Inequality, Tax Rates, and Globalization
In his response to my first post, Jared continues to leave "merit" undefined. But, the bulk of his remarks confirm my belief that his agenda is really one of narrowing inequality in general rather than trying to move incomes closer to marginal productivity. Indeed, much of the inequality that he is concerned about, such as the portion due to globalization, probably reflects competitive markets at work rather than economic power overriding competitive forces. Jared's concern about such inequality is justified, but I think that Principle #1, with its mysterious reference to "merit," does not accurately describe his outlook.
In his response, Jared also asked about evidence on the effects of tax rates on behavior. The growing literature on the elasticity of taxable income has yielded significant evidence that marginal tax rates affect behavior. For example, Jon Gruber and Emmanuel Saez estimate that each one percent increase in the after-tax reward spurs a 0.5 percent increase in taxable income. According to this estimate, raising the top rate from 35 to 39.6 percent would lower the after-tax reward to earning taxable income by about 7 percent (from .65 to .604) and thereby lower taxable income by 3 to 4 percent. To be sure, some studies find smaller effects or none, while others find larger effects. I remain convinced, however, that we should not dismiss incentive effects until we have conclusive evidence of their absence.
There is also a growing body of evidence that business investment is sensitive to taxes and that corporate tax increases affect the choice of countries in which to invest.
I'm largely in agreement with Jared's discussion of globalization. It has contributed to U.S. economic growth while also driving part of the recent increase in inequality.
Jared suggests that we should push our trading partners to recognize "workers' rights." The merit of that proposal depends upon what the term means. (Yes, another ambiguous term.) The United States should certainly oppose the murder, torture, and false imprisonment of union activists (crimes observed in some countries); indeed, the United States should oppose all murder, torture, and false imprisonment. But, we should not prod countries to adopt policies that push wages above market-clearing levels and thereby reduce employment opportunities. It is the sovereign prerogative of any country to adopt such policies, but we should not impose them on any country.
It seems to me that apologists for globalization rely on "sovereign prerogative" whenever it is convenient, as a sort of rhetorical cover for the corrosive impact globalization has on the welfare of the workers of the west.
In fact, globalization deprives first world workers of middle class jobs, and replaces those jobs with cheap goods made by low wage workers with minimal rights in 3rd world totalitarian states, e.g. china. No one ever raises the issue of "sovereign prerogative" to protect first world workers.
What is at stake for workers in the first world is: our wages, our futures, our rapidly degrading world environment, the stress on middle class families in all areas of life, and more.
The only reason "sovereign prerogative" is not used to defend first world workers is that American MNCs are making money hand over fist by destroying the American productive economy, and through cronyism and the influence of money our political system puts their interests above the interests of first world workers. This is corruption plain and simple.
April 10, 2008 2:45 PM | Reply | Permalink
. . . we should not prod countries to adopt policies that push wages above market-clearing levels . . . .
And just what is the "market-clearing wage level" of secondary industries in Guangdong Province? And if you don't know -- and I'm confident you don't -- how can you know whether any particular policy, if adopted, would "push wages above market-clearing levels"?
Note: Chinese authorities can clear any market they choose to. Hell; they can even clear Tiananmen Square when they really put their minds to it.
April 10, 2008 3:12 PM | Reply | Permalink
At times like these, I wish I had an instant Karma raygun, so I could blast people like Mr. Viard into one of those Chinese workers thin, poorly made, shoes. See how well he'd do in a sweat shop, with an overbearing, unsympathetic overseer working for change.
Maybe then he'd gain some real world appreciation for the actual real world.
April 10, 2008 5:05 PM | Reply | Permalink
Help: TPM staff publishes only a few lines of my blogs
I tried unsuccessfully four times to get TPM staff to address the problem I’m having with my blogs. Only a few lines of them get published, and when a MORE hyperlink does appear, it goes back to the few lines. I can never get to the entire piece in each blog. This was especially vexing when I achieved Recommended Reader Blog status and notified all my friends and relatives.
In frustration, I’m putting this notice up in every conceivable spot at TPM that I can. Help! I’m trapped in TPM Hell. User name: johnhughmcfadden; email: johnhughmcfadden@hotmail.com
April 10, 2008 6:03 PM | Reply | Permalink
Help: TPM staff publishes only a few lines of my blogs
I tried unsuccessfully four times to get TPM staff to address the problem I’m having with my blogs. Only a few lines of them get published, and when a MORE hyperlink does appear, it goes back to the few lines. I can never get to the entire piece in each blog. This was especially vexing when I achieved Recommended Reader Blog status and notified all my friends and relatives.
In frustration, I’m putting this notice up in every conceivable spot at TPM that I can. Help! I’m trapped in TPM Hell. User name: johnhughmcfadden; email: johnhughmcfadden@hotmail.com
April 10, 2008 6:05 PM | Reply | Permalink
Seems to me that Viard tends to obfuscate his position with economic-speak. I request that he explain what he means by "trying to move incomes closer to marginal productivity." As I understand it, a primary part of Japan's 1960s industrialization drive was the policy of "income doubling" the success of which demolishes Viard's ideas as I understand them.
Then look at Viard's paragraph on the effects of tax rates on behavior, where he claims that "The growing literature on the elasticity of taxable income has yielded significant evidence that marginal tax rates affect behavior." Yeah, well, I have seen literature that implies exactly the opposite, written by Austan Goolsbee, who is presently an economics advisor to Barack Obama.
Then, look at this sentence: "For example, Jon Gruber and Emmanuel Saez estimate that each one percent increase in the after-tax reward spurs a 0.5 percent increase in taxable income." This amply demonstrates the amorality of Viard's brand of economics. There is, in fact, lots of economic behavior that we as a society should and would like to deter, such as monopolistic pricing. And in fact, as the series of worsening financial crises this past year is showing us, we need to begin to seriously find a way to force the financial system back into subservience to the real economy. One possible way is to return to the 91 percent tax rate on top incomes, say, incomes over $5 million. That was the top tax rate from the 1940s to the 1960s, and the real economy obviously functioned better then than it does now. It was only after the top tax rate for high incomes was cut that the real economy began to suffer from asset-stripping and unsupportable financial leveraging. It is not in the nature of a modern industrial enterprise to support the type of income growth we have seen in the top one percent of incomes. I think van Hayek's work on the intemporal problem of capital touches on this. Building a profitable industrial enterprise requires years of work, even before break-even is reached. But the current system makes a fool of anyone who tries to do it - the incentives for financial manipulation are just too great. When we had a 91% tax rate on the top one percent of incomes, we simply did not get these types of financial bubbles. Coincidence? I think not.
April 10, 2008 11:33 PM | Reply | Permalink
indeed, the United States should oppose all murder, torture, and false imprisonment
But let's not cloud the issue by lumping together a boad range of despicable acts. When a mugger on a street in a foreign city murders his victim, that's lamentable, but probably shouldn't play a role in our foreign policy.
But that's different than political violence - acts undertaken to supress dissent and achieve a political goal. I gather that Jared's point is that many developing countries turn a blind eye to political violence directed against labor activists, or worse, in some cases tacitly condone it. Lumping that together with other forms of violence and asking our trading partners to ensure that their societies are less violent amounts to ignoring it. These politically motivated acts of violence have a distorting effect on the economic and political landscape. They're in no one's longterm interest. If we want stable trading partners, we should encourage the free and open expression of workers' frustrations, and pressure governments to protect workers' attempts to wield political power. The alternative is continued suppression - a short-term economic gain at the price of longterm development. For a time, corporate profits will be higher, and productivity will grow. But in the end, the violent suppression of workers aspirations fuels the sort of extreme populism that generally harms all involved - businessmen, workers, and trading partners. We're witnessing that now in Latin America. And it ought to be a cautionary example to those who would blithely dismiss the murder and torture of labor activists as yet another lamentable curiosity of exotic lands.
April 11, 2008 3:58 PM | Reply | Permalink