Category Archives: Uncategorized

Income Tax Progressivity

A hot topic is the recent changes made to the tax code by the new Obama administration.  The tax rate on the top 2% is going up and their deductions are going down.  The tax rates on the rest of the population will decline.  This is a relative redistribution of the tax burden (this does not redistribute wealth since this is not a wealth tax).  Is that fair?
When we open up our borders to trade with 3rd world countries then indirectly our labor begins to compete with their labor.  The resulting exporting of jobs forces our union system to cower and the leverage that workers have to ask for raises, collapses.  This is called factor price equalization and while it drives down incomes for most Americans, it improves the returns on management who can now oversee more productive processes where their companies' ROE inexorably rises.  We see this in all the fake productivity numbers that are generated when we make parts offshore and then complete the assembly here – with fewer US workers.  Miraculously our productivity improves.
So moving jobs offshore drives a wedge between the different strata of our labor pool and it is logical to tax the beneficiaries at a higher rate and the victims at a lower one.

Why does it matter that we have a huge trade deficit with China?

The US trade deficit with China has been exploding since President Clinton granted them MFN status in 1994.  A first world country will never profitably trade with a third world country where there is no minimum wage, no pollution controls, no patent or copyright law, and (especially) no floating currency.  What we get are unbelievably cheap imports which relative to our first world salaries are irresistible  Our trade account goes into massive deficit, our savings rate collapses and consequently our investment rate collapses with it. Us-china-trade-deficit-2006

Everyone understands that in the long run an economy without investment will die.   We have now become dependent on China to fund our profligacy and our economy has become distorted toward non-tradeable goods.  We are now an economy of lawyers, brokers, and plumbers.  As Kevin Phillips has said -" the only thing we have become good at producing is debt."