Taxing the Winners of Globalization

by: Toro

I am a big fan of globalization, as regular readers of Running of the Bulls know. However, I also think that if aspects of globalization are causing dislocations in the economy and the political body, measures should be undertaken to address concerns caused by the dislocation.

One of those concerns today is the widening gap in income. Globalization is not the only reason why this is happening, as it has been occurring for more than three decades. However, Western owners of capital, both human and financial, have benefited far more than labor, and that is causing political shifts that may bring structural damage to the economy, specifically the rise of protectionism which culminated in the Democratic takeover of Congress last November.

Obviously, the war in Iraq was the primary election issue, but voters are feeling uneasy about free trade and globalization, which effected how they voted. Very unfortunately, the rookie Democrats are opposed to free trade, calling themselves fair-traders instead, which is a misnomer since all protectionists wrap their arguments in the blanket of "fair trade." With any luck, and reason, the Robert Rubin wing of the Democratic Party will prevail.

According to an article in Thursday's Wall Street Journal , one proposal that is being put forward is to tax the winners of globalization, and distribute the proceeds to those who have not benefited.

A new argument is emerging among the pro-globalization crowd in the U.S., the folks who see continued globalization and trade as vital to the country's prosperity: 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 his frequent collaborator, 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. It has boosted productivity and made the country wealthier. It's done the same for many other countries. But the benefits of this global integration - and the accompanying revolution in information and communications technology - have been distributed unevenly.

There are some very big winners. Think investment bankers, hedge-fund partners, Wall Street lawyers, others whose skills are in high demand globally and those with big stock portfolios. But there are a lot of Americans - even many college grads - whose wages haven't kept pace with inflation. ...

To preserve political support for the globalization dividend, spread the benefits more broadly by taxing winners more and losers less.

"It is best not to address increasingly salient concerns about inequality by interfering with trade," [former Treasury Secretary Larry] Summers argued at a forum sponsored by the Hamilton Project, the think tank he and others founded to provide intellectual fodder for like-minded politicians. 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.

I have no problem with this, at least in theory, since part of the gains from globalization have come from pure luck for the owners of capital, i.e. the opening of China and India. China and India have put pressure on western wages, and offshoring has lead to higher returns on capital, which benefits the owners of capital and pressures the suppliers of labor. Thus, transferring at least a modicum of wealth from capital to labor seems fair to me since this is a windfall from globalization for the owners of capital.

One of the unique aspects of American political culture, however, is that there is a portion of the political spectrum that opposes any tax, and all increases. They are in the Republican Party, are very loud, and are very well funded. Oddly enough, some of these people are from the Pat Buchanan wing, and are economic nationalists, who erroneously promote protecting American workers through trade restrictions. Trade restrictions are merely a different type of tax, either directly through tariffs, or indirectly through higher prices, and the dead-weight loss through inefficiency.

So I have my doubts that increasing taxes on the wealthiest will be a viable solution if this problem persists, which hopefully it will not. Instead, America may instead revert to economically inefficient and wealth destroying trade protectionism, which could do serious damage to the global trading system that has been so beneficial to America since World War II.