To the extent that tax policy discourages capital accumulation, however, productivity and real wages will stagnate or decline. Figure 1 confirms that capital formation is the key ingredient to rising wages. When there is more capital per worker, wages rise. Whenever the ratio of capital worker stops rising, wages stagnate. When capital taxes are running high and investment capital grows scarce, the last areas that will receive funds from the shrinking investment pool will be low-income, inner city neighborhoods.
Human capital is also critical to increasing productivity and living standards.
Sophisticated, high-tech equipment requires skilled workers, and skilled workers need the best equipment. Human capital includes education, training, and experience. If workers are more skilled, they will produce more and thus command higher salaries. Under current law, those who save and invest in business capital are subjected to numerous overlapping taxes on corporate earnings, dividends, capital gains, and estates. Those who invest time and money in improving their own human capital are subjected to the highest marginal tax rates during their peak earning years.