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Thursday, June 14, 2007

Progressive Taxation as a Political Shield for Globalization

David Wessel of the Wall Street Journal says there is increasing support for income redistribution policies to compensate the losers from globalization and prevent a backlash against trade liberalization:

The Case for Taxing Globalization's Big Winners, by David Wessel, Commentary, WSJ (free): A new argument is emerging among the pro-globalization crowd in the U.S...: Tax the rich more heavily to thwart an economically crippling political backlash against trade prompted by workers who see themselves -- with some justification -- as losers from globalization.

The sharpest articulation of this view comes not from one of the Democratic presidential campaigns, but from economist Matthew Slaughter, who recently left President Bush's Council of Economic Advisers to return to Dartmouth's Tuck School of Business.

"Policy has become more protectionist because the public is becoming more protectionist," Mr. Slaughter and ... Yale political scientist Kenneth Scheve, write in the new issue of Foreign Affairs magazine. "And the public is becoming more protectionist because incomes are stagnating or falling."

Globalization, the two academics argue with unswerving conviction, is good for the U.S. ... But the benefits ... have been distributed unevenly. ...

The conventional response from fans of globalization, including the Bush administration, is rhetorical support for more aid for workers hurt by imports ... and better education to equip the next generation of Americans with skills needed to command high wages in a global economy. Both are crucial. Progress on both is painfully inadequate.

But trade-adjustment assistance is traditionally targeted narrowly at workers hurt by imports. Today's angst about globalization is far more pervasive. ... And education takes generations to pay off.

What to do? ... "It is best not to address increasingly salient concerns about inequality by interfering with trade," Mr. Summers argued [recently]... His solution: use progressive taxation to offset some, but not all, of the increase in inequality. For starters, return tax rates for couples with incomes above $200,000 to the levels they were under President Clinton.

"Truly expanding the political support for open borders requires making a radical change in fiscal policy," Messrs. Slaughter and Scheve argue. Their particular proposal: eliminate the Social Security-Medicare payroll tax on the bottom half of workers -- roughly those earning less than $33,000 a year -- and make up the lost revenue by raising the payroll tax on others.

This, obviously, would be a sea change in fiscal policy. ... But all this talk is likely to influence any Democrat who takes the White House in 2008. He or she will almost surely move to raise taxes on the best-off Americans -- both to raise revenue to pay the bills and to resist the three-decade-old inequality trend.

There's a lot of argument about the extent and cause of widening inequality, and a lot about the damage higher tax rates can do to economic growth. That will go on. But the ... palpable resentment of the losers is producing growing resistance among politicians ... to further lowering barriers to trade and promoting globalization...

Expecting market forces to reverse the recent trend toward ever-bigger winnings for those at the top is unwise; the forces are too strong. Taxing winners isn't without risk; as Mr. Summers says, globalization makes it easier for them to "pick up their marbles and go somewhere else."

But using the tax code to slice the apple more evenly is far more palatable than trying to hold back globalization with policies that risk shrinking the economic apple.

Personally, I'm not much on redistribution simply to make outcomes more equal. But there are (at least) three reasons to depart from this. First, when there is change such that makes one group better off at the expense of another as has happened recently with globalization, and when redistribution can leave everyone better off, then redistribution is justified.

Second, I think everyone should have equal opportunity to be a CEO or a hedge fund manager, or whatever they want to be. However, the playing field is far from level and there is a lot more we could do on this side of the equation. Not everyone will be a CEO of course, or achieve their dream job whatever it might be, but everyone should have an equal chance to be one of the winners. In the meantime, until more has been done to level the playing field, progressive taxation is a means of making up for inequality in opportunity.

Third, for me at least, progressive taxation is justified by the equal marginal sacrifice principle (the last dollar paid should cause the same amount of disutility for everyone). Thus, even if opportunity is equal, and even if there were no winners and losers to worry about, justification for progressive taxation would remain. I think a more progressive tax structure than we currently have is needed to equalize the disutility of paying taxes.

We could list "preventing a political backlash" as a fourth reason for redistribution. But I'm not sure we need to invoke the political economy argument. If we use progressive taxation in accordance with the three principles above, then income will be more equally distributed and a backlash against globalization is less likely to occur.

Are the fears of a downward spiral of protectionism real? From China Daily, some evidence that congress has China's attention:


and also:

China seizes rancid US nuts amid health scares, China Daily: China has discovered a batch of pistachio nuts imported from the United States were rancid and infested with white ants, the General Administration of Quality Supervision, Inspection and Quarantine said on Tuesday.

The pistachio nuts were discovered by the entry-exit inspection and quarantine bureau of Guangdong Province on June 2, according to the administration. ...

The administration said it had asked local inspection bureaus to thoroughly check the quality of pistachio nuts imported from US.

The administration also publicized some other unqualified US-imported food on the same day, which are three types of capsules and raisins from three US companies...

It ordered its local agencies to tighten monitoring on food imported from the US and advised domestic importers to specify food safety requirements in contracts to lower trade risks.

and, in response to "4 in Senate Seek Penalty for China":

China warns US Congress on trade bill, China Daily/Reuters: China fired a warning shot at U.S. lawmakers on Tuesday, saying that proposed legislation to pressure Beijing to step up exchange rate reform risked politicizing trade and would not sway its priorities.

With U.S. Congress members increasingly riled by their nation's trade deficit, a group of senators is expected to unveil legislation this week seeking to pressure Beijing to revalue its yuan currency more quickly...

China's Foreign Ministry, reluctant in the past to wade into trade disputes, told the U.S. lawmakers to back off. ...

"But whose standard is this? It's the United States'. But ultimately China's renminbi exchange rate must suit Chinese realities, and it must benefit China's and the world's economic development."

"The US Congress could pass this legislation which will lead to the problem of higher tariffs on Chinese goods... If this happens then the Chinese departments concerned will make a response."

China's warning over the U.S. legislative moves comes as the two countries' trade-sparring risks turning into a shoving match that could spill over into next year's presidential contest. ...

Beijing says Washington's lax economic policies are to blame for the trade gap. "Economic and trade issues should not be politicized, and related problems, especially ones arising from the U.S. domestically, should not be dragged into China-U.S. economics and trade," Qin said. ...

    Posted by on Thursday, June 14, 2007 at 12:15 AM in Economics, Income Distribution, International Trade, Policy, Politics, Taxes | Permalink  TrackBack (0)  Comments (24)


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