Kleiman on Trade and Taxes
By David Henderson
So when the modern Republican Party (R.I.P), in the name of “small government” and opposition to “class warfare,” set its face against policies to redistribute the gains from economic growth, it destroyed the theoretical basis for thinking that a rising tide would lift all the boats, rather than lifting the yachts and swamping the trawlers. Free trade without redistribution (especially the corrupt version of “free trade” with corporate rent-seeking written into it) is basically class warfare waged downwards.
This is from drug policy expert Mark Kleiman’s recent post, “Trade, Trump, and Downward Class Warfare.” His piece is not long and so if you want to completely follow my critique, you might want to read it.
The paragraph I quoted above gives the gist of his argument. He leads with this:
In a nutshell: opponents of taxing the rich have destroyed, on a practical level, the theoretical basis for believing that free trade benefits everyone.
Do you see the problem? Kleiman doesn’t and Brad DeLong doesn’t. I do.
Kleiman’s argument shows that by “the rich” he means high-income people, not wealthy people. His discussion is about incomes.
There are two problems with Kleiman’s argument.
First, on taxes. Opponents of taxing the rich have been singularly unsuccessful. Under both Obamacare and the tax deal negotiated between Vice-President Biden and Senate Majority Leader Mitch McConnell, the marginal tax rate on income for high-income people shot up in the last few years. Under Obamacare, the Medicare tax rate on high-income people was raised from 2.9% to 3.8%. Under the Biden/McConnell tax deal, the top marginal tax rate rose from 35% to 39.6%. As a result, high-income people are paying a much higher percent of their income in taxes than lower-income people.
This isn’t exactly a secret. Check any public finance text and you’ll likely find a table that gives the percent of income paid in taxes for various income levels. Or check this report from the Congressional Budget Office, dated November 2014, after the tax increases were in place.
According to the CBO report, the top 1% paid an average of 33% of their income in taxes, up from 29% before the Biden/McConnell deal, and the lowest quintile paid an average of 3% (up from 2%). The people in 81st to 99th percentile paid an average of 22%, up from 21%. The people in the middle 3 quintiles paid an average of 13%, up from 12%.
In short, Kleiman’s idea that opponents of taxing the rich have succeeded is a fantasy.
That’s what I’m sure of.
The second problem with Kleiman’s argument is one that I’m only 90% sure of: who gains from trade.
Kleiman feels confident that international trade benefits only the rich, and, I remind you, by “the rich” he means high-income people. He writes:
But the bottom line is that all of the gains, not merely from trade but from economic growth, have been concentrated in the hands of a relative few.
I’m pretty sure he’s wrong. I think of clothing, in which we have had a major increase in free trade in the last few years. Almost everyone in America buys clothing. Another item is oil. There has not been a major increase in free trade on the import side: we already have it. But oil is traded internationally and its price has fallen like a rock. Almost everyone buys oil, either directly or embodied in a product such as gasoline or transportation of consumer items.
Kleiman is making the classic mistake that Frederic Bastiat warned about over 160 years ago: looking at “what’s seen” and ignoring “the unseen that must be seen.” He is probably looking at job losses for relatively low-income people who lost their jobs because of free trade and often went to other jobs that paid less. There could be a few million people in this category and they have lost. But he’s leaving out the tens of millions of low-income Americans who did not lose their job to free trade and are benefiting from buying the cheaper internationally traded items.
To his credit, though, Kleiman reminds us of the biggest gainers from trade with China, writing:
It also ignores the biggest gainers from trade: workers in low-wage countries, most notably the Chinese factory workers whose parents were barefoot peasants.