A Big Idea for Populist Tax Reform: Really Increase Middle-Class Incomes

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Now that the Trump administration is inching toward tax reform, the country needs a big bipartisan idea to ensure the changes enacted benefit the working middle class.

The Tax Policy Center’s best estimate as of August is that the administration’s concepts will on average save middle-class taxpayers $760 per year, compared to saving the upper fifth of taxpayers an average of $13,600 annually — an 18 fold difference! With middle-class real wages mostly flat or declining, there’s only one genuinely bipartisan tax-overhaul option for helping average Americans: Making the offering of broad-based profit sharing or employee share ownership a condition for businesses receiving corporate tax incentives.

Given that the richest 10 percent of citizens have almost 80 percent of capital wealth — such as stocks, bonds and real estate — and well over 90 percent of capital income — such as all capital gains, dividends, interest and profits from businesses — this market-based solution makes sense and could garner support from both political parties.

The country is now expected to spend more than a trillion dollars every decade on corporate tax expenditures. The proposed corporate tax reform will increase the tax benefits given to corporations beyond this largesse. Businesses expect to get lower taxes and the continuation of older tax benefits, such as accelerated depreciation. All that, however, will not change the income of the tens of millions of current employees of those businesses.

That’s why it’s necessary to encourage many types of equity- and profit-sharing that goes to normal workers.

Our current system of funneling wealth to the top is the result of decades of mostly unintended shrinkage of federal encouragement of broad-based profit sharing and employee share ownership.

The Carter administration created the 401(k) plan, which resulted in the ending of many generous profit-sharing plans. The first Bush administration reversed tax incentives to encourage employee stock ownership plans in stock market companies, a program designed jointly by President Ronald Reagan and Sen. Russell Long in the last bipartisan collaboration on shares. The second Bush administration tried to reform executive pay after Enron by creating regulations for stock options. That resulted in changes to the accounting treatment on stock compensation but also unexpectedly incentivized companies with broad-based equity compensation plans to throw regular employees and managers out of their share plans.

These changes were never designed to expand the opportunity of the working middle class to participate in broad-base share plans. Our proposal is focused specifically on that.

What’s needed today, as our lawmakers tackle tax reform, is a requirement that certain tax benefits go only to companies that have some form of broad-based profit sharing or employee share ownership. Bipartisan groups in the House and Senate would figure out the details.

Congress and the administration could also instruct agencies to give some preference in federal contracts to companies with employee share ownership or profit-sharing.

Congress is at present considering about a half dozen employee ownership bills, all of which have components that could make the economy work better and more fairly. Our key message is that whatever it does, Congress should make any tax reductions for corporations conditional on sharing the benefits with workers. Ideally, the administration would also find this attractive.

Despite deep differences, many of America’s founders — Washington, Hamilton, Adams, Jefferson, Madison and Lincoln — spoke extensively about the ideal that broad-based property ownership was necessary for a democratic republic to sustain itself. In the nation’s first economic development policy, designed to rebuild the cod fishing fleet decimated by the British in the Revolutionary War, President George Washington conditioned tax incentives for new ships on the establishment of broad-based profit sharing plans with sailors.

Corporate tax reform that assures that middle class employees get a fair shake is the American way to go.

Joseph R. Blasi, a sociologist, and Douglas L. Kruse, an economist, are professors in the School of Management and Labor Relations at Rutgers University, and Richard B. Freeman is a professor of economics at Harvard University.