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91

Protectionism: A Useful Weapon . . . for Lack of Anything Better

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Piketty, T. (2017). Protectionism: A Useful Weapon . . . for Lack of Anything Better. In Piketty, T. Chronicles: On Our Political and Economic Crisis. Penguin Books, pp. 91-93

91

Why do the vast majority of economists believe in free trade? Because they learned in school that it’s more efficient, in the first instance, to try to produce as much wealth as possible by relying on free and competitive markets to maximize everyone’s comparative advantage. Even if that means, in the second instance, equitably redistributing the gains, through transparent taxes and transfers within each country. That’s what economists learn at school: efficient redistribution is tax redistribution; markets and prices must be left to do their work, by having as few distortions as possible (this is the famous “free and undistorted competition”), even if that means redistribution later, “in the second instance.”

Not everything in this lovely story is wrong; far from it. Nevertheless, it raises a major problem. Over the past thirty years, trade in goods and services has been profoundly liberalized, mostly in the name of this logic. But the “second instance”—greater redistribution—never came. Just the opposite: international tax competition has hammered the progressive levies that were patiently built up over the preceding decades. The richest benefited from sharp cuts in taxes, even though they were already the main beneficiaries of trade liberalization and globalization. Those of modest means had to be content with higher payroll taxes and consumption taxes, all in a context of wage and employment stagnation. Instead of a more equitable sharing of the gains from liberalization, tax redistribution has, on the contrary, tended to worsen its inegalitarian effects.

Some will say: That’s too bad, but what can you do? If voters’ political preferences led them to choose less tax redistribution, that might be regrettable, of course, but surely we shouldn’t reinstitute trade barriers, since that will only slow an already lagging rate of growth.

Sure. Except, on closer inspection, unconditional trade liberalization and tax dumping work hand in glove. The public authorities have been disarmed without getting anything in return. In fact, by prohibiting import taxes and export subsidies, we’ve encouraged states to develop other tools to promote their domestic production, especially through tax exemptions for foreign investors and highly skilled labor (all of this being entirely permitted, of course). Not to mention the fact that deregulation of financial services and capital flows has directly facilitated tax evasion by both businesses and individuals. Lacking sufficient coordination between countries, the capacity of states to carry out an independent tax policy has been sharply reduced.

—p.91 by Thomas Piketty 2 years, 1 month ago

Why do the vast majority of economists believe in free trade? Because they learned in school that it’s more efficient, in the first instance, to try to produce as much wealth as possible by relying on free and competitive markets to maximize everyone’s comparative advantage. Even if that means, in the second instance, equitably redistributing the gains, through transparent taxes and transfers within each country. That’s what economists learn at school: efficient redistribution is tax redistribution; markets and prices must be left to do their work, by having as few distortions as possible (this is the famous “free and undistorted competition”), even if that means redistribution later, “in the second instance.”

Not everything in this lovely story is wrong; far from it. Nevertheless, it raises a major problem. Over the past thirty years, trade in goods and services has been profoundly liberalized, mostly in the name of this logic. But the “second instance”—greater redistribution—never came. Just the opposite: international tax competition has hammered the progressive levies that were patiently built up over the preceding decades. The richest benefited from sharp cuts in taxes, even though they were already the main beneficiaries of trade liberalization and globalization. Those of modest means had to be content with higher payroll taxes and consumption taxes, all in a context of wage and employment stagnation. Instead of a more equitable sharing of the gains from liberalization, tax redistribution has, on the contrary, tended to worsen its inegalitarian effects.

Some will say: That’s too bad, but what can you do? If voters’ political preferences led them to choose less tax redistribution, that might be regrettable, of course, but surely we shouldn’t reinstitute trade barriers, since that will only slow an already lagging rate of growth.

Sure. Except, on closer inspection, unconditional trade liberalization and tax dumping work hand in glove. The public authorities have been disarmed without getting anything in return. In fact, by prohibiting import taxes and export subsidies, we’ve encouraged states to develop other tools to promote their domestic production, especially through tax exemptions for foreign investors and highly skilled labor (all of this being entirely permitted, of course). Not to mention the fact that deregulation of financial services and capital flows has directly facilitated tax evasion by both businesses and individuals. Lacking sufficient coordination between countries, the capacity of states to carry out an independent tax policy has been sharply reduced.

—p.91 by Thomas Piketty 2 years, 1 month ago