For a while now, I have thought that there are two key reasons that the middle class has gotten squeezed in our growing economy over the last forty years.
The first is the change in tax policy enacted during the Reagan administration that reduced the highest marginal tax rate on high earners from seventy percent in 1981 down to twenty eight percent by 1986.
This change in tax policy disincentivized reinvestment in labor, infrastructure, and durables, and incentivized profit-taking and huge jumps in salaries for managers and owners of private enterprises.
Don’t get me wrong: seventy percent marginal tax rate is unconscionable to me. There has to be incentive for risk-taking. The policy shift has likely resulted in huge gains in innovation by private entities. Consider where we are technologically today compared to 1980.
I’m just not sure the right balance was struck because as a result of the policy shifts, the gulf between the haves and have nots has continued to grow wider, leading to stresses throughout society.
I am not a believer in using taxes to give handouts to those who don’t work for their earnings; however, I do believe that tax policy can effectively be used to unburden government programs by forcing behavior changes in private entities that lead to increasing wages and benefits for the middle class workers. A tax rate of seventy percent won’t get it done. But a top marginal tax rate near forty percent on earnings in excess of two million dollars annually could make a dent in the income gulf.
The majority of households today have a top-end marginal tax rate of twenty-two percent, with more than ninety percent of households maxing out at twenty-four percent. Increasing the marginal tax rate on million dollar earners will benefit everyone earning under a million bucks annually.
The second important factor in closing the income gap involves labor organizing. As you know, I have represented labor unions for more than 25 years, but I am not a militant. I see the benefits for lots of workers while understanding the problems with unions.
Today, only six percent of the workforce is organized. That number is too low because it is not significant enough for the organized workers’ gains to have ripple effects through the market. The pebble is way too small.
When thinking about the downsides of unions, most folks consider that unions only protect bad workers, drive up employer costs, and lead to listlessness in the workforce. Those are often valid concerns. Effective unions understand these downsides and effectively address them.
The problem is that too many institutionalized unions are unwilling to address these concerns as a drag on commerce.
Last week, Amazon workers in Alabama overwhelmingly rejected an effort to unionize their plant. It seemed to me that the union was tone deaf in its efforts and didn’t make its case clear.
One worker who was interviewed said that she received health insurance on day one, and her pay was double the minimum wage in a state that typically does not value workers. Why would any worker want a union at a job that was already doing everything for workers that a union could do?
The workers were not stupid. They weren’t fooled. They understood completely. Unions are not needed where employers pay fair and play fair.
In places where employees are not treated with dignity or respect, and in places where an employee’s value is not recognized, a good and thoughtful union can help benefit workers and make the business more successful.