What if there were one mechanism that could support workers and communities harmed as a result of technological change; mediate the forces of the global economy; and adequately fund urgent public priorities such as education, health, and climate? In this episode, economist Kimberly Clausing stops by to talk with Steven Dean about how tax can address big challenges such as increasing inequality and growing threats to the middle class. Clausing reveals her prescription for more equitably sharing the fruits of economic progress as explored in her recent book, Open: The Progressive Case for Free Trade, Immigration, and Global Capital. Her pencil question comes from an article by Ajay Mehrotra and Julia Ott.
If it is true that taxes are a reflection of our values, what signals are we sending? In this episode, we unpack the factors affecting job loss and creation, challenges faced by American workers versus other countries, and the vulnerabilities created by tax havens—and how to solve for them.
Harvard-educated economist Kimberly Clausing, the Thormund A. Miller and Walter Mintz Professor of Economics at Reed College, speaks with Steven Dean about these and other ideas explored in her new book, Open: The Progressive Case for Free Trade, Immigration, and Global Capital. She shares how this work was “born out of [her] despair following the 2016 election” and the trouble she had with messages from both the right and left concerning trade. Particularly in the wake of the 2017 changes to the tax law, Clausing champions effective solutions for American workers and the middle class. Her specific prescriptions address income inequality and economic insecurity through better-functioning markets that allow labor to share the fruits of economic progress. Clausing and Dean discuss the value of tax lawyers and economists working together at this important time for economic policy.
This episode also features a recording by an NYU Law student, Adam from Houston, Texas, reading a quote from one of the most famous tax cases, Gregory v. Helvering.
Congratulations to Professor Clausing on her announcement that she will soon be joining the faculty of the UCLA School of Law.
Resources
Speaker 1: All of us should be willing to pay whatever taxes are necessary to enable efficient government to improve or expand any essential service.
Speaker 2: You have a beautiful tax return. The nicest one I've ever seen.
Speaker 3: Okay folks, but remember your manners, no stampeding, walk slow, like you do when you come to pay your taxes.
Steven Dean: Hi, I'm Steven Dean. This is the Tax Maven. Here we are going to, in each episode, talk to our Tax Maven, who will be a person proving Archimedes' point that a single person with a lever long enough and a place to put it can change the world. The lever in this case is tax and the place to put it is here at NYU Law.
Steven Dean: Today's Tax Maven, Kim Clausing, is an economist. She is the Thurmond, A Miller and Walter Minsk Professor of Economics at Reed College. Professor Clausing is the author of Open: The Progressive Case for Free Trade, Immigration, and Global Capital. She had a lot of trouble with what she heard, both from the right and from the left in 2016. As you'll hear, not only did she have a compelling answer to many of the concerns about trade raised by Bernie Sanders and then-candidate Trump, her solution is tax. So I'd like to just dive right in and ask you why you wrote Open.
Kim Clausing: Thanks. Well Open was really born out of my despair after the 2016 election. I noticed during that election that both Trump, but also Sanders, made trade agreements really a sort of punching bag for their discontent and held up, for instance, NAFTA as as a big problematic feature of what's happening to the middle class. Of course, the Trump campaign also bullied immigrants, and another aspect of globalization that I defend in the book is immigration.
Kim Clausing: What I really felt was important to do in the book is avoid blaming foreigners, whether trading partners or immigrants for our economic problems because I think that's dangerous for two reasons. One, they're not responsible for most of the problems which can be found elsewhere, but two, using them as a culprit in this story really distracts us from much more effective things we could do to help the American workers and the middle-class.
Steven Dean: Professor Clausing is an economist. She has a PhD in economics from Harvard and that does not make it obvious that she would become a Tax Maven, but she has, and what she does is uses her economics training to understand the powerful forces that shape our world, and what makes her a Tax Maven is that once you identified a problem, she is able to see the power of the tax law to create a precisely targeted solution to it.
Kim Clausing: So it's certainly the case that global forces have played a part here, like you can find that even though there are big benefits from trade, that trade has also caused some job loss, but there are a lot of other things that are contributing too, and think it's important to acknowledge that one is technological change. We've really seen big changes in the use of computers in our society. That's really shifted demand for workers away from those with low skills and towards those with higher skills.
Kim Clausing: But we've also seen other issues. There's a big surge in market power. Companies are more powerful than they used to be relative to workers. Labor markets have become more competitive, social norms have changed, so now CEOs make a lot more than they used to relative to the typical worker. We've seen big changes in economic policy too, with tax cuts for those at the top, but also changes in regulation and labor law. That combination of factors means that globalization isn't the only force in this storm that's hitting American workers. It's coming from a lot of different directions.
Steven Dean: It's complicated, as you suggest. That's why you wrote a book, and not a short paper, on this question, but how would you describe whether the challenges that are faced by American workers are the same or different from those faced by Chinese workers, for example?
Kim Clausing: Yeah. So there are some similar forces that are increasing income inequality in a lot of countries, and one is this sort of market power of companies. But the story is really different in China relative to the United States because the Chinese story takes place in a way that has also really lifted almost every segment of society. So if you look at the bottom half of the Chinese population, even though their share of income has fallen, their incomes have increased by five fold over the previous generation.
Kim Clausing: Whereas if you look at the US bottom half of the population, its share of income has also fallen. It's actually a similar trend as the Chinese, but this is occurred in the context of much more stagnant incomes. So there they have a much more sort of a burgeoning case of economic growth, and it's partly because they started off poor. When you're poor, there's a lot more room to grow quickly than when you're really rich. You don't have to reinvent a lot of inventions that have already occurred. You can adopt those from other countries and capital investments are very productive when you're a poor country. So in the Chinese case, even though income inequality has really expanded, nonetheless growth has really benefited everyone there.
Steven Dean: How important, just in percentage terms, or in relative terms, would you say globalization is in the loss of manufacturing jobs in the US?
Kim Clausing: Yeah. One of the interesting facts is if you look at the share of US workers in manufacturing, that share has declined at a really steady pace since about 1950, so there's a chart in the book actually, which shows you that pace. But one thing that's remarkable is trade hasn't changed that same steady pace, right? In the first few decades of that chart, in the 1950s, and '60s, trade wasn't really increasing very much at all, and then it started to increase more in later decades. So I wouldn't say that trade is the only culprit.
Kim Clausing: That said, there are some researchers who have recently published a flurry of papers that suggest that trade with China has reduced US manufacturing jobs by about 1-2 million. That's not nothing, that's a serious loss of manufacturing employment. But one thing to keep in mind is that this occurs in a context of a larger US economy, that has a lot of job churn. So every quarter in the US economy, we create and destroy over 6 million jobs. So that's happening on a quarterly basis in the US economy, as domestic competition, technological change, and other changes create an incredible amount of churn. So even though this 1-2 million manufacturing jobs sounds like a lot, it's occurring in a much larger context where there's a lot of of job churn. So it's an important factor, but it's certainly not the only factor.
Steven Dean: That's very helpful. One of the best things you do in the book is offer that kind of context because we don't often hear about ... We get to go beyond the soundbites in the way you write and it's very helpful. Here's another potential bit of context that may be helpful for those listening out there. We're all going to run out and read your book, hopefully. So who are the winners from globalization and are they a distinct group of people, or companies, from those that are the losers? Or is there overlap? Or how does that work?
Kim Clausing: Yeah, so this story is kind of an interesting one. When you first do sort of a textbook analysis of trade, you see that the export industries win, and the import industries lose, and in the United States, the export industries tend to be industries that use a lot of capital and that use a lot of high skilled workers. Whereas the import industries tend to use less capital and more labor. So that would tell you that our high skilled workers are winning relative to our low skilled workers and capital is winning relative to labor.
Kim Clausing: But another thing to keep in mind is that there's a sort of fluidity between our export and import industries. We live in a world with global supply chains, and that means that often the industries that export a lot are also the industries that import a lot. So that's made this story a little more complicated than it used to be because when you look at the top traders in this country, they're companies that do both sides of the equation. When you put tariffs in place that sort of adds sand to the wheels of their business operations and can sort of hurt both their exports and their larger business picture, and create some new shocks. That's one of the things I caution about in the book.
Steven Dean: Interesting. So thinking more about the nature of potential solutions to the challenges, the very real challenges you talk about in the book, what would you say is the best way to address the economic insecurity that globalization produces?
Kim Clausing: Yeah, so first I would say it's important to acknowledge that this storm that is buffeting American workers is really coming from a lot of different directions. So we can't just blame globalization because we're just going to address one source of the problem, not all of the sources. A second thing to keep in mind is that I think we should try hard not to shoot ourselves in the foot. We wouldn't throw away the gains from technology, even though it hurts some workers. Nobody's dying to throw away their computers and smartphones. So we also shouldn't throw away the gains from trade, or the gains from immigration. I spend time talking about that in the book too. These are really tremendous gains and things that we could lose.
Kim Clausing: A third issue is that I think it's important to go directly to the policy aim when you do policy. So if we're worried about workers, we should support workers directly, and there are a lot of really direct ways to do that. You can expand things like the earned income tax credit, which supports wages at the bottom of the income distribution and even into the middle of the income distribution. You can have policies like wage insurance where you make up some of the difference between someone's old wage and new wage, if they lose their job. You can make investments and infrastructure and R&D and education that goes straight to the productivity of workers. You can change tax burdens to sort of redistribute income better and share the gains from globalization.
Kim Clausing: So all of these types of things I think are really important ways to make our markets function better and make sure that prosperity is really reaching everyone. Unfortunately, I think in the last few years we've moved in the opposite direction and this has been kind of frustrating to watch. We've made health insurance more fragile by repealing the individual mandate that was part of the Affordable Care Act. We've given the middle-class much larger budget deficits in exchange for little tiny tax cuts. So we've made our sort of our government financial picture less stable and health insecurity less stable, and kind of sort of added fuel to the fire of the forces that are harming US workers.
Steven Dean: Who would you say is doing a good job of protecting vulnerable workers from economic insecurity?
Kim Clausing: Yeah, so it's interesting if you look among US states even you see a fair amount of variation in how policy responds to workers' needs. So for instance, consider Massachusetts, which has a health insurance program that was laughingly called Romney Care because Obamacare or the Affordable Care act was sort of modeled on it, that has really expanded health insurance access in Massachusetts. They also invest a lot in education in that state. So their earnings outcomes are sort of more robust and less stagnant than they are in some other States. You see just better outcomes. So I think we can learn something just by looking across US states.
Kim Clausing: But abroad you can also find countries that are doing a better job at supporting their workers. In Germany, you see a lot more labor power in businesses, labors have more role in decision making and they share more of the fruits of economic progress. And that really shows up in both their macro statistics but also in their inequality picture. So I think countries abroad also do a better job at supporting sort of universal health insurance so that people feel more economically secure. There's a lot of things that we could do to sort of move in that direction and strengthen the Affordable Care Act, for instance. I think we could do a much better job also making education more affordable, for instance, expanding community college and the like.
Kim Clausing: So I think there's a lot we can learn from outside, but in general I prefer sort of targeted measures that would go straight to workers rather than things that are sort of universal entitlement. So as one example, I think free community college might make more sense than free college because if you have free college, you're giving the benefits to a lot of people who are sending their kids to very elite institutions who probably don't need financial support from the taxpayer. Right? Our higher education system generally works well and is the envy of the world. We attract students from all over the planet who are seeking education here. So what we need to do is target those opportunities better to those that are lower in our society rather than sort of make them universally free to all.
Steven Dean: Kim Clausing knows a lot about a great many topics. She takes a very broad view of the world's economy and she has a clear sense of what is moving in the right direction and what is moving in the wrong direction. When the moment comes to offer a solution, Professor Clausing reaches for one tool in our toolbox above all others. Her work has consistently emphasized the power of the tax law to improve lives.
Kim Clausing: Yeah. So in the book I suggest kind of a three-pronged approach. Doing things to support workers, and I've talked about some of those and to support communities too that have been harmed by the sort of forces of technological change, or import competition. But I also think we can do things through tax reform. I have a chapter on that, of how to better sort of mediate the forces of the global economy through the tax system.
Kim Clausing: We can have a better partnership with the business community where the business community gets some of the things they want open markets, fair and simple regulations and taxes. But we also take market power seriously. We take transparency seriously, we get more information and we also ask more tax payments from our successful businesses. So I think that's a big, big part of it. We also need, of course, adequate funding for the government so that they can invest in some of these urgent priorities like research and infrastructure and education.
Steven Dean: So I'd like to hear a little bit more about that. Tell me more about how our tax laws affect the economic insecurity of American workers.
Kim Clausing: Yeah, so there are several mechanisms here. One is through the simple matter of who's paying, right? So if we ask less from those at the bottom and more of those at the top, we make our society more equal. You can even have negative tax rates at the very bottom. That's one way that you can affect the economic wellbeing of American workers. A second issue is of course having the revenue that we need to make important public investments in things that benefit workers, things like infrastructure and education.
Kim Clausing: Another role of the tax system is by setting rules and affecting incentives and even the values of our society. I saw a film a few months ago that was based on the early years of Ruth Bader Ginsburg's career. At one point, her spouse who's a specialist in tax, Marty Ginsburg announces that the tax system is in fact a statement of our values. I sort of swooned in the movie as I heard this because I couldn't agree more. I think the tax system is a statement of our values and it affects almost everything in the economy. So working with that tool effectively I think is a really important part of making a just society.
Steven Dean: Did the 2017 tax changes address the challenge you see?
Kim Clausing: No, I unfortunately think that they were a big step backward in a number of ways. First, it made our tax system more regressive. If you look at the big beneficiaries of those tax cuts, they were disproportionately those at the top of the distribution. A lot of the business tax cuts, for instance, help those with a lot of capital income. But they're also cuts in estate taxes, and cuts at the top tax bracket. The poor and the middle-class got some tax cuts, it's true. But if you look over the 10 year windows of the legislation and you'll see that their tax benefits turn from a few hundred bucks in the early years to actually a tax increase by the end of the 10 year window. So we're basically, redistributing income up the ladder instead of down with that tax change.
Kim Clausing: Another big step backward if you ask me is the deficit finance of that. It's going to cost us probably about $2 trillion over 10 years if you include the interest on the additional new debt. That's the latest number from the congressional budget office. That's all money that we desperately need to tackle a lot of important public priorities like infrastructure, and education, and healthcare. So financing that with deficits means that, not only are we not giving the middle-class very much to begin with, but we're actually going to ask them to either suffer from future tax increases or higher government spending in the future, and that's not great.
Kim Clausing: In addition, if I were going to make one more complaint about that tax law, and I've already given you a couple, it's made the tax system far more complex and while that might be a boon for those studying tax law, because we're going to need more tax lawyers and tax account accountants, we don't necessarily think that that's a good way to design a tax system. So it kind of performed the trifecta of bad things by making the tax system less fair by raising less money and by making it more complicated in a lot of ways, especially on the business side where a lot of that extra complexity is.
Steven Dean: So turning in a somewhat different direction. One of the prospects you raised in the book, I'm not sure whether it's optimistic or not, but let's just say it is for now. You suggest that a carbon tax might help produce a more equitable globalization. What can you tell me about that?
Kim Clausing: Yeah, so I viewed the carbon tax as part of a grand bargain where you use the revenue from the carbon tax in part to keep tax rates lower elsewhere in the system and to help those, particularly in the bottom in the middle of the distribution. Another way you could do that, even without this big grand bargain, is you could just have a brand new carbon tax where you took all the revenue generated, you divided by the number of people and you handed it back to them, and in fact there was a bipartisan letter signed by a huge number of economists in favor of this idea because if you do that combination of policies, those in the bottom, roughly 70% of the population actually end up better off because they get more back in carbon dividend than they paid in carbon tax because the rich do use more carbon than the poor, even though it's less relative to their income. That combination of policies leaves those at the bottom better off.
Kim Clausing: One of the great things about the carbon tax, of course, is normally when we tax things, we're taxing things that we like, like labor, or business, or entrepreneurship, or savings, and here we're taxing something that it's really damaging the future of our planet. So discouraging something that's bad is really a sensible thing to do and it raises a lot of revenue. Even if we had half the tax that would be required to fully capture the social cost of carbon, we'd still raise over a trillion dollars over 10 years. So that's a lot of money that could be used for urgent priorities.
Steven Dean: So your book is, I think, a very helpful and hopeful book in a lot of ways. I don't think there are really any villains in Open, but if there were, one of the strongest candidates might be the tax haven. What is different between a tax haven and a country without an income tax?
Kim Clausing: Yeah. So one issue that people focus on a lot with tax havens is the issue of secrecy where it's not so much that they just have a low tax rate, but they're also sort of facilitating nefarious activities of those who don't want to be known, and that's a big issue too. Another feature that people worry about is the tax haven sometimes pair with vulnerabilities and loopholes in other countries tax systems to help erode their tax base. A good example here would be if you look at the US check the box regulations, those together with regimes in other countries enabled the creation of income that was truly stateless, that wasn't taxed anywhere. So you could view tax havens is sort of symbiotic with dysfunctional rich country tax systems. But one thing to point out is that it's kind of up to the rich country or the the non haven country to solve this problem.
Kim Clausing: There's a lot that the United States could do without any cooperation from havens that would help reduce this sort of tax avoidance. So I would strongly suggest that we take those types of measures and there's some simple suggestions that I make in the book from having a better minimum tax regime. We've started a minimum tax now, but I think you could do a more effective one and I suggest how to do that in the book, to maybe even looking at some of these more grand proposals for international taxation where you might, for instance, require companies to consolidate all of their worldwide activities on their tax form and pay tax on that basis rather than having them separately account for each subsidiary's income. So there's a lot we could do even without the cooperation of tax havens. But yeah, I think tax havens themselves make our tax system vulnerabilities far worse.
Steven Dean: So you may know this, the story of Willie Sutton, the bank robber who was asked why he brought banks, he says, "That's where the money is." So they call that Sutton's Law. To me, I wonder, having read your book, is that why fixing our tax laws are so important? When we spoke earlier, you talked about the values that our tax law represents, but is the grand bargain for better tax policy described, is that important mostly because that's where the money is? Or is there something more? How would you describe it?
Kim Clausing: Yeah, it's not just about the money, although money of course is important because we need that for a lot of things, but the tax system really does shape our incentives and express our values. So what I suggest there is sort of a bargain that does better at supporting workers, that does better at collecting revenue without really high tax rates by treating different types of revenue more similarly, both for individuals, thinking about capital and labor, but also for companies, and dealing with the climate change problem to get there. If you do all of those things together, I think you can do it in a pretty revenue neutral way that would help motivate both those on the left and on the right. So for the left you could tell them, "Okay, this is going to be a more progressive tax system than the one you had earlier and you get to solve one of the problems you're most worried about, climate change," or at least contribute to solving that problem.
Kim Clausing: For those on the right, you can say, "Listen, we're raising some revenue from some of these other taxes, like the carbon tax. So we're not going to have to jack up your rate quite as high. Since we're solving some of our base erosion problems for both corporations and for individuals who are distorting some of their decisions by taxing all types of income the same, that means that we can probably get away with having a tax rate on you that's lower than it would be if we weren't solving those problems." Something in the neighborhood of the high 30s, instead of this sort of Ocasio-Cortez style, 70%, right? So I think you can maybe bring people to the table, sort of with that combination of things because the people on the right get more reasonable tax rates and less distortion and planning that they have to do because we're treating things more similarly. The people on the left get the progressivity that they want, and a greener tax policy.
Steven Dean: So you're not a tax lawyer, but you've written a lot about tax and hearing you talk about it, it makes it clear that you not only understand it, but I have strong views about it. What makes tax law important from your perspective as a non lawyer?
Kim Clausing: Yeah, well I think you can tell that I think taxes are important for a lot of reasons. But I also think this is an area where legal scholars and economists should really work together more, even practitioners. Economists understand some things well, but we can fall in love with our own mathematics and we can propose ideas that are entirely too difficult to pass or administer. Legal scholars are better at spotting the importance of implementation issues. They're very good at sort of drafting laws and thinking about good ways to do that, but they can also gain insights from the economists regarding understanding the theory and the data of the world around us. Together I think we can have better ingredients for a better tax policy. So I would suggest that economists and lawyers should work together more on this just tax policy because then nothing could stop us.
Steven Dean: Excellent. Is there anything else you'd like to add?
Kim Clausing: Thank you for having me. It's been really nice to talk and I hope everyone will be inspired to engage with the ideas in the book and regardless of whether you share my particular perspective, I think it's important to participate in this battle of ideas. Right now we're at a really important time for economic policy and I have a strong sense that we could do a lot better than we have been.
Steven Dean: Well, I am so grateful to Kim Clausing, the author of Open: The Progressive Case for Free Trade, Immigration, and Global Capital. I don't know whether you're a gambler? Professor Clausing? Do economists like gambling?
Kim Clausing: Generally we're known to be not particularly risk loving. We're more in the risk averse type, but I'm willing to give it a gamble.
Steven Dean: Well I guess ... I mean, I don't know if it's gambling. But I do know, as a fellow nerd, and I say that with the upmost respect, you probably like pencils as much as I do. I'm holding now in my hand and NYU Law graduate tax program pencil. If you can answer one question correctly, you get to go home with this NYU law graduate tax program pencil.
Kim Clausing: Okay. Well for the listeners at home you should know that it's purple and very attractive, so I'm definitely game for this.
Steven Dean: All right. The question is this, which of these innovations to the income tax occurred in 1921. I'm going to give you three choices. So these are three innovations. One of them occurred in 1921, and let's see if you can identify the right one. So the mortgage interest became deductible, that's A. B is, the preference for capital gain was introduced. Or C, the foreign tax credit allowing US tax payers to credit foreign taxes against their US tax obligations was enacted.
Kim Clausing: Okay, well in the spirit of Open, I'm going to guess C.
Steven Dean: Are you sure?
Kim Clausing: I am not sure. But that's my guess.
Steven Dean: All right. You're going to go .... So, and you know that was not correct. So that was actually a dastardly trick on my part because it was enacted in 1919, but the tax law that it was introduced in was named the 1918. So with the title of the bill was 1918 but as introduced in 1919, the foreign tax spread was around the same time. You of course, I mean the real win here is not falling for the mortgage interest deduction because as that was never created. It was always there and everything else went away. So I knew you wouldn't fall for that one-
Kim Clausing: Yeah well, partial credit I guess.
Steven Dean: But it was the preference for capital gain. I learned this from reading The Curious Beginnings of the Capital Gains Tax Preference by Ajay Mehrotra and Julia Ott. That was published in the Fordham Review. So in addition to going out and buying a Kim's book, open, you could also download Ajay and Julia's article. If you want to learn more about the beginnings of the income tax.
Kim Clausing: And maybe someday you can win the pencil, then.
Steven Dean: I think we'll talk about it, we'll negotiate over the pencil later. We'll bargain over it. But thank you so much Kim. Thank you for coming and thank you for speaking with us.
Kim Clausing: Thank you.
Steven Dean: Thank you for listening to the Tax Maven, and I also want to give a very special thank you to those that helped make the podcast possible: Patrick Kelly, Joe Rivera, Greg Addison, Leslie Hart, Rebecca Carmichael, Jill Rachlin and Anthony Pietrangelo. The NYU Law graduate tax program has been the premier place to learn about tax law for the past 75 years. So please visit us on the web. Visit our graduate tax program website to see the different programs we offer, both in person and online, both for lawyers and non lawyers. Take a look at what we offer and I hope you consider joining us.
Steven Dean: Now we like to end each of our episodes with a quote about taxes read by one of our students. Today we have a quote from Adam from Houston, Texas, and he is reading a quote from a very famous tax case, Gregory v. Hovering.
Adam: The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or all together avoid them, by means which the law permits, cannot be doubted.
Steven Dean: Please email us at info@taxmavenpodcast.com if you have any questions, or comments, or suggestions, and if you are a student and want to email us a recording of your favorite tax quote, please email it there as well. Thanks for tuning in.