Trade Deficit, Saving, and Tax Policy
By Arnold Kling
I argue that our trade deficit is really a savings deficit.
Increasing exports relative to imports is not a matter of beating up on China to live up to its commitments in the World Trade Organization. It is not a matter of prohibiting U.S. firms from outsourcing to India. It is a matter of increasing national saving.
I suggest that to reduce its trade deficit, the United States could
use tax policy to encourage work and thrift rather than as a tool to redistribute income. We should change the mix of taxes to favor saving rather than consumption. That would increase private saving.
Edward J. McCaffery also argues that we should
abandon the attempt to have an income tax altogether and move instead to a consistent consumption tax. This is the right path to take. It means eliminating all attempts to tax savings directly under the income tax—having unlimited savings accounts, no capital gains taxes, no tax-law concept of “basis.” It also means eliminating the adjutants or “backstops” to the income tax’s porous and flawed commitment to taxing capital, namely the corporate income and gift and estate taxes
For Discussion. What other policies might serve to increase national saving?