying higher wages to retain senior workers simply doesn’t make business sense. The most profitable way to manage employees is hire the least-experienced workers, get them up to speed and then keep their wages more or less the same. If they leave for another job, the tasks they were performing can be learned by new employees relatively quickly because they’ve been commoditized.
Now that even inexperienced workers are scarce in many regions, businesses are having to pay more wages and offer more flexibility to get replacement workers. But the modest rise in wages (roughly 3%, if recent estimates are accurate), are much less than the gains being accrued by successful privately owned companies.
In other words, rising income inequality may be a reflection of the changing nature of work: to streamline and automate work, labor has been commoditized wherever possible so the tasks can be performed by anyone with some training anywhere in the world.
The days in which the senior workers held the most profitable knowledge in their heads, and employers who wanted to secure strong profits paid senior workers handsomely to keep them, are largely gone. Would you pay someone $30 an hour when someone getting $20 an hour produces the same output? No wonder the “working rich” are keeping most of the gains for themselves: there’s not much incentive to reward seniority if seniority is no longer adding to the enterprise’s core human capital.
