Someone once said if economics made sense we wouldn't need economists.  It's true that good economics is often counterintuitive.  One example of that is the concept of labor productivity, or output per hour of work.  It turns out that the productivity of labor has more to do with capital than with labor. 

When I was about 10 years old I picked a little cotton for a week or two (that was enough) on Billy Joe Hoppers' farm. The pay was three cents a pound, and, as I recall, my goal was to get 100 pounds in a day and earn $3.00.  I don't recall whether I met that goal, but I do recall being bone tired riding to the cotton gin on top of a load of cotton with a delicious feeling of accomplishment.

In retrospect, Billy Joe was just doing my Dad a favor putting up with me.  The real cotton pickers dragged those nine foot sacks behind them and, as I recall, picked over three hundred pounds in a day, making over $10.00.  The difference between my 100 pounds or less and their 300 pounds or more was a difference in labor productivity based on labor — the skill, experience, strength, and tenacity of the workers themselves.

I'm not sure when it happened, but before long, the mechanical cotton picker arrived in Billy Joe's cotton fields, and a single operator could pick acres of cotton in a day.  That guy had enormous productivity compared to the best of the hand pickers. (He gets credit in the productivity statistics even though the mechanical picker is doing the work.)  That's generally the way it happens.  Huge productivity improvements, often based on new technology, come in chunks; it's not a gradual, linear thing, although smaller improvements come in between the big ones.

My point is that the big changes in what we call labor productivity have more to do with capital than with labor. Construction workers working with picks and shovels may work harder, but they hardly have the productivity of the heavy equipment operator.  Labor productivity rises as labor saving technologies enable fewer and fewer workers to do more and more work — or preside over the work done by capital equipment.  Recall the old joke about the factory of the future:  It has only two workers: a man and a dog.  The man is there to feed the dog; and the dog is there to keep the man from touching the computer.

If economic output just keeps pace with population growth, we may be holding our own, but significant increases in our standard of living come from a growing capital stock available to our labor force.  Growing prosperity involves a growing ratio of capital to labor. Think how the bar code and cash registers with pictures on them made pimply-faced high school kids productive behind the counter.  

To belabor the point, rising wages and incomes of workers depend, ironically, on growth in labor saving capital.  Capital investment depends on saving.  Domestic saving has been inadequate to support domestic investment for years, with the difference made up by the capital inflows that are the flip side of our current account deficit.  

We need to shrink the deficit and increase domestic saving, but that discussion is for another time.  Now, I want to focus on the burden of taxes on domestic saving and investment necessary, not only for our general growth, but for growth in the wages of rank and file workers.  Taxes on capital hurt labor, and a huge threat to worker income is the potential increase in the 15 percent tax rate on capital gains and dividends.  That rate should be lowered or eliminated altogether, but it can easily be demagogued as a tax break for the rich, as can a needed reduction in the 35 percent corporate tax rate.

The irony is that increasing these tax rates is very likely to reduce rather than increase the tax revenues to the government.  The Laffer curve works more readily on capital gains and dividend taxes than on other income because the tax payer has more control over them.

Capital gains tax rate cuts almost always pay for themselves; so raising taxes on them will not only slow capital investment, but will have a negative tax revenue effect.  It boggles the mind to know that and say, nevertheless, that "fairness" demands it.