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Monday, January 23, 2017
How Congress And Trump Can Reform Taxes To Put America First
The Federalist - Monday January 23, 2017
by Mike Lee
“Donald Trump Warns on House Republican Tax Plan,” ran the Wall Street Journal headline Monday morning. The story focused on the then-president-elect’s concerns about “border adjustment,” a clever but controversial idea House Republicans have hit upon for taxing imports and exports. They hope it might serve as an alternative to President-elect Trump’s stated preference for tariffs.
In the story, President Trump was quoted as saying, “Anytime I hear border adjustment, I don’t love it.” For all the controversy the remark caused, I have to say, I was encouraged. I think he may have been right. I’m not sure I love border adjustment either, and I think it’s for many of the same reasons. Border adjustment is “too complicated,” as Trump put it, and its success depends on a theory about international exchange rates that, if it doesn’t work out, could ravage huge swaths of our economy.
On the other hand, I share most congressional Republicans’ concerns about tariffs and trade barriers. Like them, I would prefer an alternative solution to the stress global competition is putting on our economy in general, and on America’s working class in particular.
Happily, I think there is a much simpler, and more powerful, tax reform framework that would put “America first.” More than that, it would put the forces of globalization, even global elites themselves, to work for American workers, instead of the other way around.
Global Capitalism’s Middle America Gap
To begin, consider exactly how capitalism and globalization work. Capitalism succeeds largely by aligning the interests of people who might otherwise be adversaries—buyers and sellers, employers and employees, bankers and borrowers, etc.
Consider specifically how capitalism makes partners of (forgive the overly simplistic terms) “rich” people and “not-rich” people in forming businesses. Rich people with money to invest join with not-rich people who have labor to sell. Together, they help each other, their families and neighbors, their countries, and the world. It’s win-win.
Globalization simply extends capitalism beyond national borders. This opens up new opportunities, but it also puts a new twist on those rich/not-rich partnerships. Financial centers like New York are still funding business ventures — more and more profitably than ever, in fact. It’s just that today, some investments that used to flow to places like Michigan or Ohio now flow to places like India and China.
You see the twist. Whereas pre-global capitalism mostly brought together “rich” and “non-rich” people from the same country, global capitalism today increasingly brings together rich people from rich countries and not-rich people from not-rich countries—making both richer than they have ever been.
Who gets left out of that bargain, however? Not-rich workers in rich countries—that is, the Trumpist, Brexiting, populist-nationalist constituencies upending politics across the West.
You don’t have to believe in conspiracy theories or ignore other factors like automation to see how globalization, as such, can leave these “forgotten” workers behind. The natural forces of global capitalism—especially those billions of people in poor countries desperate to finally have the chance to work their way out of poverty—tend to expand investment opportunities and increase returns for affluent elites who can access these new markets. Those same forces can narrow work opportunities for non-elites in places like the United States.
The interests of affluent and non-affluent Americans used to be bound up in America’s national economy. Globalization, automation, financialization, and other forces today make this less true. Propelled by these forces, many wealthy Americans have reached a kind of “escape velocity” from the national economy into the global one. Between robots and developing economies, American investors today can often make more money by not partnering with American workers.
So, while wealthy Americans have been riding a rocket, working Americans have been stuck on a treadmill. That’s problem number one.
The U.S. Tax System Is Hopelessly Outdated
Problem number two is that the federal government, as usual, has not kept up with the change, and indeed, has only exacerbated the problem.
For instance, Washington still taxes investment income at much lower rates than labor income on the outdated logic that Americans’ dividends and capital gains will be reinvested in the national economy. But what in 1981 may have incentivized a virtuous economic cycle in 2017 may just be giving preferential treatment to rich Americans for creating jobs in other countries.
So, what would a tax system that puts American workers first look like? It would start with a cut in the federal corporate tax rate. Not to 25 percent or 15 percent, but to zero. Eliminate it altogether.
It may seem ironic that a populist, pro-worker tax reform could begin with what sounds like a handout to corporations. But it’s true. Remember, the corporate tax is not assessed on some villainous collection of “Wall Street fat cats.” It’s assessed on profits, which are created by the partnership of ownership’s capital and workers’ labor. The corporate income tax takes money that would otherwise be some combination of investors’ dividends and workers’ wages.
Economists differ on the precise ratio, but the consensus is that lost wages make up between one-quarter and one-half of corporate tax revenue. (According to one recent study, it may be even more.) But whatever the proportion, we know that eliminating the corporate tax would immediately liberate every penny of American workers’ share of it, and in short order boost take-home pay in every industry across the country.
It would also, of course, reduce federal revenue. But lost revenue could be recouped, at least in part, by raising the tax rates on capital gains and dividends. That’s step two. Taken together, these two changes would transfer the workers’ share of the corporate tax onto American investors, who, again, are the natural and disproportionate beneficiaries of globalization relative to American workers.
A Better Deal for Everyone Involved
A number of economists on the Right and Left recognize the advantages of cutting corporate taxes and raising shareholder taxes. Although there are some important differences, this general approach is similar to a 2014 plan by Eric Toder of the Urban Institute and the American Enterprise Institute’s Alan Viard. Indeed, in a global economy with global investment opportunities, there is no reason for the United States not to tax all income the same.
But, you might ask, won’t hiking capital gains and dividends tax rates chase investment offshore? Not with that 0 percent corporate rate! That’s the beauty of this approach.
For foreign investors, it would be an offer they couldn’t refuse. But even for American investors, it would be a better deal than they could get anywhere else. Today, our 35 percent corporate tax rate, 20 percent rate on capital gains and dividends, and the 3.8 percent Medicare surtax add up to a 50 percent real top federal tax rate on investment income.
Overnight, the fastest and easiest way for global elites to make money would be to create productive, middle-class jobs in the United States.
After eliminating the corporate tax, we could raise tax rates on capital gains and dividends all the way up to par with labor income (top rate today: 39.6 percent), and investors could still come out ahead, just not as much as workers will, and only if they invest in the United States. Americans would still be free to invest their capital around the world. They will just have to pay the same tax rates in their income all other Americans pay. Thus, this tax reform would not advantageworkers over investors; it simply levels the playing field that globalization and current policy have tilted against them.
Under this pro-growth, pro-worker framework, hundreds of billions—if not trillions—of dollars of foreign and domestic investment would flood the American economy. This would create new businesses and jobs here—not “old” jobs being “brought back,” but new jobs of the sort that won’t be automated or outsourced the day after tomorrow.
Also, with workers’ share of the corporate tax liberated by the zero rate, a greater portion of all this new investment and growth would be channeled straight into workers’ paychecks. (If I had my way, we could make pro-worker tax reform pro-family as well, by providing additional relief to working families by eliminating the parent tax penalty!)
Suddenly, the United States would become the best place to do business—almost any kind of business—period. Overnight, the fastest and easiest way for global elites to make money would be to create productive, middle-class jobs in the United States.
Bring the Global Economy Back to America
Tax reform should not be about accepting the broken status quo, and just skimming off the top of the global economy for political redistribution. President Obama tried that. Nor should it be about shutting down the global economy with a zero-sum trade war that would hurt us far more than it would help.
Rather, our goal should be to harness globalization to the interests of American workers, to bring the global economy here rather than sending the American economy abroad. Under this framework, free trade would no longer be a mixed blessing for working Americans. It would work for all Americans, both as consumers and as workers. President Trump could even kick off this new era with a new trade alliance with Prime Minister Theresa May and our brave friends in post-Brexit Great Britain.
Our goal should be to harness globalization to the interests of American workers, to bring the global economy here rather than sending the American economy abroad.
Finally, for those so inclined, imagine amplifying this pro-worker tax reform framework with immigration reform that stopped illegal immigration and sharply reduced low-skilled immigration. Imagine focusing immigration policy instead on recruiting high-skilled innovators and entrepreneurs who could turn all that foreign investment into new American start-ups and jobs.
Wages would rise, and jobs would be more plentiful and secure. Struggling neighborhoods and families would more stable. Meanwhile states would all race to modernize their own policies—tax, regulatory, housing, education—to compete for global investors and the jobs and communities they will support.
As a conservative, I am no utopian. This tax reform framework, for all its virtues, would have its weaknesses, too. Measures might be needed to prevent corporations from gaming the system by hiding dividends in nonprofits. There will almost certainly be unintended consequences of turning the United States into a tax haven that will need to be addressed down the road. The rest of the world will eventually reform their own policies to keep up. All the while, automation will continue to displace many jobs, no matter what policymakers do.
No reform is ever perfect or permanent. But it also seems to me that whatever unintended consequences this reform brings will be more easily dealt with on the other side of a few million new jobs and a few trillion dollars worth of economic growth!
The bottom line is that federal tax policy, like all federal policy, should serve the interests of the American people, and especially struggling families and communities currently being left behind. The goal of this tax reform is twofold. First, to channel more of the global economy to the United States. And second, once it’s here, to channel more of its fruits to American workers.
The lesson for populist-minded conservatives is this: globalists may be a problem, but globalization isn’t. Smart, principled-populist tax, trade, and immigration reform can finally put the forces of globalization to work for American workers.