“The era of taxing ‘capital’ at lower rates than ‘labor’ should end,” according to the latest Investment Outlook from Bill Gross, co-founder of PIMCO. The piece, which is titled Scrooge McDucks, is in line with recent comments that the financial manager made about Carl Icahn’s campaign at Apple Inc. (NASDAQ:AAPL), and with the views of several prominent investors.

Bill Gross

According to Bill Gross, investors who raked in millions in the last thirty years did not create their wealth. They worked hard, and they survived where many others did not, but they rode the wave of easy credit and rising markets. “Now it’s time to kick out and share some of your good fortune by paying higher taxes or reforming them to favor economic growth and labor,” Gross told his fellow investors.

Higher taxes at PIMCO

Bill Gross recognizes the successes of his fellow investors, and makes reference to his own in the piece, but he is calling directly for an increase in tax on carried interest, and he wants capital gains tax readjusted so it is equal to marginal income tax. Bill Gross references Stanley Druckenmiller and Warren Buffett as investors who have recently advocated similar proposals.

This is the alternative to “corporate profits and individual gazillions” according to the fund manager, and it would change the structure of the tax system to “favor economic growth and labor.”

The statement is likely to be a contentious one. Many of the wealthy have said that increased capital gains tax would have a poor effect on the economy of the United States. Bill Gross has his own ideas about the larger economy.

Credit waves and share buybacks

Gross takes a look at the growth in corporate earnings in the United States against the growth in earnings per share. In what he calls “Financial Alchemy”, earnings per share have continued to grow even when corporations saw a fall in their income.

Companies have achieved this by cutting their expenses and buying back some of their own stock. This trend, according to Bill Gross, is remarkably similar to what has happened to the economy of the United States in recent years. Wages as a share of GDP have been cut from 47% to 43% in the last ten years, and the Federal Reserve’s quantitative easing program has been acting like a $1 trillion per year buyback program.

This leads Bill Gross to the pertinent question

The money from the Federal Reserve’s QE program has flown into risky paper assets rather than productive ones. This leads Bill Gross to the pertinent question, “Has our prosperity been based on money printing, credit expansion and cost cutting, instead of honest-to-goodness investment in the real economy?”

The question is a reasonable one, and it is one that policy makers and investors should ask themselves. Bill Gross says that prospects for markets are not good under the current regime. The United States needs to rebalance taxes ,and focus on real rather than financial investment in order to improve the situation.