"We have a tax system that assumes we are the only game in town." That statement, from a recent chat I had with former top Bush administration economist Lawrence Lindsey, came to mind as I read the blog of economist Robert Reich, President Clinton's first labor secretary. Reich recently wrote the following:
The consequence of fiscal austerity and unwillingness to raise taxes on the rich is that America doesn't have the means to lift the bottom half.... There are only two economic philosophies in America—trickle down and bottom up. Trickle down means the rich get richer and pay less taxes. Supposedly they use their extra income to invest in America, which makes all of us more productive. But it doesn't work that way. In a global economy, investments don't trickle down; they trickle out to wherever on the planet the rich can get the highest return. If trickle down worked as advertised inequality wouldn't be widening so fast.... [Democrats must] stop obsessing about balancing the budget and start pushing for a serious tax hike on the rich. Yet all Democratic presidential candidates are styling themselves "fiscal conservatives" and none has suggested raising the marginal tax rate on the richest beyond the 38 percent rate it was under Bill Clinton. They may talk bottom-up economics but they're still wedded to trickle down.
Now compare Reich's "sock it to the rich" argument to this recent hunk of analysis by Harvard economics Prof. Kenneth Rogoff:
Many super-earners are also super-creative and bring enormous value. Places like the United Kingdom actively court wealthy foreign nationals through extraordinary preferential treatment of their investment income. The ultra-rich are an ultra-mobile group, too. If you are earning $540,000 an hour, it does not take too long to save up to buy an apartment, even in London.... Anyway, there are limits to how much tax pressure the political system can apply to the ultra-rich.... Rather than punitively taxing wealth, globalization strengthens the case for shifting to a flat tax on income (or better yet consumption) with a moderately high exemption. Aside from the usual efficiency arguments, it is just going to become increasingly difficult and costly to maintain complex and idiosyncratic national tax arrangements.
My take: Rogoff's comments help explain the air of unreality surrounding much of this presidential campaign. To a great extent, both parties seem to be largely unaware that the U.S. economy is part of a great race—though one where there does not necessarily have to be any losers—called globalization. Some nations, however, will do better than others. America should have policies that make our economy as innovative and competitive as possible. The tax code would seem to be one element of that.
Consider this: Over the past dozen years or so, some 14 nations have adopted flat income taxes, including many of the formerly captive nations of the now defunct Soviet Union. Even Russia has one. The flat tax seems to be a dead issue for now here in America. Not only might global competition thrust it back into the policy limelight, but the great international economic race might also undermine attempts to massively boost taxes on wealthier Americans.