Comment by Robert E. Litan

Alternatively, a second idea suggested by Greg Ip of the Wall Street Journal, Nobel Prize winners Paul Krugman and Daron Acemoglu (with co-authors Andrea Manera and Pascual Restrepo) is to rectify the current imbalance of taxation on labor and capital, by increasing the taxes on physical investment. As Ip points out, since the 2017 tax bill, while the marginal tax on labor has dropped a bit, from 29% to 27%, the marginal tax rate on new equipment is now just 4%, down from 14% before that legislation. This glaring disparity calls out for rectification especially because of the very limited effect that tax rates are having on physical investment and in turn GDP. Moreover, all three authors point to the secular decline in labor’s share of national income and the corresponding rise of the capital share (represented by profits), trends which AI is likely to accentuate. Hence at least a modest tax increase on capital seems in order.