Do states’ tax policies cause U.S. employees to earn less and employers to earn more?

There are many economic theories about why overall income has moved away from income earned through labor and towards capital, such as stocks and bonds. Economics columnist Robert Samuelson notes that the United States has experienced a $750 billion transfer in income from labor to capital in the past decade alone. The academic world is hard at work trying to figure out what is behind this trend, but finding the kind of causal evidence necessary to identify possible policy proposals to reverse is even more difficult.

That is why Owen Zidar, an assistant professor for economics at the University of Chicago Booth School of Business, and 2014 Equitable Growth grantee, is investigating whether states’ individual tax policies may play a role in the decline of income going to labor. Over the past 50 years, many states, in an attempt to be “business friendly,” have experimented with different kinds of investment and corporate tax credits as a means to encourage investment in their states. Zidar’s research asks whether such tactics by states have resulted in a shift in income from workers to capital owners.

Zidar’s research will build upon earlier research by Loukas Karabarbounis and Brent Neiman of the University of Chicago, who contend that it is cheaper and more powerful technological equipment that is driving the trend. Computers and robotics, they believe, have allowed businesses throughout the world to replace workers with automated systems, thereby reducing the labor share of income. Zidar is exploring the possibility that state tax preferences could have the unintended consequence of making such investments even cheaper, furthering workers’ disadvantage.

To economists, this recent phenomenon of a falling share of income going to labor comes as a big surprise. In 1957, when Nicholas Kaldor outlined six “stylized facts” about economic growth, he included a declaration that there is a roughly constant share of income flowing to labor versus capital. Until it was discovered very recently that the labor share was indeed declining, Kaldor’s point was taken as economic gospel.  Today, there are many explanations for what is happening to labor’s share of income, such as Karabarbounis and Neiman’s claim that changes in technology are driving the trend. Other research suggests that globalization, the growth of the finance sector, or the decline of unions are important contributing factors.

Zidar’s research on the role cheaper technology may play in reducing the labor share of income could have important policy implications, especially if it reveals a direct relationship between states’ tax policies and the amount of income going toward labor versus capital. Policymakers might need to reconsider whether these kinds of tax credits are always the most economically prudent—both in terms of paying a fair wage and strengthening the economy overall.