9. Kimberly Clausing, “Corporate Inversions,” Tax Policy Center; Urban Institute and Brookings Institution, August 20, 2014.
10. A particularly promising long-term reform option is formulary apportionment of corporate income. Chapter 7 discusses this option further. See also Reuven S. Avi-Yonah and Kimberly A. Clausing, “Reforming Corporate Taxation in a Global Economy: A Proposal to Adopt Formulary Apportionment,” In Path to Prosperity: Hamilton Project Ideas on Income Security, Education, and Taxes (Washington: Brookings Institution Press, 2008), 319–344. And for details on the US state experience with formulary apportionment, see Kimberly Clausing, “The US State Experience under Formulary Apportionment: Are There Lessons for International Reform?” National Tax Journal 69:2 (2016), 353–385.
11. According to the OECD, the cumulative effects of climate change will reduce global annual GDP between 1.0 and 3.3 percent by 2060. Estimates vary due to the impossibility of predetermining the planet’s sensitivity to changes in the atmospheric concentration of greenhouse gases. Research done by the US Environmental Protection Agency suggests that efforts to reduce the temperature rise due to climate change could save the US economy hundreds of billions of dollars due to saved lives, and the avoidance of property damage, droughts, flooding, and other costs. See US Environmental Protection Agency, OAR, “Climate Change in the United States: Benefits of Global Action,” Report, US EPA, April, 2015.
12. This tax rate is lower than many estimates of the tax rate that would cause market participants to find the ideal level of carbon dioxide emissions, but it would be a sizable step in the right direction, and the tax rate could be increased over time. Arguably, the rate should eventually be about twice as high.
13. One option would be to simply refund the revenue from the carbon tax to the population on an equal per-person basis. Although the poor spend a higher share of their income on carbon-intensive products than the rich, those with higher incomes pay higher carbon taxes in absolute terms. Thus, refunding the revenue evenly would make the majority of Americans better off, with particularly large benefits for those in the lower half of the income distribution.
14. This does not include the additional costs of servicing the debt. Some “dynamic” estimates suggest the deficit cost will be lower due to higher economic growth, but still greater than $1 trillion. Other dynamic estimates suggest that the growth drag of higher deficits will offset any positive growth effects, so that the overall effect will still be about $1.5 trillion in new deficits. There are also concerns that the new loopholes provided in the legislation will raise deficits beyond these forecasts. See, for example, Reuven Avi-Yonah et al. “The Games They Will Play: An Update on the Conference Committee Bill,” Social Science Research Network Working Paper, December 28, 2017.
15. The best source for information on the effects of this legislation is the nonpartisan Tax Policy Center. They estimate the effects on both deficits and distribution. See Tax Policy Center, Distributional Analysis of the Conference Agreement for the Tax Cuts and Jobs Act, Report, December 18, 2017; and Benjamin R. Page, Joseph Rosenberg, James R. Nunns, Jeffrey Rohaly, and Daniel Berger, Macroeconomic Analysis of the Tax Cuts and Jobs Act, Report, Tax Policy Center, December 20, 2017. Also, the Joint Committee on Taxation website provides the full breakdown of the forecast revenue costs of the bill’s provisions. Additional distributional estimates are available from both the Joint Committee on Taxation and the Congressional Budget Office.
16. A nice study on the additional complexity generated by the legislation is provided by thirteen expert tax lawyers: Reuven Avi-Yonah et al. “The Games They Will Play: An Update on the Conference Committee Bill,” Social Science Research Network Working Paper, December 28, 2017.
17. This observation is based on JCT revenue estimates of the bill’s provisions. The comparison sets aside the revenues associated with the one-time tax on prior unrepatriated earnings. While that provision raises revenue, it represents a tax cut relative to prior law.
18. The overall influence of the legislation on profit shifting is confounded by several conflicting effects. The fact that foreign income is typically exempt from US taxation, even upon repatriation, will increase incentives for profit shifting, but there are also provisions in the legislation that combat profit shifting, including the colorful acronyms GILTI and BEAT. Overall, however, the JCT revenue estimates indicate that the international provisions in the bill lose revenue over ten-years, relative to prior law. (Again, this disregards the revenues from the tax on prior repatriated earnings.)
19. As Barack Obama put it, “The real test is not whether you avoid this failure, because you won’t. It’s whether you let it harden or shame you into inaction, or whether you learn from it; whether you choose to persevere.” Barack Obama, “Our Past, Our Future, and Vision for America,” Speech to the Campus Progress Annual Conference, July 12, 2006.
20. Showdown at Gucci Gulch is an excellent book on the passage of the Tax Reform Act of 1986, written by two Wall Street Journal journalists who covered this chapter in tax history. Alan Murray and Jeffrey Birnbaum, Showdown at Gucci Gulch: Lawmakers, Lobbyists, and the Unlikely Triumph of Tax Reform (New York: Vintage, 1988).
11. A Better Partnership with the Business Community
1. International organizations like the International Monetary Fund and the World Bank have long promoted inclusive growth. Inclusive growth has even become a marquee goal of the World Economic Forum, an organization best known for its annual meeting hosting the global elite each winter in Davos, Switzerland. Since 2015, the World Economic Forum has compiled and published an Inclusive Development Index. Despite being one of the richest countries in the world, the United States ranks twenty-third among advanced economies in the Inclusive Development Index in 2018.
2. The Tax Cuts and Jobs Act (TCJA) cut business (corporate and pass-through) tax revenues by over $900 billion over ten years, putting to one side the temporary revenue gains from the repatriation tax break. Thus, starting from the reduced revenues scheduled for 2018 and beyond, most true tax reforms would likely increase taxes on most businesses. It is also important to keep in mind that the TCJA is likely to expand the business tax base by causing artificial shifting of labor income into capital income, since capital income is now taxed far more lightly than labor income. This will act to buttress business tax revenues even as it drains individual income tax revenues. However, this effect is not due to additional business activity; instead, it results from a tax-motivated relabeling of existing economic activities.
3. Companies may argue that such reporting is burdensome, but this, too, is a red herring. Companies already have this information at their fingertips, and providing such simple breakdowns is far less administratively burdensome than most reporting requirements.
4. See Ahmed Riahi-Belkaoui, “Relationship between Tax Compliance Internationally and Selected Determinants of Tax Morale,” Journal of International Accounting, Auditing and Taxation 13:2 (2004), 135–143; Grant Richardson, “Determinants of Tax Evasion: A Cross-Country Investigation,” Journal of International Accounting, Auditing and Taxation 15:2 (2006), 150–169; Grant Richardson, “The Relationship between Culture and Tax Evasion across Countries: Additional Evidence and Extensions,” Journal of International Accounting, Auditing and Taxation 17:2 (2008), 67–78; and Jason DeBacker, Bradley T. Heim, and Anh Tran, “Importing Corruption Culture from Overseas: Evidence from Corporate Tax Evasion in the United States,” Journal of Financial Economics 117:1 (2015), 122–138.
5. David Weil, The Fissured Workplace: Why Work Became So Bad for So Many and What Can Be Done to Improve It (Cambridge, MA: Harvard University Press, 2014).
6. For detailed reporting on the German case, see Steven J. Dubner, “What Are the Secrets of the German Economy, and Should We Steal Them?” Freakonomics Radio, October 11, 2017.
7. For one set of proposals to modernize labor laws with this in mind, see Seth D. Harris and Alan B. Krueger, “A Proposal for Modernizing La
bor Laws for Twenty-First-Century Work: The ‘Independent Worker,’ ” Discussion Paper 2015-10, The Hamilton Project, 2015.
8. Also, conventional measures of market concentration may understate the problem due to common ownership patterns of large firms. There is evidence that common ownership can worsen competitive outcomes. See José Azar, Martin C. Schmalz, and Isabel Tecu, “Anticompetitive Effects of Common Ownership,” Journal of Finance, 73:4 (May 2018); Jose Azar, Sahil Raina, and Martin C. Schmalz, “Ultimate Ownership and Bank Competition,” CEPR Working Paper, July, 2016.
12. A More Equitable Globalization
1. Although, interestingly, research suggests that people are more likely to interact with people of disparate political views on the internet than in their personal lives. See Seth Stephens-Davidowitz, Everybody Lies: Big Data, New Data, and What the Internet Can Tell Us about Who We Really Are (New York: HarperCollins, 2017), 144.
2. One nice, short book makes this call to action clearly and persuasively: Bruce R. Bartlett, The Truth Matters: A Citizen’s Guide to Separating Facts from Lies and Stopping Fake News in Its Tracks (New York: Crown, 2017).
3. Some have even called for antitrust solutions to address these problems. See, for example, Luther Lowe, “It’s Time to Bust the Online Trusts,” Wall Street Journal, October 31, 2017.
4. The International Trade Organization itself never came into being. Instead, the General Agreement on Tariffs and Trade (GATT) liberalized trade, and nations worked together as contracting parties to the agreement. Eventually, the GATT evolved into the World Trade Organization in 1995, after the Uruguay Round of trade liberalization.
5. This process began with the Treaty of Rome in 1957. Originally the European Economic Community, the European Union was established in 1993.
6. See Max Roser, “War and Peace,” Our World in Data, 2016, https://ourworldindata.org/war-and-peace/.
7. At a recent World Economic Forum in Davos, Xi Jinping said: “Pursuing protectionism is like locking oneself in a dark room. Wind and rain may be kept outside, but so are light and air.”
8. The phrasing of this last line evokes a book that I found inspirational early in my college education: Alan S. Blinder, Hard Heads, Soft Hearts: Tough-Minded Economics for a Just Society (Reading, MA: Basic Books, 1987).
Acknowledgments
This book contributes to the battle of ideas that surrounds us, hoping to improve the world in some small way. Whether or not it succeeds in this aim, it has been an immense pleasure to bring together knowledge I’ve accumulated in three decades of thinking about international economics. I’m deeply grateful for this opportunity, and for the unwavering support of colleagues, friends, and family.
I first conceived of writing this book in November 2016, and I am thankful for several sources of inspiration during that bleak time. Having belatedly discovered Hamilton the month before, the inimitable genius of Lin-Manuel Miranda provided optimism and reinforced my sense that writing could be important. I also thank Alan Blinder for his 1987 book Hard Heads, Soft Hearts: Tough-Minded Economics for a Just Society. This book played an important role in my earliest thoughts about how to be a good economist. Since then, I have often reflected on what that means in a world filled with practical limitations.
Now, I will thank people I actually know. In the middle of November 2016, a phone call with the tireless and brilliant Heather Boushey was crucial in strengthening my resolve to write this book. Heather’s contributions were many. She provided ideas, enthusiasm, and support for the project, and she also put me in touch with Ian Malcolm, my editor at Harvard University Press. Ian has been a joy to work with every step of the way, and I appreciate his steadfast enthusiasm, his skill, and his discovery of the Open title. I’m immensely thankful to Olivia Woods at the Press for her cheerful and industrious work on the project. My production editor, Julia Kirby, provided careful edits with both skill and understanding. Jill Breitbarth did beautiful work conveying openness in her cover design. I appreciate my readers. Kadee Russ provided extensive, timely, and enthusiastic comments on the manuscript. Michael Klein provided crucial feedback at a key point in the project.
In the conceptual phase of the project, Tamara Metz put me in touch with her former editor, Tim Sullivan, who provided essential advice about how to navigate the world of publishing; David Wessel also provided excellent advice on this front. Reuven Avi-Yonah, Eric Bernstein, Walter Frick, Alice Harra, Robert Kuttner, and Thomas Piketty all provided helpful advice.
My friends and colleagues were a constant source of support throughout the project. I am thankful to Steven Arkonovich for his laudable efforts in brainstorming titles, and for his steadfast bullishness about the project. Mark Burford generously offered his invaluable perspective on early sample chapters. Paul Silverstein was an enduring and stalwart supporter. Andrew Jalil was an enthusiastic early reader; I remain grateful for his relentless optimism. Paul Buchanan and Andrew Altschul provided key votes of confidence with a reading of the draft manuscript. I also received support and encouragement from Leonard Burman, Chris Koski, Amy Koski, Edward Kleinbard, Alan Taylor, Karen Perkins, Kelly Riordan, Jill Horwitz, Ted Parson, Peter Andreas, Penny Serrurier, James Hines, Lorraine Arvin, Myles Buchanan, Shelly Buchanan, Kevin Myers, Dawn Teele, Josh Simon, Mariela Szwarcberg Daby, Walter Englert, Morgan Luker, Dipali Mukhopadhyay, Jay Mellies, Earl Blumenauer, and Ron Wyden.
My students have been an important part of the project. My teaching provides a constant reminder of the importance of translating the economics literature for the broader public. My students have cheered on the project at every opportunity. My former thesis students (and soon to be PhDs) Michael Kincaid and Ahyan Panjwani provided useful advice and feedback. My department colleagues Denise Hare and Jon Rork generously shared insights.
I am particularly grateful to the formidable team of four research assistants who helped with the project. Uma Ilavarasan is one of the most capable individuals I have met; her willingness to lead this team substantially impacted my enthusiasm for the project. I am so thankful to all four of them: Uma, Soha Ahmed, Carolyn Cole, and Oona Palmer. They were marvelously efficient, attentive to detail, and consistently enthusiastic. I also thank Florin Feier for his work formatting references, and Gabby Blackman for her animated interest in the project.
I am deeply grateful to the Washington Center for Equitable Growth for providing grant funding for this project and enthusiastically supporting my work. Their vote of confidence was immensely valuable. I am grateful to Reed College and the economics department for their support, and for indirectly enhancing the breadth of this book. At most other institutions, my teaching duties would not have fostered such a broad synthesis of important topics in economics.
Finally, I thank my parents, Arthur and Willa Clausing, for being truly wonderful and inspirational people. I deeply appreciate their unflagging support and their thorough reading of early drafts. And I thank my children, Ursula and Holden. You are the lights of my life.
Index
Acemoglu, Daron, 64, 189–190
Affordable Care Act, 231
Alibaba, 148
Alphabet. See Google
American Airlines, 283
American dream, 4, 178, 304n1
Antidumping, 315n2
Antitrust laws, 153–154, 162–164, 283–286; and European Union, 153–154
Apple, 61–62, 145, 147, 167–168
AT&T, 284, 286
Autor, David, 77
Bargaining, 42–44
Bartlett, Bruce, 334n2
Base Erosion and Profit Shifting (BEPS), 159, 226–227, 279
Bell Laboratories, 284
Bernanke, Ben, 151
Bilateral trade balances, 135
Birnbaum, Jeffrey, 332n20
Boeing, 60–61, 144, 153
Borjas, George, 194
Bracero Program, 193, 196
Brain drain, 206–207
Brexit, 160, 298
British Columbia carbon tax,
275
Budget deficits, 241–242
Buffett, Warren, 246, 249
Burman, Leonard, 247
Bush Administration, 274
Business tax reform, 168–174, 250–252, 275–278
CAFE standards, 255–256
Campaign finance reform, 292
Canada: free trade area, 96; immigration policy, 185–188
Capital markets, 120
Capital taxation: rationale for, 250; tax rates, 248; trends, 46
Carbon tax, 162, 254–257; in British Columbia, 275
Card, David, 194
Center for Automotive Research, 84
CEO pay, 43–44, 152
Chetty, Raj, equality of opportunity project, 303n1
Child labor, 162
China: accession to WTO, 102; currency value, 127; economic growth, 63–68; infrastructure spending, 237; One Belt, One Road initiative, 100, 237, 298; relations with United States, 104; trade surplus, 12, 123, 144
China shock: and 2016 election, 76–79; size of, 76–78
Clemens, Michael, 191, 194, 196–197
Clinton, Hillary, 78
Clinton Administration, 78, 103, 274
Columbia Sportswear, 272
Comcast, 285
Open Page 27