Rep. Barney Frank, the acerbic and insightful Democrat from Massachusetts, called together a group of leading members of the House to meet with academics to discuss globalization. The panel was billed as a discussion of Globalization, outsourcing and the American worker. But the meat of the discussion touched on income inequality. Frank argues it's a leading reason wages for average working folks are stagnant. As a result, there is little support in middle America for policies that create more competition: free trade, immigration and services liberalization.
The group included Alan Blinder, a former Federal Reserve Vice Chairman, and a well-known analyst on the emerging impact of offshoring on services employment. The surprise really was the inclusion of Matthew Slaughter, a former adviser to President Bush. Slaughter has made headlines recently with an article supporting progressive tax increases as one way to address concerns over free trade and income inequality. Slaughter suggests the tax code could be used to redistribute the gains from free trade. Right now, Slaughter estimates that only the top 3% of workers with doctorates and professional degrees have seen their wages increase since 2000.
One interesting aspect of this debate: Slaughter focuses his comments on increasing the payroll taxes used to fund Social Security. Right now those taxes are capped around $97,000 in income. Slaughter wants to remove the cap. In the past Democrats have opposed efforts to tinker with payroll taxes, fearing that would turn Social Security into a welfare-like system and open the door to means testing. They didn't mention those concerns today.
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America should adopt a tax system based on net worth for the following reasons.
1. A tax on net worth has the largest tax base. The net worth of this country is larger than the income system, about $9 trillion, and the consumption system, less than the gross domestic product, (GDP) about $14 trillion. The individual assets of $55 trillion and business assets of about $60 trillion is over 8 times larger than the consumption system.
2. Income is not a measure of being rich, net worth is. George Will has said that the wealthiest 1-percent of households have more assets than the lowest 90%, $16 trillion. Since the total individual assets are $55 trillion. The wealthiest 10% own about 73% of the net worth in the USA.
3. Taxes should be based on ones ability to pay. A tax on net worth is the fairest tax to all.
4. Taxes on net worth have the lowest percentage. America’s budget is about $3 trillion. A consumption system requires a sales tax of over 21%. A net worth tax would be less than 3%.
5. A tax on net worth is the most versatile. Besides a flat tax of 3% for individuals and businesses, there are other possibilities. Some people say we have double taxation. We could tax only people at 6% or only businesses at 6%. Since businesses can’t vote and they pass there cost on to their customers, that is the best way to go. Next is the progressive path. The first $1 million could be tax-free and increase by 0.1 % for each $1 million up to 5% after $50 million.
6. A tax on net worth is the simplest to file. Take what you own minus what you owe.
7. A tax on net worth is the easiest to enforce. Since this is a property rights country, all assets are traceable.
8. Like the consumption tax, all of our present taxes could be replace, Individual income tax, corporation income tax, employment taxes, gift tax, excise tax, and estate tax.
9. Guarantees funding for all budget items like social security and Medicare by eliminating use taxes.
10. A tax on net worth promotes transparency. When a company shows an annual report with a book value of $1 billion and only $10 million in taxes, they aren’t paying their full taxes.
11. A tax on net worth promotes free trade. Money, inventory, buildings, etc. are all assets so everyone can move assets around for the best effect.
The idea behind international trade, perhaps all trade, is Ricardo’s doctrine of comparative advantage: basically each country focuses on what it does best. It envisions high skilled, knowledge-intensive, high margin products and jobs in the first world while the third world contributes lower skilled, labor-intensive, lower margin jobs and raw materials. The result: aggregate well-being is raised. But the entrance of high skilled workers in China, India, and the former Soviet Union along with the means to offshore work to them is rapidly undermining this neat historical theory and blurring the distinction between first and third world. According to Richard B. Freeman (‘Labor Market Imbalances’ and ‘The Great Doubling’) the entrance of these countries into the global market contributed 2.93 billion workers up to 2000. Economists repeatedly argued that the first world’s superior education meant that it would have the comparative advantage of innovation, R&D and thus increases in productivity and generate higher margin jobs. But increasingly that looks like the triumph of ideology over reality. And just to make sure, brand name universities like MIT are establishing campuses in India and other developing countries to meet the desires of American corporations for low cost skilled labor. The recent expansion of skilled labor force from the addition of developing countries has given the advantage to capital and put skilled American workers at a competitive disadvantage.
Economists and others who are not suffering from this globalization and who largely represent the interests of capital are able to view the plight of American high tech workers and scientists (biotech R&D is moving to India) with equanimity as the natural and proper adjustments of globalization. The notion that first world knowledge workers displaced by labor arbitrage should be given some kind of assistance offends their social Darwinian sensibilities. Yet not doing so will likely bring on social unrest and resistance to further globalization as well as the loss of productivity from skilled workers if Alan Blinder’s speculations even partly come to pass. The net effect of this will be the decline in the standard of living for the bottom 80% of Americans while the differences between the upper class and the rest grows exponentially. If continued, America’s democratic institutions will be undermined because the upward mobility and opportunity that supports them will be undermined.