Increase Top Tax Rates to Cut Taxes to Middle-Class Workers Hurt by Automation

While automation has substantially reduced the costs of consumer goods, it has also hindered the wage growth of middle income workers. My recent work with Paul Gaggl suggests that automation is responsible for about a third of the growth in per-capita income since the 1990s, but that the gains are not equally shared.

The advent of computers has made it possible to automate middle income jobs, such as administrative or manufacturing jobs. At least for the time being, however, high-skilled work that involves creative thinking cannot be automated. Consequently, the growth in middle income wages has not kept pace with the growth in high income wages.

In addition, research suggests that automation tended to favor business owners over wage earners. For example, the automation of manufacturing work meant that plant owners were able to economize on labor costs and retain a larger share of their profits.

A tax cut for middle income workers would somewhat compensate them for the effects of automation. Who should pay for it? Those who saw the largest gains. The government’s budget could be balanced by increasing taxes on both capital and high wages.

While both sides of the political debate voice concerns about the strength of the middle class, both may be uncomfortable with this proposal. On the right, some may worry that increasing top tax rates may hurt economic efficiency. On the left, some may ask, why should we cut taxes rather than redistribute more toward the poor? Even if middle-income salaries stagnated relative to high-income salaries, they are still better than low-income salaries or no salaries at all.

Typically, redistribution is limited because we want to motivate people to work hard. But this rationale makes sense only when inequality is not an outcome of pure luck of the draw. In the case of automation, luck played a big role: Twenty years ago, it was impossible to anticipate which jobs would be automated. Some were lucky and chose careers that benefited from automation, while others developed expertise in jobs that subsequently became obsolete.

Periodically adjusting the tax code to redistribute gains from beneficiaries of unanticipated technological change toward its victims is a reasonable way to spread the benefits of technological progress. Technological change is inevitable and its impact on various groups over time is unpredictable so it makes sense to share the risk.

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