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Argument: Progressive taxes adjust for winners and losers of globalization

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Kenneth F. Scheve and Matthew J. Slaughter. "A New Deal for Globalization". Foreign Affairs. July/August 2007 - Globalization has brought huge overall benefits, but earnings for most U.S. workers -- even those with college degrees -- have been falling recently; inequality is greater now than at any other time in the last 70 years. Whatever the cause, the result has been a surge in protectionism. To save globalization, policymakers must spread its gains more widely. The best way to do that is by redistributing income.


Over the last several years, a striking new feature of the U.S. economy has emerged: real income growth has been extremely skewed, with relatively few high earners doing well while incomes for most workers have stagnated or, in many cases, fallen. Just what mix of forces is behind this trend is not yet clear, but regardless, the numbers are stark. Less than four percent of workers were in educational groups that enjoyed increases in mean real money earnings from 2000 to 2005; mean real money earnings rose for workers with doctorates and professional graduate degrees and fell for all others. In contrast to in earlier decades, today it is not just those at the bottom of the skill ladder who are hurting. Even college graduates and workers with nonprofessional master's degrees saw their mean real money earnings decline. By some measures, inequality in the United States is greater today than at any time since the 1920s.

Advocates of engagement with the world economy are now warning of a protectionist drift in public policy. This drift is commonly blamed on narrow industry concerns or a failure to explain globalization's benefits or the war on terrorism. These explanations miss a more basic point: U.S. policy is becoming more protectionist because the American public is becoming more protectionist, and this shift in attitudes is a result of stagnant or falling incomes. Public support for engagement with the world economy is strongly linked to labor-market performance, and for most workers labor-market performance has been poor.

Given that globalization delivers tremendous benefits to the U.S. economy as a whole, the rise in protectionism brings many economic dangers. To avert them, U.S. policymakers must recognize and then address the fundamental cause of opposition to freer trade and investment. They must also recognize that the two most commonly proposed responses -- more investment in education and more trade adjustment assistance for dislocated workers -- are nowhere near adequate. Significant payoffs from educational investment will take decades to be realized, and trade adjustment assistance is too small and too narrowly targeted on specific industries to have much effect.

The best way to avert the rise in protectionism is by instituting a New Deal for globalization -- one that links engagement with the world economy to a substantial redistribution of income. In the United States, that would mean adopting a fundamentally more progressive federal tax system. The notion of more aggressively redistributing income may sound radical, but ensuring that most American workers are benefiting is the best way of saving globalization from a protectionist backlash.

Jason Bordoff and Jason Furman. "Progressive Tax Reform in the Era of Globalization: Building Consensus for More Broadly Shared Prosperity". Harvard Policy Review. Vol 2, 2008 - While internal considerations like simplicity and efficiency are important, two emerging strains of tax reform are motivated by external factors. The most important of these factors is increasing income disparity. Although the United States has enjoyed strong macroeconomic performance in recent years, much of the gain from that growth has accrued to those at the very top.5 At the same time, however, the tax code has become less progressive. Not surprisingly, polls show a majority of Americans feel the economy is not working for them and worry that their children will not enjoy a higher standard of living than they do.6 The lack of broad-based economic growth helps explain why a growing number of people across the ideological spectrum are rejecting further efforts at global economic integration, such as trade liberalization, which they perceive as responsible for lost jobs and declining wages in the United States.7 While this perception is exaggerated, there is nonetheless growing evidence that trade and globalization increasingly contribute to inequality.8

This potential protectionist backlash is a serious threat to America’s economic well-being—not to mention that of other countries, particularly developing ones—since open economies enjoy higher growth rates.9 To avoid such a backlash and sustain support for globalization, its supporters must advocate much more forcefully for policy reforms to make sure that America’s prosperity is more broadly shared than has been the case in recent years. Tax policy is a relatively efficient, immediate, well-targeted, and scaleable policy tool to help spread the gains of global economic integration more broadly.10 A cornerstone of such an effort should be progressive income tax reform.

David Wessel. "The Case for Taxing Globalization's Big Winners". Wall Street Journal. 14 June 2007 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 gap between winners and losers has widened persistently, and the palpable resentment of the losers is producing growing resistance among politicians -- acutely sensitive to public sentiment -- to further lowering barriers to trade and promoting globalization. Consider just a few recent headlines: the rise and fall of the immigration bill in Congress; the hostility toward China; Sen. Hillary Clinton's opposition to the U.S.-Korea free-trade pact.

Counting on the inevitability of globalization is imprudent; politics and policy can interfere. 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.

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