Progressive Tax Reform in the Era of Globalization: Building Consensus for More Broadly Shared Prosperity

Jason Bordoff, The Brookings Institution
Jason Furman, The Brookings Institution

Abstract

Part I of this Essay reviews the traditional case for progressivity in the tax code, putting it in the context of the recent trend toward increasing income inequality. This Part also rejects the view that modestly more progressive rates will seriously harm economic performance by blunting incentives to work, save, and invest. Part II suggests a broader motivation that goes beyond concerns about inequality per se, instead appealing to the widely accepted notion that economic policies should be favored when they make everyone better off. A combination of progressive tax reform and proglobalization policies can move us closer to this ideal. This is not just a theoretical argument. Evidence shows that globalization policies like free trade lead to stronger economic growth and higher standards of living, but there are worrisome signs of an increasing protectionist backlash. We argue that this backlash stems in part from real economic dislocations caused by trade, but far more from the government’s failure to ensure that the fruits of strong economic growth are broadly shared. Falling or stagnant incomes, likely due largely to factors other than trade, have led to this protectionist drift. A disproportionate share of blame is attributed to trade in part because of its highly visible manifestations. A firm’s decision to outsource jobs to China or India is easier to see than the rising returns to skill from technological change, which most economists agree is a key cause of wage stagnation and rising inequality.14 Those who seek enhanced economic security for American families and those who seek greater globalization should come together in support of progressive tax policy to achieve more broadly shared prosperity. Part III compares the relative merits of alternative proposals to secure more broad-based economic growth and explains why progressive income tax reform is a more promising approach. Part IV then offers a set of specific recommendations to effect progressive income tax reform. Part V concludes.