07/16/2014 04:19 pm ET Updated Dec 06, 2017

Beyond the Minimum Wage, a Middle-class Share of Capital?


Photo credit: Fibonacci Blue

The battle to increase the minimum wage is everywhere, from global fast food worker protests and new local minimum wage laws to executive orders and passionate speeches from President Obama. Democrats say that they will make their commitment to reducing economic inequality a cornerstone of the midterm elections this fall. Some conservative business leaders are saying that the middle class needs more spending power and Republicans need to recognize this reality. It's worth considering whether minimum wage policies are sufficient to substantively address rising inequality and the broad decline of the middle class.

While several million workers would benefit from an increase in the minimum wage, it is simply not far-reaching enough to cover broad swaths of the middle class. What tens of millions of middle-class citizens need is a capital wage. With a minimum wage, a citizen works for capital and tries to squeeze out a fair living wage in a difficult situation. With a capital wage, middle-class citizens gain access to capital ownership through shares that can pay them capital income in the form of capital gains and interest and dividends. Here, the goal is to obtain a maximum wage in order to expand wealth. The root cause of growing inequality is a lack of access to this capital income among the majority of the population -- a structural change in our economy that has the middle class and capital going in opposite directions. The important discussion of the concentration of wealth among the top one percent has sidelined the focus on how to democratize access to capital. The solution is to give more middle-class workers access to this kind of wealth via shares of stock and profits in the companies where they work and through citizen's trusts.

According to the Urban Institute and the Brookings Institution Tax Policy Center, in 2011, a whopping 86% of all capital gains and capital income was concentrated in the wealthiest 20% of the U.S. population. True, 56.8% of this income in the hands of the top 1% and 38.1% is in the hands of the top 0.1%, yet the big story is the plight of the middle classes. The next 20% received only 6.6% of all capital income in 2011, and the middle 20% received only 3.8% of all capital income in the same year. The middle class is employed by capital but they receive mainly wages and do not obtain a fair share of the income of capital.

Why is capital income so concentrated? Because the ownership of capital itself is highly concentrated. The wealthiest 10% of the U.S. population control over three-quarters of all wealth and 90% of all financial assets. Stock ownership among adults in 2013 was at 52%, its lowest level since 1998. Even ownership of mutual funds drops significantly below incomes of $75,000 per year. Only 53% of households making $50-74,000 own mutual funds and only 36% of households making $35-49,000 own any mutual funds. Worse still, most household mutual fund ownership is through retirement plans such as 401(k) plans where the household is not actually receiving the interest and dividends to support their wage income and the cumulative 401k assets are unlikely to provide a comfortable retirement. Many households have negligible retirement assets and zero stock market investments.

This concentration of ownership of key assets keeps creeping up. As a result, the share of capital income going to the top 1% increased from one-third to three-fifths from 1979 to 2005. Add to this the general flatness of inflation-adjusted middle-class wages since 1980, and the middle class is squeezed on both labor income and on capital income. Gone is the era of "working for the post office," that quip from the '50s and '60s that meant annual inflation-adjusted wage increases and the expectation of a generous pension plan paying a high percent of one's final wage for life. It has been replaced by an era where the entire middle class essentially has a minimum wage. Calls to raise the minimum wage for the working poor are justified. But as a policy for addressing the economic reality of rising wealth concentration and the overall decline of the middle class, it is insufficient. We need new thinking.

If the concentration of capital ownership and income is the problem, then one solution worth exploring is societal-wide mechanisms to broaden access to capital. Fortunately, we have established mechanisms for giving workers access to capital in the companies in which they work -- broad-based employee stock ownership plans (ESOPs), profit-sharing plans, and stock options. Sadly, the last seven presidential administrations have rolled back or plan to roll back tax incentives for these plans. President George H.W. Bush's Administration cut back Reagan-era tax incentives that encouraged stock market companies to fund ESOPs -- low-risk grants of capital for all their workers -- by letting the banks deduct part of their interest income on the loans to finance buying the stock for workers. In ESOPs workers do not have to use their savings to buy the stock.

A Democratic Congress under President Clinton's administration further eliminated this incentive and then allowed those same stock market companies to have virtually unlimited deductions for elite stock ownership and profit/gain-sharing plans for their top five executives alone through a little known part of the Internal Revenue Code called 162(m). That little gift now eats up billions in tax expenditures annually. President George W. Bush's Administration supported a change in the accounting on stock option plans that led to a mass abandonment of broad-based stock option plans, especially in Silicon Valley and high tech industries across the country. This led to a more than 30% drop of middle-class professionals in broad-based stock option plans throughout the economy. This policy misstep could have been avoided had the Administration supported a tax credit for corporations that broadly share stock or stock options with their workers. President Obama's Administration is fighting hard to change the tax law in ways that will further roll back other incentives. Their recommendations would prevent companies from deducting dividends used to finance ESOPs that provide free grants of stock to workers. In addition to all the tax incentive rollbacks for stock-based plans, tax incentives to create generous cash profit-sharing plans have been withering as well. Briefly, the last seven Administrations have a policy of capital shares for the middle class that has been uncoordinated, irrational, and focused on sharing capitalism mainly with the 1%.

What would a meaningful policy on capital wages look like? First, current and future Administrations and political leaders from both parties should announce that making everyone a capitalist is a worthy public policy goal. Democrats need to own up to the fact that the minimum wage is not sufficient. Republicans need to own up to the fact that modest individual tax cuts alone will not magically bring back the middle class.

Second, the many mistakes of past administrations on capital shares for the middle class should be undone. New tax incentives can mostly be funded by undoing the same excessive and irrational Internal Revenue Code 162(m) subsidies that squander billions of tax expenditures to subsidize top executive pay. One compromise is to allow stock market companies to continue to deduct top executive employee ownership and profit sharing plans as a business expense as long as they have broad-based employee ownership and profit sharing plans for all of their employees

Third, we need a presidential commission to explore how to extend lower-risk types of employee stock ownership and profit sharing for workers at their companies throughout the economy.

Fourth, recognizing that all capital ownership cannot be provided through the company where employees work, Wall Street and the Treasury need to work together to design diversified bond and equity funds that can be used in 401(k) plans which will be allowed to directly pay their dividends and interest to workers. The bond funds can be used to finance the nation's much-needed infrastructure rebuild.

Fifth, we need federal, state and local tax incentives that will encourage investment managers to set up investment funds called citizen's trusts. These citizen's trusts should be allowed to use leverage to acquire diversified investments in capital projects throughout the economy where the earnings on the capital projects are likely to pay back the loans so that the citizen's trusts end up, just like private equity firms, with substantial ownership interests in the economy. The condition for these tax incentives should be that the private ownership shares in these projects are broadly distributed among citizens in a region or a locality. This would be a new type of private equity that would benefit many individual citizens. It would be the private market economy version of the Alaska Permanent Fund that for years paid dividends to all of Alaska's citizens based on income from the access to oil deposits that Alaska has given to private oil companies. We need new ideas for middle-class workers and citizens who need to own capital and to receive income from it.