Tax Just the Rich and Erode the U.S. Capital Base

By July 9, 2007Economy, Trade

An obstensibly pro-trade thesis has been making the rounds lately, being pushed by Matthew Slaughter, a former member of Bush’s Council of Economic Advisers now at Dartmouth’s Tuck School of Business. President Clinton’s Treasury Secretary, Lawrence Summers, is also on board.

As the Wall Street Journal columnist, David Wessel, characterizes it,

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.

That seems more like a political argument than an economic one: Workers — and some employers, too, certainly — are angry at the consequences of globalization, and they want some sort of retaliation. If politics demands a victim, better to make it the wealthy rather than trade in general.

John Tamny, the editor of RealClearMarkets, makes the economic argument against this thesis in today’s National Review Online. Makes the argument? Tamny refutes the argument, at least as far as we can tell.

Policymakers defy basic economics when they bemoan the plight of workers while at the same time advocating higher taxes on the rich. The two work at cross-purposes for the simple reason that job availability is a function of capital being available to fund the aforementioned jobs. High tax rates by definition erode the capital base, and in so doing, reduce the amount of capital that accrues to jobs and wages.

Summers and Slaughter make a good point that rising protectionism among the electorate is a major economic risk, since it may lead to contractionary protectionist legislation. But tax hikes on the rich will only serve to make workers even more uneasy when a smaller capital base negatively impacts both job availability and wages.

That’s the economic reality, of course. The politics of the issue are very different, indeed.

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