In recent decades Americans have seen a huge increase in trade (flows of exports and imports). This influx in global trade has posed significant challenges to U.S. workers. The trade flows (and policy responses to them) have contributed to anemic wage growth for workers without a college degree, caused severe damage to manufacturing communities throughout the country, and represent an increasingly unsustainable organization of global production and consumption.1 People in the U.S. have good reason to be conflicted about the challenges that globalization and the rise in trade pose to their working lives and communities, and the potential benefits trade can create.

U.S. workers have also watched as too many policymakers enthusiastically push a proliferation of trade agreements. These agreements have accelerated trade flows and carved out corporate-driven “rules of the game” for a globalization that puts almost no priority on the well-being of regular people in the United States or the resilience and sustainability of the overall economy. Most of the Washington, D.C., establishment has supported these trade agreements, promising a supposed influx of good jobs and increased standards of living that would come because of increased trade.

Given this history, it is no surprise that many of these workers want something different from policymakers regarding our nation’s approach to globalization. And the Trump administration’s current approach is certainly different—it is even worse than what came before. This approach is motivated by ever-changing and contradictory goals and is built entirely on threats of historically high and broad-based tariffs that change by the day (or even hour) rather than opportunities for mutual benefit from cooperation.

Ratcheting up tariffs across the board is not a serious response to, nor will it solve, the larger challenge of lackluster wage and job growth for noncollege workers. Lower tariffs were not a significant driver of the larger trade flows that pressured wages for these workers in recent decades. This is not to say that there are not real problems with the U.S.-led global trading system nor useful changes to be made to policies regarding globalization. But historically high and broad tariffs are not among them, and domestic policy choices have had much more to do with the wage suppression most U.S. workers have experienced in recent decades (Mishel and Bivens 2021).

In this paper, we provide a rough outline for how those concerned about the economic plight of working-class Americans should approach issues concerning globalization and trade. Often the best approach to issues intersecting with international trade does not directly implicate traditional trade policy tools (like tariffs). For that reason, we say that these recommendations constitute a progressive approach to globalization in the 21st century.

Key challenges that globalization poses to U.S. workers:

• Growing import flows from lower-wage nations and threats to offshore jobs put modest, but steady, downward pressure on wages of workers without a college degree.
• Chronic trade deficits have reduced employment in U.S. manufacturing and raised our foreign debt.
• The inflation stemming from pandemic and war shocks between 2020 and 2024 highlighted the fragility of global supply chains. These supply chains should be strengthened to prepare for a future prone to larger and more frequent shocks.
• Competition from foreign trading partners that permit unfair and abusive labor practices has made labor artificially cheap.
• A failure to harmonize climate regulations internationally threatens to see greenhouse-gas polluting production simply migrate away from the United States to low-standard locales rather than being reduced globally, undermining U.S. industry and forcing the burden of adjustment onto workers in greenhouse gas-intensive sectors.
• A failure to harmonize corporate tax treatment internationally allows corporations to play countries off each other and ensures that some countries will almost always have incentives to act as tax havens, making it harder for all countries to impose reasonable taxes on corporate profits.

Although policymakers from both parties have too often been reluctant to admit to the problems created by a U.S.-led, corporate-friendly global trading system, none of these problems presents insurmountable challenges. Our key recommendations to solve the central problems of globalization are the following:

• While trade flows have put downward pressure on wage growth for large portions of the U.S. workforce in recent decades, trade policy would have only weak and unreliable effects in reversing this. Instead, policymakers should strengthen key domestic policy bulwarks that underpin workers’ leverage and bargaining power to boost wage growth. These domestic policies include a substantial increase in the minimum wage, protections for workers to freely associate and bargain collectively in unions, and full employment macroeconomic policy management, which will have larger and more reliable effects on wage growth.
• Reducing damaging trade deficits cannot be solely achieved through trade policy unless it is so restrictive that it functionally returns the country to an isolated regime with no trade at all. Instead, more balanced trade will only result from macroeconomic policies consistent with lower trade deficits, including exchange rate management and a reasonable mix of fiscal and monetary policies.
• Supply chain resilience is important, yet individual businesses will underinvest in it without public support. Collapsing supply chains initially sparked the post-COVID-19 inflationary spike across the globe. Supply chains remain vulnerable to disruptions from natural disasters, geopolitical events, and even human and computer errors. Unless one is entirely confident that these events will never happen again, the costs of supply chain fragility are potentially large enough that it’s worth using policy measures to build up supply chain resilience. Trade policy tools like tariffs and subsidies are potentially useful measures here.
• The U.S. should reward countries that respect labor rights with preferential access for their imports and should incentivize other countries to enforce labor standards. This can be done by imposing tariffs that shrink as countries improve in upholding labor rights. These tariffs cannot fully protect U.S. workers from competition from countries where exploitation makes labor cheap, but tariffs can provide some buffer from this, and imposing them provides a valuable political signal that simple fairness matters for trade policy (as it does for all other types of policy).
• Effective climate policy must be global, if not universal. In terms of driving destructive climate change, it does not matter where greenhouse gas pollution originates. National policies that raise the price of pollution locally but simply push emitting factories offshore fail to deal with the overall problem while putting domestic industries at unfair disadvantage. Until there is a more coordinated global approach to greenhouse gases (a global carbon tax or something similar), national governments should be willing to leverage trade policy tools (like tariffs tied to the intensity of greenhouse gas emissions involved in producing imports) to promote lower-pollution industries while avoiding “carbon leakage,” reduce global emissions, and incentivize industry investments in carbon-reducing technologies.
• International coordination of tax policy that ensures large multinational corporations pay their fair share in taxes would help U.S. workers far more than either higher tariffs or more trade agreements. The global tax system currently provides easy access to tax havens for corporations and encourages the offshoring of both paper profits and real factories away from the United States. Much of this problem can be solved unilaterally, but even the remaining problems constitute a far more important and pressing target for useful international coordination than further trade agreements do.

Policy recommendations to address these challenges

In this section, we provide some high-level recommendations about how policies should address globalization’s challenges.

Trade policy can do little to spur wage growth, but domestic policies would be much more effective

The production of imports from lower-wage nations tends to intensively use noncollege labor relative to U.S. exports. This means that the pattern of trade flows between these nations and the U.S. reduces the demand for noncollege labor in the United States, as imports displace more noncollege labor than exports support. Hence, trade flows put steady, albeit modest, downward pressure on wage growth for noncollege workers, a group comprising over 60% of the workforce (EPI 2025). The downward pressure on wage growth is nontrivial. Between 1979 and the mid-2010s, these trade flows likely depressed wages of noncollege workers by between 5%–6% (Bivens 2013; Autor, Dorn, and Hanson 2011). For workers who have seen extremely slow growth in wages over this entire period, another 5%–6% of wage growth would have been most welcome.

Crucially, this downward wage pressure stemming from trade flows does not just affect workers in tradeable industries. It spills over and puts downward pressure on wages for noncollege workers throughout the economy. Further, the wage suppression that trade flows imposed on noncollege workers allowed income gains for college-educated workers and business owners. 2 Yet policymakers never offered compensation to noncollege workers at anything close to the scale of this redistribution of income away from them. Instead, policymakers offered vague promises of retraining and empty assurances that trade was always “win-win.” This policy neglect added a deep insult to the injury of trade-induced wage suppression for these workers.

Yet it is important to remember that this policy neglect was not confined to globalization. In fact, nontrade forces supported by intentional policy decisions were putting far more intense downward pressure on wages than trade flows did.3 One aspirational benchmark for wage growth is economywide productivity growth. In the 30 years after World War II, broadly equal wage growth among all workers was clearly a target for policymakers who supported strong institutions (from unionization to fast-growing minimum wages to the maintenance of full employment) to meet this target. But over the 1979–2019 period, wage growth for noncollege educated workers decoupled from overall productivity growth, and as productivity growth continued, worker wages lagged behind—cumulatively by close to 50 percentage points over this period.

Trade competition certainly contributed to this decoupling and stagnation of wages. But analysis shows that nontrade sources explain three-quarters or more of the entire wage suppression these workers experienced in this time (Mishel and Bivens 2021). Reversing the nontrade forces that have contributed to wage suppression would do far more to help noncollege workers than any policy that could influence trade flows. Further, besides these nontrade forces having more force in boosting wage growth, they are also far more reliable in their effect. The policy levers available to influence trade flows are generally weak and unreliable unless taken to utterly extreme levels.

Finally, while growing trade flows with lower-wage nations reduced wage growth for noncollege labor in recent decades, they also boosted business profits and wages for workers with a college degree. Using tariffs to reverse these trade flows might, after long periods of time, lead to a reorientation of production in the United States that boosts demand for noncollege labor and raises their wages (though it might not). If tariffs did lead to this production reorientation, however, it would also lead to reduced wages for college-educated labor and lower profits, and the decline in college wages and profits would be larger than the increase in noncollege wages.

To be clear, this distributional shift toward noncollege labor and away from college-educated labor and profits would be a progressive outcome, and if it was the only option available to policymakers to make noncollege wages rise faster, we would be in favor of it. But it would be an extremely inefficient way to boost noncollege workers’ wages. Other wage-boosting policies like increased unionization or maintenance of full employment would not clearly lead to overall growth declines and might even boost growth. In short, while rising trade flows have put downward pressure on noncollege wages in recent decades, using the tool of tariffs to reverse this would be an extremely inefficient way to raise noncollege wages relative to other available tools.

Macroeconomic policies supporting a ‘strong’ dollar are the real causes of damaging trade deficits

Trade deficits are driven near entirely by the value of the U.S. dollar being too high to balance imports and exports—an outcome that can be traced to macroeconomic policy choices.4 A high value of the dollar makes imports cheap to U.S. consumers and makes U.S. exports expensive on global markets. This, in turn, leads to an excess of imports over exports. It is often taken as given that the United States should pursue a “strong dollar” policy, and that has often been the implicit (sometimes even explicit) goal of Treasury departments during both Republican and Democratic administrations. This bias toward dollar strength has led directly to toleration of excess trade deficits.

A rule of thumb for thinking about policies to reduce trade deficits and boost manufacturing is simply that if a given policy does not lead to a reduction in the value of the U.S. dollar, it will not have any traction in reducing trade deficits. The value of the U.S. dollar is driven by the demand and supply of dollar-denominated assets in global markets—traditionally called the capital account of the United States’ international balance of payments and now sometimes referred to as the financial account. When the demand for dollar-denominated assets is high relative to supply, the dollar rises in value and vice versa (Blecker 2009).

This rule of thumb is why tariffs are highly unlikely to be effective in reducing U.S. trade deficits unless raised to prohibitive levels. Tariffs actually raise the value of the U.S. dollar, which causes exports to fall roughly in proportion to the import declines following imposition of tariffs. This effect is compounded by the fact that many U.S. exports today contain substantial imported content, which causes export prices to rise directly in response to tariffs.5

Currency interventions from foreign governments

The demand for and supply of these dollar-denominated assets is set by macroeconomic policy decisions. One such decision is to allow the capital account to be influenced by intentional decisions of foreign governments. Often, for example, the Chinese and Japanese governments have intervened in global financial markets to purchase dollar-denominated assets to keep the demand for dollars high and to subsequently allow their own exports to gain a cost advantage in U.S. consumer markets. U.S. policy encouraged such policy actions through trade agreements that incentivized offshoring manufacturing production and strong support for financial liberalization that exposed countries to excessive risks of currency, banking, and financial crises.

The role of private capital flows

Another decision is to allow the capital account to be influenced by speculative private capital flows, even if they lead to an uncompetitive value of the dollar. In the late 1990s, for example, capital flowed from European countries to the United States largely due to European investors looking to buy rapidly appreciating U.S. corporate equities. When the U.S. stock market bubble eventually popped, the flow of capital from Europe largely dried up, and the dollar lost considerable value relative to the euro. This reversal led to a welcome decline in the U.S.–euro area trade deficit in the early 2000s. Until the end of 2024, a similar trend seemed to be occurring as the U.S. stock market had seen very large gains relative to those in Europe. This was associated with a large increase in the dollar’s value in recent years. The recent sharp decline of U.S. stock markets has not been mirrored in Europe, so some welcome relief from chronic upward pressure on the dollar stemming from these capital flows may well arrive over the next year.

The safe haven of the U.S. dollar during financial crises

As liberalized global financial markets have grown more volatile and prone to crisis (Reinhart and Rogoff 2011; Claessens and Kose 2013), nation states and financial institutions have sought to insulate themselves by accumulating ever-greater reserves of U.S. dollar financial assets. This demand to acquire dollar-denominated assets led directly to upward pressure on the dollar, which, in turn, led directly to these countries running large trade surpluses (that is, selling more exports to the United States than the imports they buy from the United States). This practice of self-insuring against systemic financial risks caused by liberalized global markets accelerated following the 1997–1998 Asian Financial Crisis, when countries learned it was too costly to depend on external institutions like the International Monetary Fund to help manage these risks.

When instability threatens international capital markets, investors and financial institutions “flee to safety,” meaning they sell off relatively risky assets and buy relatively safe U.S. dollar assets. The worsening of the dollar’s overvaluation occurs at a time when U.S. exporters are under the highest stress. The upshot of all of this is that a more effective international regime to aid countries facing currency and financial crises could reduce the need for countries to “self-insure” by trying to build up dollar reserves. This would be good for both the self-insuring countries who could now use precious financial resources on other social goals and for U.S. trade deficits.

Fiscal and monetary policy choices

Fiscal and monetary policy decisions are other macroeconomic policy choices affecting the U.S. trade balance. In regard to fiscal policy, when the U.S. economy is near full employment, federal budget deficits can push up trade deficits. If budget deficits run at full employment lead to higher interest rates (as they often do), this will lead foreign investors to demand more dollar-denominated assets to earn these now-higher rates. Increased demand for U.S. assets, in turn, causes the dollar to appreciate and the trade deficit to expand.

In regard to monetary policy, the same dynamic holds when the Federal Reserve raises interest rates. Whatever the source, a widening spread between U.S. and foreign interest rates attracts more capital to dollar-denominated assets, and this causes a rise in the value of the dollar, which, in turn, harms U.S. net exports.

Strategies to manage the value of the dollar

Keeping the value of the dollar at a level that more closely balances imports and exports, hence, requires a range of macroeconomic strategies. The most controversial would see the U.S. engage in more active currency management to ensure that foreign influences—either intentional government policy decisions or destabilizing private capital flows—are not allowed to push the demand and supply of dollar-denominated assets out of balance. Currently, Congress requires the U.S. Treasury to monitor currency management by foreign countries and make biannual reports naming countries that undertake active currency management for competitive gain. In practice, Treasury has more often than not demurred on naming clear instances of currency management. (Treasury 2024).

The U.S. government has much stronger options than mere surveillance and naming to countervail trade-distorting currency practices of other countries. If, for example, a foreign government began buying dollar-denominated assets, the U.S. could simply begin buying assets denominated in the currency of the foreign government, thereby neutralizing the effect of the foreign governments’ intervention in the U.S. capital account.6 Another possible option is for U.S. policymakers to institute a “market access charge” such as the one proposed in the 2019 bill, Competitive Dollar for Jobs and Prosperity Act (2019) that would levy a small tax on the foreign purchase of U.S. dollar assets for countries maintaining sustained trade surpluses with the United States (Hansen 2017).

Running fiscal and monetary policies that are consistent with lower levels of interest rates would also relieve upward pressure on the dollar’s value and help close trade deficits. On the fiscal side, this simply means that when the economy is at full employment, deficits should not be increased or should even be reduced. The how of this deficit reduction at full employment is every bit as important as the how much in terms of its effect on the welfare of U.S. residents, but it is the how much that determines the degree to which deficit reduction can help pull down the trade deficit.7 On the monetary side, the Federal Reserve should set interest rates at the lowest level consistent with stable inflation and avoid periods when unnecessarily high interest rates put upward pressure on the value of the dollar.

The advantages of a stronger dollar

Among policymakers, the reflexive privileging of a “strong dollar” policy has contributed to chronic trade deficits in the United States. However, any change in the value of the dollar creates both winners and losers. A strong dollar, for example, makes imports cheap to U.S. consumers and foreign travel more affordable for U.S. residents. It also makes it easier for U.S. businesses both domestically and abroad to attract foreign capital for investment projects. It allows retailers like Walmart and Amazon to source goods more cheaply for resale. These are not trivial benefits.

The advantages of a weaker dollar

But a lower value of the dollar would bring its own significant benefits. Most importantly, U.S. exports would be on a much more level playing field in global markets. Export-oriented production in the United States would expand. Domestic businesses competing with imports would gain competitive breathing room and expand their production. The manufacturing sector in the United States would expand. The reduction in trade deficits would lead to less future income leaking out of the U.S. to foreign investors.

Globalized supply chains are fragile. Industrial policy and trade protection can support their resilience

In recent decades, multinational corporations have prioritized maximizing short-term profits, even at the expense of investing in the resilience of their supply chains. For example, a company that focuses on maximizing current profits might source all inputs from the single lowest-cost producer. They might also minimize the size of their inventories of key inputs to production since inventories, by definition, are inputs not being sold in the current period and generating profits.

This short-term focus both ignores risks to the company’s own operations from supply chain disruption and creates a negative spillover cost for other businesses and consumers that rely on their products. In the jargon of economists, underinvestment in supply chain resilience creates a negative externality, a cost of business that is absorbed by others besides the actor undertaking it.

Underinvestment in supply chain resilience is a valid target of industrial policy interventions, sometimes including trade protection. For example, businesses focused on resilience should spread production of key inputs among different producers to hedge against the risk of disruption at a key link in their production chain, even if this modestly boosted the current cost of producing these inputs.8 This could also include “reshoring” of key inputs if policymakers were worried about threats to resilience stemming from international conflicts that would stop the ability to source imports. One way to ensure this greater regional diversity (including a larger role for U.S. production) of key inputs could include trade policy measures like tariffs.

This logic lies behind the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act passed in the Biden administration. It offers subsidies for chipmakers to set up manufacturing facilities within the U.S., largely in hopes of avoiding the extreme shortage of chips that drove the first wave of inflation in the post-pandemic recovery. There are also undeniable geostrategic issues driving the CHIPS Act (for good or for ill), but even these geostrategic concerns largely center on the basic question of how to make the U.S. economy more resilient to economic shocks.

Further, a resilience-minded business could maintain buffer stocks of key inputs (such as semiconductor chips or fuel oil), so they can keep production flowing in the event of supply delays or disruptions. Failure to do so can create large costs for the firm and the broader economy, as evidenced by the inflation stemming from pandemic- and war-related supply shocks between 2020 and 2024. One obvious long-running example of this is the Strategic Petroleum Reserve, which the federal government can run down or build up to help smooth out fluctuations in energy costs.

Because individual companies are unable to ensure systemic supply-chain robustness, the rational incentive for them is not to incur costs trying to do this. This market failure defines a key role for policymakers in creating incentives for investments to make supply chains more resilient. Besides creating incentives for more private investment, there are also explicitly public roles for policymakers in bolstering resilience. One key example is having federal agencies monitor supply chains for areas of weakness. Providing subsidies or other public supports for investments in resiliency is a worthy priority for policymakers concerned with the challenges of globalization.

The U.S. should buffer its workers against abusive foreign labor practices and incentivize trading partners to strengthen labor standards

The U.S. should reward countries that respect labor rights with preferential access for their imports and incentivize other countries to enforce higher labor standards. Laws and regulations protect workers and businesses against having to compete with producers willing to exploit vulnerable workers within the domestic economy. Given that, there is good reason to be concerned when this kind of unfair competition is embodied in imported goods as well.9

Much of the wage differential between U.S. workers and workers in lower-income countries like Mexico and China is driven by productivity differentials. The U.S. economy is the most productive in the world, while productivity (defined as average output generated in an hour of work) is much lower in our lower-income trading partners. But some of the wage differential between the U.S. and other countries reflects not just productivity differentials, but the state of labor standards and enforcement.

Econometric analysis by Rodrik (1999), for example, shows that the level of democratic institutions has large and significant impacts on national wages. Rodrik finds that moving from a level of democratic quality that characterized Mexico in 1999 to a level characterizing the United States in that year could see wages in Mexico increased by up to 40% even with no change in productivity. Palley (2005) further finds that this effect runs entirely through greater degrees of democracy leading to higher levels of labor standards, measured by the number of International Labour Organization (ILO) “core labor standards” ratified in a given country. In short, even after accounting for productivity differences, labor can be made significantly cheaper through nondemocratic, exploitative labor regimes.

Widespread violation of labor rights and democratic norms is problematic for fairness and for the competitive position of U.S. workers. In countries like China, substantial investments in production technologies and human capital development (health and education) are narrowing the productivity gap with the United States, which should, in theory, lead to less wage pressure. But if the degree of labor exploitation intensifies, this can undo some of the useful lessening of wage pressure that should have accompanied Chinese productivity growth.10 Even when low-income countries might wish to boost labor standards, the destructive race-to-the-bottom logic of global competition among open economies can lead them to hold back for fear of losing export competitiveness and foreign investment attractiveness.

There are many potential benefits for both U.S. workers and for workers throughout the world to engage in economic competition along many margins. But the scope of useful competition should be focused on who can make their exports more efficiently, not who can more effectively serve up their own nation’s workers for exploitation—whether by local or multinational firms. When trade competes on low labor standards, few of the potential benefits from trade flow to workers.

Two different groups have resisted efforts to incorporate enforceable labor standards within the structure of existing international trade rules. On one side, there are developing country interests concerned about losing the comparative advantage of exploitation who see labor standards as a kind of neoprotectionism. In theory and reality, strong labor protections favor, rather than hinder, growth in late-developing economies (Storm and Capaldo 2018). On the other side are advanced economy corporate interests profiting from this exploitation by substituting workers in their own countries for oppressed workers offshore.

The linkage between trade policy and labor standards has a long intellectual history, yet very few workable proposals have been made during that time. For most of this debate, the primary focus was on whether enforceable labor standards should be part of the main treaties governing the global economy, whether it be trade agreements between countries or multilateral agreements like the World Trade Organization (WTO). But these efforts largely aimed to put the onus for enforcing labor standards on national governments that may not have the capacity, resources, or interest in upholding worker rights instead of on the companies profiting from the exploitation. Further, the efforts were hampered by the need to achieve unanimity among parties to an agreement.

A different model was instituted with the so-called Rapid Response Mechanism (RRM) in the U.S.-Mexico-Canada Agreement (USMCA) that entered into force in 2020. In addition to implementing new and improved labor laws in Mexico, USMCA’s RRM allows enforcement of labor standards at the factory level by an independent panel investigation (rather than a government inspector for whom incentives may be conflicted) when freedom of association and collective bargaining labor rights are violated. While the RRM represents a substantial policy innovation, it is not a match for the challenge of lifting labor standards at a systemic level. To date, only slightly more than two dozen cases have been alleged (ILAB 2025). Meanwhile, wages in Mexican manufacturing today are below their level in 2002 in inflation-adjusted terms and now stand at just 10% of U.S. manufacturing wages, or a mere $2.76 per hour.11

A ranking system for countries based on respect for labor rights

There is, however, no real reason why the U.S. must wait until new trade agreements are signed to begin the process of incentivizing better labor standards in trading partners and buffering U.S. workers from destructive competition. Rodrik (2019), for example, urged the U.S. to institute unilateral domestic safeguards.

The broad brush of our proposal is simple. The United States (perhaps led by the International Labor Affairs Bureau (ILAB) in the Department of Labor) should work with other international bodies and experts to develop a five-tiered ranking of countries around the world based on their respect for labor rights.12 Tier one would be countries that have legislated and successfully enforce the highest degree of labor protections around the world. Tier five would be countries whose labor regime is so odious that the U.S. should simply refuse to accept their imports until it is improved. In between, tier two countries should face a 5% tariff on all exports to the U.S., tier three countries a 10% tariff, and tier four countries a 15% tariff.

Are we positive these are the exact right number of tiers and tariff levels? Of course not, but that’s something that could be researched and assessed by the institutional staff assigned to this task. Further, this proposal is not meant to be calibrated to precisely solve the entire problem of differing labor standard regimes around the world. Instead, it is meant to show that the U.S. government takes seriously how labor is treated around the world and how that spills over onto workers in the United States. It is also meant to provide a competitive buffer against unfair competition that is a bit more than purely symbolic. The highest tariff level here (15%) would cut roughly in half the wage penalty imposed by being in the bottom tiers of democracy or labor standards enforcements identified by Rodrik (1999) and Palley (2005).

One difference between this broad proposal and some others that try to address the “social dumping” of exploitative labor practices is that it is country-based, not product-based. Often proposals aimed at integrating labor standards and trade policy require a finding that abusive labor practices provide a competitive advantage in a particular export good. We think a country-based approach makes more sense for two reasons.

First, it requires much less granular information to sort countries into tiers based on their general approach to labor rights than it does to investigate the cost structure of every possible export to the United States and how it might be impacted by labor practices at particular plants. Second, poor countrywide labor practices have powerful externalities that will pull down wages paid in exporting plants, even if the plants themselves have decent labor standards. Export plant owners only have to pay wages above those in the surrounding labor market to attract the workforce they need. If the surrounding labor market has wages suppressed by substandard national labor policy practices, then the exporting plant can have decent labor practices within its walls yet benefit strongly from the substandard national labor environment. Given these considerations, a commitment to provide better market access to entire nations based on their labor practices is a more workable policy.

The highest tariff level in this broad proposal would not be trivial, and it certainly might apply to large and important trading partners like China unless they make some welcome changes to their labor rights regime. In this sense it might sit uneasily with our skepticism about the use of tariffs in the previous section on trade deficits. We argue that it doesn’t. This labor standards-based tariff would be in effect regardless of the state of trade balance between countries. It does not aim to reduce trade deficits (and it cannot). Further, unlike the second Trump administration’s tariffs, it has a clear goal and specifies a clear road map for how trading partners could change their behavior to have it removed.

Harmonizing climate policies will help reduce greenhouse gas emissions and strengthen U.S. industry

Without harmonized climate regulations, individual countries risk the migration of greenhouse gas-intensive production to low-standard locales and the replacement of domestic production with carbon-intensive imports. This dynamic means that national climate policies and emissions regulations might simply push production to lower-standard locales rather than reducing global emissions overall. If, for example, the U.S. instituted a carbon tax and China did not, instead of reducing carbon emissions globally, some of the effect of this U.S.-based tax could be to push production that emitted carbon offshore to China. This “carbon leakage” would undermine the environmental goals of the carbon tax, and it would see U.S. producers of these emitting industries having to find new economic activity to engage in for no particularly useful reason.13

All of this is highly theoretical so far. The U.S. does not have robust regulations against carbon emissions (in part because of rollbacks to key greenhouse gas regulations during the first Trump administration), and no such regulations seem to be on the horizon. But if the day comes when some countries want to move ahead with stricter emissions controls, these countries should have the freedom to use trade tools like tariffs based on the carbon content of goods to ensure that production is not just moved offshore.

But until there are internationally harmonized climate policies, the progressive approach to globalization for the United States would be to leverage trade policies to herd the global economy toward reduced greenhouse gas pollution and other economic practices that threaten planetary boundaries critical for sustained life on Earth (Richardson et al. 2023). As with labor standards, U.S. trade policy could be designed to reward countries pursuing climate change-mitigating policies that incentivize foreign producers to reduce polluting emissions and clean up their manufacturing industries. The latter could be accomplished by forcing the internalization of costs of greenhouse gas emissions embodied in imports. By preventing “leakage” of emissions to foreign pollution havens, U.S. climate policy would also ensure that domestic, emissions-intensive industries would not be put at a cost disadvantage while shouldering the burden of adjusting to low-carbon production on their own.

The European Union is already putting such a policy regime in place with the Carbon Border Adjustment Mechanism (CBAM). This mechanism, in essence, levies a tariff on goods equivalent to the cost of greenhouse gas emitted during production in the country of origin. Beginning in 2026, EU importers will be required to purchase CBAM certificates covering the embodied emissions they import, consistent with EU pricing for equivalent emissions. Foreign producers that pay for emissions costs domestically will receive credits against fees due under the CBAM. Initially, the EU’s CBAM will apply to imports of iron, steel, and aluminum products; cement; fertilizer; hydrogen and electricity goods; with the mechanism expanding to cover imports from additional emissions-intensive industries, such as chemicals and polymers, down the road.

A policy to level the playing field in terms of emissions pollution is critical both to addressing the imminent climate crisis and to ensuring fair competition for U.S. industries. These industries are among the world’s cleanest producers but are up against other countries whose rapidly expanding production capacities are among the world’s dirtiest (Hersh and Scott 2021). During the Biden administration, the United States and European Union made strides toward a cooperative regime to limit unfair global competition from polluting imports with the Global Arrangement on Sustainable Steel and Aluminum. The agreement would provide a platform for onboarding like-minded countries intent on greening the most pressing industrial emissions (Mullholland and Meyer 2024; Malhotra and Tucker 2023). Legislators have already introduced a number of proposals for U.S. versions of a CBAM (JEC 2024).

This approach to limiting global greenhouse gas emissions and the competitive advantage for polluting countries also may conform to World Trade Organization (WTO) rules. The WTO carves out explicit rights for national regulation of “process and production methods,” recognizing that traded goods can be distinguished by how they are made, although WTO case law has yet to define clear boundaries for how such distinctions can be regulated (Benson et al. 2023; Porterfield 2023).

New international agreements should focus much more on taxes than on trade

Most of the benefits of freer trade can be secured by countries unilaterally and do not require international agreements. If a country decides that it is in their economic interest to allow imports to enter without tariffs, they do not need to strike an agreement with a trading partner to allow this. These unilateral tariff reductions are usually the largest source of estimated gains from trade by far.

Taxing capital income (profits from corporations and returns to wealth), however, is different. Here, effective policy requires some degree of international coordination. Without this, some countries will seek to become tax havens and carve out benefits for themselves at the expense of other countries’ ability to tax the richest entities in society. 14

The levers of international reform that would end tax havens and profit-shifting by rich corporations are well known and require political will to enact. One obvious lever would be for countries to agree upon and adopt a global minimum tax on corporate profits, regardless of where profits are booked. Proposals to adopt such a global minimum tax could, by themselves, raise roughly $500 billion over the next decade (Clausing 2021). The Biden administration made some promising first steps in cobbling together an international coalition to adopt and enforce such a tax—but future policymakers need to build on this progress, not tear it down.

Other reforms would build on Senator Sheldon Whitehouse and Congressman Lloyd Doggett’s No Tax Breaks for Outsourcing Act (2025), which would, among other things, fully tax the foreign income of U.S. multinational corporations, eliminate the tax-free return on foreign tangible assets, and eliminate a subsidy for excess profits from exporting that exists in current law. The overarching principle is that taxes owed should depend on the level of income, not the type of income (or one’s accountant’s creativity in claiming what type of income is being earned).

The current method of taxing capital incomes, and especially the corporate income tax, provides an incentive for corporations to shift both accounting profits and tangible production abroad.15 The current tax method essentially subsidizes firms to generate income outside of the United States. This is a perverse and inefficient setup, one aiming to serve the interests of rich corporations rather than the broad U.S. economy. It can be stopped with some straightforward policy changes.

Conclusion

Donald Trump’s approach to trade policy is bad for the United States and the rest of the world. But this does not imply that the pre-Trump global trade regime was working well. As usual, Dani Rodrik (2019) has put it best, arguing about Trump’s first term: “In a way, one of the worst consequences of Trump [emphasis added] is that he is reinforcing the views of the architects of the existing system as to why there shouldn’t be a change.”

The flawed approach inherited by Trump’s first administration perpetually sought to extend a set of international agreements and norms that privileged corporate interests over workers. From a progressive perspective, the bad part of this system was that it privileged corporate interests. From Trump’s perspective, however, the bad part was that it was a set of international agreements.

The Biden administration made some useful breaks with past practice on globalization. While the administration did not go far enough on many margins, it set off in a useful direction. The administration prioritized the effect of trade on workers, not just consumers, and didn’t prioritize corporate-led trade agreements. Key industrial policy targets aiming to solve market failures were put ahead of ideological fealty to free trade. In short, the Biden administration was not simply a return to the pre-Trump globalization regime that was so bad for American workers—instead they had tentatively begun charting a new path.

The second Trump administration has completely spurned this new path and doubled down on xenophobia and dominance displays as the center of trade policy. If this policy approach continues, it will lead to a poorer United States and a poorer global economy. It will not lead to a renaissance of good jobs in manufacturing.

At some point, a serious approach to the challenges of globalization will need to be reestablished. We hope this paper can help spark and inform that more serious debate.

Notes

1. See Bivens 2017 for an overview of the effect of globalization on American wages and how policy has amplified the harms of globalization. U.S. Bureau of Labor Statistics (BLS), “Table A-4. Employment Status of the Civilian Population 25 Years and over by Educational Attainment: Monthly, Seasonally Adjusted” retrieved from FRED, Federal Reserve Bank of St. Louis, February 12, 2025. David H. Autor, David Dorn, and Gordon H. Hanson, “The China Syndrome: Local Labor Market Effects of Import Competition in the United States,” American Economic Review 103, no. 6 (2013): 2121–2168.

2. The theory here (supported by evidence) is called the Stolper-Samuelson theorem. Its broad outlines are explained in Bivens 2017. The summary is that it predicts that trade with labor-abundant countries will lower wages in the United States and raise returns to other factors of production (like human capital).

3. See Mishel and Bivens 2021 for a decomposition of all the policy changes that led to wage suppression and wage inequality.

4. For a broad overview of trade deficits and their economic effects, see Blecker 2009.

5. See Steil and Della Rocca 2021 for an assessment of the economic effect of tariffs introduced in the first Trump administration. Another obvious issue in regard to tariff effects on the balance of trade is the retaliation that may occur.

6. See Gagnon 2020 for a discussion of countervailing currency intervention and its role in keeping trade deficits manageable for the U.S.

7. See Bivens 2019 on how different routes to deficit reduction imply very different outcomes for the welfare of most Americans. In a nutshell, deficit reduction achieved through higher levels of revenue raised progressively (mostly from rich households and corporations) can see deficit reduction go hand in hand with improved welfare for most, but deficit reduction achieved through cuts to income support, social insurance and public investment programs will harm welfare for the majority.

8. See Acemoglu 2021 for a broad discussion of how private investment decisions can lead to supply chain fragility.

9. See Rodrik 2019 for a good overview of these types of fairness concerns when domestic regulation and the rules of the global economy seem to conflict.

10. From 2010 to 2025, Chinese output per hour of work increased from 11% to 24% of the U.S. productivity level (ILO 2025a, 2025b). A recent ILO report (2025a) confirms China’s expanding use of mass detention and forced labor in export industries. Friedman 2014 shows how labor regulation in China has evolved to increase repression as wages and development have increased—a model that is being exported to other developing economy countries with increasing Chinese foreign direct investment.

11. EPI analysis of ILO (2025b) and BLS (2025a, 2025b) data.

12. There are numerous bodies around the world that collect detailed information on the state of labor rights in countries around the world. Freedom House periodically publishes a report on the global state of workers’ rights, the International Labour Organization and the International Trade Union Confederation annually track countries’ progress in protecting key labor freedoms, and the WageIndicator Foundation and the Centre for Labour Research collaborate to produce a tiered ranking of countries’ labor protections called the Labour Rights Index. In short, much of the raw material to provide a ranking of the type called for in this report already exists.

13. See Sato and Burke 2021 for an explanation of “carbon leakage.”

14. See Zucman 2015 for an overview of the problem of tax havens.

15. For evidence on this, see Kimberly Clausing, “Profit Shifting and Offshoring, Then and Now,” and Rebecca Kysar, “Profit Shifting and Offshoring in the New International Regime,” presentations for “Will the Trump Tax Cuts Accelerate Offshoring by U.S. Multinational Corporations?,” a conference hosted by the Economic Policy Institute, May 7, 2018.

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In this post, we highlight—in very broad strokes—what is needed to build an economy that generates faster, more sustainable, and more equitably distributed growth. We then identify where the administration has made progress in the first 100 days and where more forceful action is needed.

Building an economy that works for everyone requires the following:

• Pursuing a “go-for-growth” approach to macroeconomics that aims for labor markets where jobs are plentiful and employers have to work hard (including offering higher wages) to attract workers, so-called “high-pressure” labor markets.
• Crafting and enforcing fairer rules for markets, particularly through labor market institutions and standards that provide workers a more level playing field when bargaining with employers for better pay and working conditions.
• Constructing deeper and more protective social insurance systems that use a larger public role in providing unemployment benefits, health coverage, and retirement income security— including long-term care for older adults and people with disabilities.
• Undertaking ambitious public investments in both people and physical capital, including physical infrastructure, early child care and education, higher education, and green investments.
• Reforming taxes in a way that helps finance the needed fiscal spending in this program, curbs growing inequality, and discourages the economic “bads” of greenhouse gas emissions and financial speculation.

Below, we expand on these points and assess the Biden-Harris administration’s progress in the first 100 days. The brief summary is:

• A comprehensive $1.9 trillion relief and recovery bill—the American Rescue Plan (ARP)—has passed that will secure a go-for-growth approach to macroeconomics for most of its first term—a very large accomplishment.
• One proposed plan—the American Jobs Plan (AJP)—calls for investments in traditional infrastructure, green investments, and long-term care—all financed with progressive taxes. But this plan has not yet passed, and the labor standards included in it have no real enforceable mechanism yet.
• Another plan just released today—the American Families Plan (AFP)—proposes large investments in children and higher education and is financed by progressive taxes on capital incomes accruing to the richest households.
• Decent first steps in improving administration of unemployment insurance (UI) and affordability of health care have been made in the ARP and AFP, but concrete plans for permanently deepening crucial social insurance programs are yet to be done.
• Tough-minded but realistic strategies to pass transformative policies like the Protecting the Right to Organize (PRO) Act and Raise the Wage (RTW) Act remain to be formulated.

“Go-for-growth” macroeconomics

The first 100 days of the Biden-Harris administration deserve very high marks on this front. In the face of loud voices declaring that their plans for macroeconomic rescue would lead to economic “overheating” (inflation and interest rate spikes), the administration held firm and secured passage of the American Rescue Plan (ARP). If measures to suppress the coronavirus work and it is safe to return much closer to economic normality in coming months, the ARP will drive rapid and large reductions in unemployment. This is in stark contrast with the too-small efforts at fiscal rescue following the Great Recession of 2008.

A go-for-growth approach to macroeconomics can never be secured forever with one piece of legislation—it requires consistent monitoring of macroeconomic trends and requires an evidence-based Federal Reserve to buy into it. But the ARP is a great start, and the Fed has so far been admirably supportive. The benefits of high-pressure labor markets are large, and they accrue disproportionately to workers facing historic discrimination in labor markets, making them a powerful tool for fostering both economic and racial equality. This solid macroeconomic approach is a superb first achievement for the administration.

Crafting and enforcing fairer markets—especially through labor standards and institutions

The two most important changes to labor standards and institutions currently being proposed are the Protecting the Right to Organize (PRO) Act and the Raise the Wage Act (RTW). The PRO Act is a comprehensive reform of labor law which would significantly improve the prospects of U.S. workers trying to organize unions in the face of growing employer hostility and abusive union-busting tactics. The RTW Act would raise the federal minimum wage to $15 per hour by 2025 and index it thereafter to growth in typical workers’ wages. Combined, these two pieces of legislation would rebuild two of the most important bulwarks to wage growth for the large majority of U.S. workers. Further, collective bargaining and large expansions of the federal minimum wage have in the past been two of the most powerful measures we’ve ever seen for fostering greater equality by both race and income class.

The Biden administration has admirably expressed support for both measures. The fact that the Biden administration has issued an executive order establishing a White House Task Force on Worker Organizing and Empowerment is particularly welcome, as is their Statement of Administration Policy (SAP) in support of the PRO Act. (In contrast, the Obama administration never issued a SAP in support of the labor law reform effort made in its first term.)

But the U.S. Senate remains the principal roadblock to both the PRO Act and the RTW Act. A serious strategy is needed to move these vital pieces of legislation past this roadblock, and the White House is the most obvious place for such a strategy to originate. In particular, the Senate filibuster imposing an implicit 60-vote threshold on most legislation means that a significant modification of Senate norms is likely needed to pass these bills. Either filibuster reform is needed, or the budget reconciliation process (which provides an end run around the filibuster for budget-related legislation) needs to be stretched further than it has been in the past, even in the face of unfriendly opinions from the Senate parliamentarian.

Much of the progressive agenda can pass through budget reconciliation if 50 votes can be found in the Senate. Under current Senate norms (and that’s all they are—norms—which have been broken repeatedly by Republican-run Senates), the PRO and RTW Acts could not be passed with 50 votes. If the current Biden administration ends with no progress on these fronts, the upward march of inequality in the U.S. is near guaranteed to continue. Rhetorical support from the administration is a good first start on these vital bills—but more is needed, and soon.

While labor standards that apply economywide, like the PRO and RTW Acts, are the really transformational changes to the economy’s rules, there are smaller measures in the labor standards space that could still help groups of workers in nontrivial ways that remain to be secured. For example, in a following section, we discuss the administration’s proposals for ambitious public investments which, if enacted, would be important steps down a path toward broadly shared prosperity. One key way to make these investments even more impactful in supporting high-quality jobs would be to make sure that the labor standards associated with them are strong. Much like their rhetorical support of the PRO and RTW Acts, the Biden administration has called for strong project-specific labor standards to accompany the investments in the American Jobs Plan (AJP), but a legislative and regulatory strategy to ensure they do is yet to come forth and is crucial.

The administration also yesterday issued an executive order requiring federal contractors to pay a minimum wage of $15 per hour. This is a very welcome step and will increase the earnings of up to 390,000 low-wage workers on federal contracts. We encourage the administration to go further to help ensure that the estimated two million total jobs held by federal contract workers are good jobs. This would include steps like ending practices that allow low-road contractors to win bids that are so low they are inconsistent with decent pay and working conditions, and banning federal government contractors from requiring contract workers to sign forced arbitration and class action waivers.

More generous and accessible social insurance

During the COVID-19 pandemic, huge but temporary changes were made to the U.S. unemployment insurance (UI) system to make it more protective and generous to jobless workers. But decades of disinvestment in state-run UI systems meant that this aid was fraught with administrative problems and took too long to reach millions. Worse, the more generous aid “turned off” for months due to congressional inaction. While the ARP extended the more generous pandemic UI provisions through September of this year, no structural reform has happened yet. Going forward, a comprehensive reform of UI that makes it more generous, more automatically responsive to economic conditions, and easier to access should be a key priority. The American Family Plan (AFP) provides money for states to invest in their delivery systems and calls for more fundamental reform, but it does not contain policy specifics, so more work on this front is needed.

The job losses spurred by the pandemic also cost millions access to health insurance they received through their employer-based plans. Moving to a U.S. health system with a much larger public role is needed to provide real economic security to jobless Americans. A larger public role would also greatly increase economic flexibility and opportunities for workers and for aspiring business owners. The ARP included a welcome and large increase in subsidies provided for health insurance purchased in the marketplace exchanges created by the Affordable Care Act (ACA), and the proposed American Family Plan (AFP) would make more generous subsidies permanent. Encouraging Medicaid expansion into states that have not yet adopted the ACA provisions on this and allowing a lower age of eligibility for Medicare (including perhaps a “buy-in”) are other key priorities that the administration and Congress should take up in coming months.

Finally, the pandemic has highlighted that the primary constraint keeping people who would otherwise like to work out of paid labor markets is caregiving responsibilities. Public investment in early child care and education (which we discuss below) could help families meet many of these caregiving responsibilities, but expansions of public caregiving for older adults and those with disabilities that is proposed in the administration’s American Jobs Plan (AJP) could also help many. These investments would allow everybody—not just the rich—to afford decent care for loved ones who are elderly or have disabilities and would improve the job quality of caregiving jobs.

Both the vital services provided by the increased caregiving spending as well as the boosts to job quality of caregiving employment will provide disproportionate benefits to women. In particular, women bear a hugely disproportionate burden in providing unpaid eldercare, and women (and particularly women of color) make up a very large majority of paid care workers. Given the large and progressive benefits of this expansion of public caregiving spending, it is encouraging to see these investments included in the AJP proposal.

Ambitious public investments

The U.S. clearly could benefit from large public investments in traditional infrastructure, but large investments in decarbonization strategies and in people are also needed.

The case for traditional infrastructure is well understood. The case for a large public role in financing and directing green investments is even more vital. Until the price of emitting greenhouse gases (GHGs) is raised significantly by policy (like a carbon tax or direct regulations), private investment in GHG mitigation (like building weatherization or installing solar panels) will remain far below efficient levels.

This green investment is optimally financed directly through the public sector, and most of it should be financed with debt, even if the economy has largely recovered. After all, our children and grandchildren will be far better off inheriting an economy with a higher debt ratio but lower stock of GHGs in the atmosphere than inheriting an economy with low debt but higher temperatures.

With regards to investment in people, besides the expansions in care investments for older adults and those with disabilities highlighted above, early child care and education and higher education could be made much more affordable and higher quality for U.S. families. This would not only benefit the receiving families directly, but would also have large spillover effects in building a more productive economy overall. Further, anything that improves the resources available to poorer families with children has been shown to have large effects down the road in boosting their productivity as adults. This includes direct provision of health and nutrition assistance, but also cash. Finally, since these investments also call for higher pay and better training for the early child care and education workforce, they will provide disproportionate benefits to women (and disproportionately women of color), who make up the large majority of workers in this sector currently.

The American Jobs Plan (AJP) includes many of the investments in traditional infrastructure and green investments, while the American Family Plan (AFP) has excellent provisions to make both early child care and education as well as higher education more affordable for families. The AFP also extends the large increases in the Child Tax Credit included in the ARP until 2025. These are big steps in the right direction.

Tax reform for the common good

Much of the spending proposed so far by the Biden administration—particularly those meant for macroeconomic stabilization and one-time investments—can and should be financed with debt, not taxes. But expansions of permanent programs should be mostly financed with more revenue. The U.S. can certainly afford this—we are among the most lightly taxed rich nations in the world. The first tranches of increased tax revenue to finance permanent spending expansions should be raised from high-income households, either through increases in the progressivity of the tax code or through greater and more progressively targeted tax enforcement. Other areas of tax reform should aim to correct economic “bads” like GHG emissions and financial speculation.

So far, the Biden administration’s proposed taxes are clearly progressive. The AJP includes increases in taxes paid out of corporate income (essentially repealing large chunks of the most egregious bits of the Tax Cuts and Jobs Act (TCJA) from 2017), and the AFP is said to include tax increases on capital gains accruing to the highest-income households. This includes the elimination of an egregious loophole (“step-up basis”) that allows large intergenerational transfers of wealth to happen untaxed. All these taxes affect high-income households while barely touching low- and middle-income households.

The administration has also made several welcome and concrete steps in moving toward greater tax enforcement, particularly on high-income households and corporations. This includes a multilateral effort to crack down on abusive tax havens.

Taxes on economic “bads” like GHG emissions and financial speculation have not yet been mentioned. We hope further progress on these fronts is made.

Conclusion

The administration deserves praise for what has happened so far and much of what they have proposed. And normally one would want to cut a little slack for strategies yet formed on passing key bills. After all, it has only been 100 days. But the economic challenges facing U.S. families are huge and time is ticking. As hard as it is to believe, every 100 days going forward into 2022 need to be just as productive as the first in meeting these challenges.

These large increases in federal spending require correspondingly large increases in revenue. This report describes our proposals for raising revenue and the reasoning behind them, highlighting in particular policies aimed at raising significant revenue from the richest U.S. households. The report also highlights the often underappreciated potential of raising revenue progressively and efficiently by radically reforming so-called tax expenditures—deductions, exclusions, and exemptions that result in different types of income streams facing different tax rates.

The spending programs in the Budget for Shared Prosperity would substantially benefit the vast majority of American households

Rising income inequality, anemic wage growth for the vast majority, a dearth of public investments, and an inadequate social safety net all pose significant challenges for the U.S. economy. Facing these challenges most efficiently and equitably will require substantially higher levels of federal spending and, in turn, substantially higher levels of federal revenue. This is just what the Budget for Shared Prosperity calls for. By 2049, our budget raises total noninterest spending by 11.3 percent of GDP on net, or by roughly 50 percent over projected baseline noninterest spending. To support increased spending, we increase federal revenue more than one-for-one.

Safety net spending

About a quarter of this net spending increase, or 2.6 percent of GDP, goes to policies that would strengthen the U.S. social safety net outside of health care. These policies include boosting SNAP (Supplemental Nutrition Assistance Program) benefits, providing additional money for child nutrition, implementing a universal child allowance, strengthening Unemployment Insurance, providing paid family and medical leave, expanding Social Security, implementing the Obama administration’s End Family Homelessness initiative, implementing a progressive carbon tax refund to more than offset the regressive impact a new carbon tax would have on low-income households, and expanding the EITC for childless workers. In particular, our universal child allowance—which replaces the current child tax credit with a monthly payment to families of $500 per child under age six and $400 per child age six through 17—would substantially reduce child poverty. Shaefer et al. (2018) find that replacing the child tax credit with monthly payments to families of $300 per child under age six and $250 per child age six through 17 would immediately cut child poverty by about 40 percent and deep child poverty by nearly half.

Infrastructure and public investments

Between one-tenth and one-fifth of spending increases, or 1.7 percent of GDP, goes toward non-health-care-related public investments. We’ve long argued that the economy could use a substantial uptick in public investment, given slow productivity growth and weak private investment. This investment should be broad, covering not just “core” infrastructure like transportation systems and utilities, but also noncore public investments such as child care, education, renewable energy, and health care (Bivens and Blair 2016b). In keeping with this, we include an ambitious national investment in our nation’s children by implementing universal early child care and childhood education, investing in our nation’s educators and schools, and making college more affordable. We provide space for further investments by pushing nondefense discretionary (NDD) spending back up to its historical average of 3.5 percent of GDP, increasing it by roughly 1.5 percent of GDP relative to baseline. Historically, about half of NDD spending is public investment (Bivens 2013). The combination of enhanced NDD spending and the earmarked funds for public investment would provide sufficient money for a major green investment that is worthy of the name “Green New Deal.”

Health care reform

The real outlier in terms of budgetary costs is the implementation of a public single-payer Medicare for All program, which we estimate would add 8.2 percent of GDP to public spending by 2049. Even with savings from smart policy that can restrain the growth of Medicare and Medicaid costs, spending on health care in the Budget for Shared Prosperity accounts for almost two-thirds of our increase in overall spending.

How do we pay for these investments?

Making all these socially beneficial investments, while also maintaining a deficit of around 2 percent of GDP,2 requires a substantial increase in revenue—from the baseline estimate of 19.8 percent of GDP in 2049 to 35.4 percent in 2049. Given the unabated rise of inequality over the past four decades, the first tranche of this revenue should come from those at the top. But increased tax revenues from the top 1 or 5 or even 10 percent will not be sufficient to support the large public spending required to guarantee health care for all Americans through a public single-payer program. A substantial portion of revenue must be raised from a larger share of taxpayers.

Tax policy in the Budget for Shared Prosperity is based on principles of optimal taxation

For decades, much of the discussion in Washington around taxing those at the top has focused largely on increasing top marginal tax rates on labor income within a fairly narrow band of a few percentage points: Top marginal rates were raised to 39.6 percent during both the Clinton and Obama presidencies, and they were reduced to 35 and 37 percent, respectively, during the Bush and Trump presidencies (TPC 2019).

But the history of U.S. taxation makes it clear that the space for increasing top tax rates is far larger than reflected by current rates or by tax policy debates over recent decades. From 1936 to 1980, top rates ranged from 70 percent to over 90 percent (TPC 2019). And contrary to the theory of trickle-down economics that was used to justify the radical tax rate cuts of the 1980s, higher top rates have actually been associated with stronger economic growth, historically: Over the period from 1949 to 1979, the average top marginal income tax rate was 80.4 percent and the average rate of net productivity growth was 2.4 percent. In contrast, from 1980 to 2018, when top marginal income tax rates were much lower (averaging 39.8 percent), the average growth rate of net productivity was also lower, at 1.3 percent.3 Higher top rates on labor income have long been under discussion among economists, with Saez (2001) finding optimal top tax rates on labor income to be no lower than 50 percent and possibly as high as 80 percent given the estimates from the empirical literature at the time.

The possibilities for much higher top marginal tax rates seem to have finally pierced Washington policy discussions after Rep. Alexandria Ocasio-Cortez appeared on 60 Minutes in January 2019 and suggested that a 70 percent top marginal tax rate be applied to earnings over $10 million. Much of the reporting and commentary that followed emphasized the historical precedence and the economic rationale for implementing higher rates (Kessler 2019; Yglesias 2019).

To understand the economic rationale for high top marginal tax rates, we must first look at just what an “optimal” top tax rate is.

An introduction to optimal taxation

At its core, the economics literature on optimal taxation attempts to answer this question: How do you build a tax system that maximizes social welfare subject to a government budget constraint, given that taxes influence individual incentives to work and save? That is, what is the best way to build a tax system given the classic economic tradeoff between equity and efficiency?

Estimating the optimal top tax rate

Deciding what tax policy maximizes social welfare requires making value judgements. One such value judgement flows naturally from a common assumption that economists make about the diminishing marginal utility of income. This assumption of diminishing marginal utility argues that the value to a person of an additional dollar of income falls as their income rises. So, for example, $1,000 to a family making $15,000 really matters; $1,000 to a family making $15 million hardly matters at all. This means that a redistribution of this $1,000 from the richer to the poorer household will increase the latter’s happiness far more than it decreases the rich household’s happiness. In turn, optimal tax models based on diminishing marginal utility of income put a small value on the consumption of top earners compared with the consumption of an average person; in essence, the parameters of the model assume that society values redistribution.

This means that the optimal tax is often simply the one that maximizes revenues from taxpayers in the top bracket. But what rate maximizes revenues depends on how the reported, taxable income of those at the top responds to changes in tax rates—in economics jargon, this is referred to as the elasticity of taxable income to the net-of-tax rate (ETI). Top taxpayers may respond to higher tax rates not just by working less or saving less (which generates some genuine economic losses for society4); they may also use accounting gimmicks to arbitrage across differing tax rates—making sure their income appears (to the IRS) to be whatever type of income will minimize their overall tax rate. They can also adjust the timing of income receipts or find other ways to avoid paying the higher tax rates.

In a broad review of the empirical literature, Saez, Slemrod, and Giertz (2012) find that while there is not yet a truly convincing estimate for ETI in the long run, the best available estimates range from 0.12 to 0.4. Diamond and Saez (2011) show that a midrange empirical estimate for ETI corresponds to an optimal top tax rate of 73 percent. Medium-term estimates following tax code changes in 2013 lend further support for this midrange ETI (Saez 2016).

Broadening the tax base pushes up the optimal top tax rate

Crucially, ETI is not a fixed parameter; instead, it depends on multiple features of the tax system that policymakers can alter. For example, Slemrod and Kopczuk (2002) and Kopczuk (2005) provide evidence that the ETI depends on the broadness of the tax base.5 Specifically, they find that a broader tax base reduces the ETI, making it clear that a broader tax base and higher rates effectively complement one another (Fieldhouse 2013). This is because much of the measured behavioral response of top earners to higher tax rates is not real in an economic sense, but is rather attributable to income-shifting by taxpayers aiming to arbitrage between tax rates that differ by type of income. For example, reviewing the literature, McClelland and Mok (2012) find “little compelling evidence that high-income taxpayers have substantially higher elasticities with respect to their labor input than lower-income taxpayers”; instead, they find that “higher estimates of elasticity of broad income among high-income taxpayers appear to reflect their greater ability to time their income rather than great changes in their labor supply.” Essentially, rich people don’t work or save all that much less when taxes are increased; instead, they just look for ways to shield their income from the now-higher taxes. But a broad tax base, by definition, provides fewer avenues for this type of income-shifting.

The effect that a broad base has on optimal tax rates is considerable. For example, Gruber and Saez (2002) find that ETIs for high-income earners depend on the tax base, with the ETI being nearly three and a half times as high for the current tax base when compared with a tax base with no deductions. Diamond and Saez (2011) show that these estimates of the ETI correspond to optimal top tax rates of 54 percent (current tax base) versus 80 percent (tax base with no deductions). In short, a broader tax base creates a lot more room to raise rates.

Using top rates to address inequality: If the pay of top earners is driven by bargaining power instead of just productivity, top rates should be pushed still higher

If high and rising top incomes are not simply driven by higher productivity, but instead are the result of a shift in economic and bargaining power that makes top income earners’ gains come at the zero-sum expense of others—as argued by Bivens and Mishel (2013)—then even the midrange estimate of an optimal top tax rate of 73 percent isn’t high enough. As Figure A shows, following drastic cuts to top tax rates, the past four decades have seen enormous gains in the share of income going to the top 1 percent. While wages for the vast majority have failed to rise with productivity (Bivens and Mishel 2015), the share of income going to the top 1 percent has surged.

Figure A

This link between lower top tax rates and rising pre-tax income inequality may not be a coincidence. Piketty, Saez, and Stantcheva (2014) extend the typical optimal tax model to the case where much of the income generated in the economy consists of “rents” that can be bargained over, with the distribution of these rents not affecting decisions regarding labor supply or savings. This means that rising incomes for CEOs and others at the top of the income distribution may stem from increased economic and bargaining power, not because they are adding productivity to the economy. In this case, high marginal tax rates can reduce the incentive of top-income households to maximize how much income they extract from others in a zero-sum process of wielding greater bargaining power. For example, if you are a CEO when top marginal tax rates are high (say, 90 percent), maybe it isn’t worth the hassle and bad publicity (“outrage costs”) of bargaining hard against your workers when you’ll get to take home only 10 cents of every dollar you wrest away from these workers.

Piketty, Saez, and Stantcheva (2014) present macro and micro evidence that these types of bargaining effects play a large role in the estimate of overall ETI. International evidence in the evolution of top income shares since 1960 suggests an overall long-run ETI for top earners of 0.5. The key addition of Piketty, Saez, and Stantcheva’s work is that nested within the overall ETI are not just supply-side and tax-avoidance elasticities, but an elasticity for bargaining as well. In the long run, they find evidence from the U.S. case that tax avoidance can’t account for a substantial portion of the long-run surge in top income shares—that is, the extraordinary rise in U.S. top income shares is real, not just an artifact of income-shifting.6

However, Piketty, Saez, and Stantcheva also find no evidence of a correlation between growth in real GDP per capita and the drop in marginal rates since 1960, which, consistent with the previous literature we discussed, suggests modest effects of tax rate changes on labor supply or private savings. The modest impact of tax-avoidance effects and supply-side effects suggests that bargaining elasticity plays a significant role in the overall ETI. Microdata on CEO pay provides further evidence that bargaining effects play a critical role in overall elasticity. Including these bargaining effects pushes the optimal top tax rate to 83 percent.

Our plan raises top marginal tax rates closer to their optimal rates while broadening the tax base

After incorporating employer payroll and state income taxes, the effective top marginal labor rate in our model budget is 59.3 percent.7 Given the findings discussed above, it is clear that this top labor rate is far from being excessive—and not only is it far from being excessive, but it is likely on the low end of optimal tax rates in the literature.

While our top rate is on the lower end of the optimal tax range in the literature, it is worth noting that our budget does not undertake a full accounting reform of Social Security. A full accounting reform of Social Security might well result in the full uncapping of the Social Security payroll tax—applying the 12.4 percent tax to all labor earnings, not just those below the current payroll tax cap of $132,900. If the Social Security payroll tax were fully uncapped, then the effective top marginal rate would be pushed to 67 percent8—more in line with the literature’s optimal tax rates. In essence, we’re leaving some tax powder dry to help any potential effort to undertake a comprehensive reform of Social Security.

We also raise the top rate on capital income to be roughly the same as our top labor rate; our capital taxation plan is discussed in more detail in the next section, along with an exploration of capital taxation theory.

Finally, our plan broadens the base of taxes subject to these top rates, e.g., by eliminating all tax expenditures except the EITC and closing loopholes in the tax code. More details on our strategies for broadening the tax base are provided in subsequent sections.

Our plan stops taxing wealth more lightly than work

As we have noted above, it is important to keep rates on different forms of income the same or close to the same; otherwise, top earners will use accounting gimmicks to shift income into the most tax-privileged category. To effectively tax the richest households, we must combine higher top marginal rates with reforms to how income from wealth is taxed.

Capital income tax rates should not be much lower than labor income tax rates

Capital income tax rates must be roughly equivalent to labor income tax rates if we are to meaningfully broaden the tax base. If equity is valuable to society at all, today’s large gaps in tax rates facing income generated from wealth versus work are damaging.

The understanding we’ve built of optimal tax policy can help us see just how far from ideal the U.S. tax treatment of capital income is. Saez and Stantcheva (2018) develop a relatively simple theory of optimal capital taxation that allows the optimal top rate to be calculated from off-the-shelf estimates of elasticities and distributional parameters—much like the derivation of optimal top rates described in the previous section. The broad takeaway is that if equity is a key concern for policymakers, then higher rates on capital incomes are needed. To understand why this is, it is helpful to look at the shares of income coming from capital and business income for various groups. These shares are shown in Figure B.

Figure B

Households at the top of the income distribution largely get their income from capital and business income. So, unsurprisingly, the distribution of capital and business income is more skewed than the distribution of labor income, with the top 1 percent getting 55.9 percent of capital and business income compared with 8.9 percent of earned income (CBO 2018).

If one believes that the utility of income falls as incomes rise, then there is a benefit in redistribution from the top to the middle and bottom, and capital income should be taxed accordingly. Moreover, if the supply-side elasticities are the same, then the extreme concentration of capital income makes the optimal top rate on capital income higher than the top rate on labor income. As we discuss above, there is considerable uncertainty around these estimates in the long run, but a recent review of capital gains behavioral response studies suggests elasticities are likely below 0.5 (CRS 2019). Taking the same previous midrange ETI estimate of 0.25 from Diamond and Saez (2011) would imply top rates on labor income a little under 70 percent and a top rate on capital income of about 75 percent.

In our model budget, the top federal tax rate on capital income is 52.8 percent,9 slightly lower than our top marginal federal rate of 53.7 percent on labor income. If the cap on Social Security payroll taxes were scrapped, pushing up top labor income tax rates, the gap between labor and capital taxation in our budget would be even wider. Why haven’t we erased the labor/capital income tax rate gap completely? Mostly because our budget also includes wealth taxation—which layers on another de facto tax on capital income.

We implement a wealth tax and expand the estate tax to further close the gap between how labor and capital are taxed

Our wealth tax starts at 0.1 percent on net worth over $10 million, which ramps up to 1 percent on net worth over $19 million (affecting roughly the top 0.1 percent of wealth holders [Bricker et al. 2016]). Further, we tax estates at a rate of 45 percent on amounts between $1.5 and $5 million, with a top rate of 55 percent for estates over $5 million; amounts up to $1.5 million are exempt. While a net worth tax is new in the history of U.S. taxation, these levels of estate taxation certainly aren’t. Adjusted for inflation, these parameters are roughly in line with estate taxation in the late 1990s and early 2000s (Jacobson, Raub, and Johnson 2007), when only about the top 1–2 percent of estates were subject to the estate tax (Phillips and Wamhoff 2018).

There are many ways to tax income generated from wealth in the real world. One can levy a net worth tax directly on wealth stocks; one can tax the flow of income generated by wealth (dividends and capital gains, for example); or one can tax bequests when wealth is handed off from one generation to the next. The optimal tax literature does not provide clear guidance about the advantages and disadvantages of choosing one versus another of these ways to tax the income generated by wealth. Instead, this literature tends to examine each type of wealth tax in isolation. A recurring theme in this literature is how one interprets the fact that households see higher rates of return on their net worth the higher this net worth is. A growing body of empirical evidence shows that these differing rates of return are an important factor in wealth inequality (Bach, Calvet, and Sodini 2015; Fagereng et al. 2016).

Piketty and Saez (2012) find that if no other taxes are levied on income generated from wealth, then the optimal tax rate on capitalized bequests would be as high as 70 to 80 percent for top wealth holders. Piketty and Saez then note that because capital income taxes and bequest taxes are close substitutes for one another, and because gaps in tax rates between wealth-based and work-based incomes can spur tax avoidance, there is a strong rationale for setting capital income rates closer to labor income rates.

Piketty and Saez also explore different rates of return using a model in which capital taxation can insure individuals against risky returns. But given that returns depend in their model on individual effort, taxing returns may discourage effort and thereby reduce aggregate rates of return. This makes the key elasticity the elasticity of aggregate returns to the net-of-tax rate. Again, there is considerable uncertainty around the true value of this elasticity but Piketty and Saez point to available macro evidence suggesting a low elasticity, in which case the optimal capital income tax is more than double the optimal top rate on labor income. And they suggest this could help explain why countries with high top inheritance taxes often also have high top capital income tax rates.

It is particularly worth highlighting that higher individual effort may largely translate into higher individual returns at the expense of others, whereby individual returns vary but the aggregate return is minimally affected. Harkening back to Piketty, Saez, and Stantcheva (2014), it is almost certainly the case that—though they don’t explicitly model it in this paper—extending their capital model to include rent-seeking would again imply a still higher top rate on capital income.

We broadly conceive of our plan’s wealth tax as shaving off a part of the flow of income for top wealth holders. But as the quantitative importance of differing returns across households has become more clear in the data, there has been a growing literature exploring the different implications for taxing the stock of capital through a wealth tax vs. the flow of capital through an income tax. Most interestingly, Guvenen et al. (2018) find that in a model where different household returns result from differences in entrepreneurial ability, shifting from capital income taxation to wealth taxation creates efficiency gains economywide by imposing less of the total capital tax burden on productive entrepreneurs relative to unproductive entrepreneurs.

Valuable spending in our plan—particularly for single-payer health care—requires raising revenues from more than just the top 1 percent, or even the top 5 or 10 percent

Between Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), and the Affordable Care Act (ACA), the federal government is set to spend 9.2 percent of GDP on health care by 2049. Even with smart savings realized from drug negotiations and other savings within Medicare and Medicaid, our budget would see total federal health expenditures at 6.9 percent of GDP over baseline by 2049.

For context, all of the other of the spending we outline in the Budget for Shared Prosperity will cost about 4.3 percent of GDP in 2049. While there are fluctuations in the short run, by 2049 the suite of non-health-care-related spending in our budget is basically paid for by tax proposals that raise the majority of revenue from the top 1 percent (through higher top rates, higher rates on capital, and higher corporate rates).

Shifting private health care spending to a public system is a clear outlier in terms of budgetary cost. To raise enough revenue to pay for health care, we need to tax more households than just those at the very top of the income distribution.

In the long run, the move to a single-payer public health care system would guarantee health care access for all households and would slow the growth of health care costs, which currently put pressure on the growth of living standards. Moreover, a Medicare for All system provides clear benefits to middle-income households, because it is largely about shifting these households’ current spending on health care onto the public sector, which has done a much better job historically at containing costs.

This recognition is why we built the Budget for Shared Prosperity around the notion that it’s fair to ask middle-income households to pay for programs, like Medicare for All, that provide largely middle-income benefits. And we built our funding sources—an income-based premium contribution and an employer-side payroll tax—to mirror the way most working households currently pay for health care costs (with premium costs generally split between employers and workers). Our plan also aims to cut out-of-pocket health costs in half.

Our plan eliminates regressive tax expenditures, raising enormous revenue—enough to fund universal health care

Tax expenditures are subsidies delivered through the tax system in the form of exemptions, deductions, credits, or privileged tax rates. These tax breaks exist ostensibly to encourage individuals and corporations to perform socially desirable actions, like saving for retirement or investing in plants and equipment. Many tax expenditures—such as the home mortgage deduction—are considered to be politically sacrosanct, because they are seen as broad “middle-class” tax breaks. But this sort of “spending through the tax code” is more opaque than direct government outlays and is in fact often highly regressive. For example, consider the fact that the value of a deduction rises with income—each $1 deduction saves families in the top income bracket $0.37 while saving families in the lowest bracket just $0.10.

In our model, we eliminate all tax expenditures except the EITC. Such a broad repeal of tax expenditures is typically viewed as political fantasy, but the virtues of such a policy are so large they are worth lingering on.

The revenue raised from repealing tax expenditures would be substantial

First, the benefits in terms of revenue raised are substantial. In fact, the revenue gains turned out to be even larger than we had expected when we submitted the budget for scoring.

Figure C shows the size of all tax expenditures (as a share of GDP) relative to other government spending. Tax expenditures accounted for 7.7 percent of GDP in 2017, which is a bit more than half as large as all noninterest mandatory spending, a quarter larger than all discretionary spending, and almost half as large as all federal revenue in 2017.

Figure C

Because of projected changes in taxpayer behavior resulting from the elimination of tax expenditures, we do not get back in revenue the full 7.7 percent of GDP that is currently lost to tax expenditures—but we get close, bringing in 5.9 percent of GDP in 2021. All told, the net effect in our budget of repealing all tax expenditures but the EITC is enormous—it would eventually raise 6.9 percent of GDP by 2049. Coincidentally, the net cost of the Medicare for All plan discussed above is also 6.9 percent of GDP—this means that the revenue from repealing tax expenditures would actually be large enough to entirely pay for our plan’s largest expenditure, Medicare for All.

Repeal of tax expenditures is largely progressive

Tax expenditures are largely regressive, so their repeal would be largely progressive. The benefits of tax expenditures largely flow to the top 20 percent—which, according to the Tax Policy Center (TPC), consists of households making over $153,300 in 2018 (TPC 2018). According to TPC, the top 20 percent account for 75.2 percent of the benefits of the state and local tax deduction, 79.3 percent of the benefits of the mortgage interest deduction, 90.2 percent of the benefits of the pass-through income deduction, 91.5 percent of the benefits of the charitable deduction, and 93.2 percent of the benefits of the lower rates on capital income. Even these numbers mask some of the skewness, as the top 10 percent alone account for around 60 percent of the benefits of the state and local tax and mortgage interest deductions, around 80 percent of the benefits of the pass-through and charitable deductions, and 90 percent of the benefits of the preferential rates on capital income.

It is worth noting that tax expenditures have become much more regressive in the wake of the Tax Cuts and Jobs Act of 2017 (TCJA). Estimates from TPC show that many tax expenditures are now even more tilted toward the top 1 percent. For example, the share of the home mortgage interest deduction going to the top 1 percent doubled from 8.3 to 16.7 percent after the TCJA. The share of the charitable deduction going to the top 1 percent exploded from an already large 37.9 percent to 56.4 percent.

Additionally, the TCJA opened a brand new loophole for the rich, the deduction for pass-through income: 55.4 percent of the benefits of this deduction goes to the top 1 percent (TPC 2018). The only tax expenditure that the TCJA capped—the deduction for state and local taxes—makes this point in reverse. The share of the state and local deduction going to the top 1 percent fell from 33.6 percent to 12.4 percent after the TCJA. For the most egregious tax expenditure—the previously discussed preferential rates on capital income—TPC estimates that 75 percent of the benefits go to the top 1 percent after the TCJA.

Repeal of tax expenditures raises revenue from taxpayers beyond just the top 1 percent—but without squeezing those at the bottom

Despite the skewness of tax expenditures toward the very top, these expenditures nevertheless benefit a broader group than just the top 1 percent. As discussed above, they largely accrue to the top 20 percent, or households making over $153,300 in 2018.

Figure D shows the shares of income going to the top 1 percent, the 91st through 99th percentiles, the 81st through 90th percentiles, and the bottom 80 percent from 1979 to 2015. The key takeaway from these data is that while a radical reform of tax expenditures largely affects the top 20 percent of households, this reform raises revenues from a base of taxation that accounts for over half of all income earned.

This means that by broadly repealing tax expenditures, we can expand the tax base considerably while increasing the progressivity of the tax code to counter growing inequality. Figure D shows that while most of the rise of inequality over the past generation has been accounted for by the top 5 and top 1 percent, even the bottom half of the top 20 percent of households have mostly held their income shares steady in the face of rising inequality.

Figure D

The share of income going to the bottom 80 percent has fallen by 8.3 percentage points since 1979, while the top 1 percent has seen their income share almost double, from 9.0 percent in 1979 to 16.6 percent in 2015. Within the rest of the top 20 percent there is less movement: Income shares for the 81st to 90th percentiles fell just 0.5 percentage points, while the income share going to the 91st to 99th percentiles increased 2.2 percentage points.

Radical reform of tax expenditures achieves our goal of expanding the share of taxpayers affected by tax reforms beyond just the top 1 percent, in order to raise sufficient revenue to cover big-ticket items like universal health care—but it does so without putting excessive pressure on taxpayers in the bottom 80 percent.

Repeal of tax expenditures further broadens the tax base

The repeal of these tax expenditures would also create further space for raising revenue from the top as it would close off avenues for income-shifting, ensuring those at the top are actually taxed at the new top rates.

Revenues from the repeal of tax expenditures can be used to fund direct government spending—which is a more efficient and effective way to provide the benefits associated with tax expenditures

Finally, the social benefits that tax expenditures are meant to supply could be provided in a more targeted and efficient manner through direct government spending. For the tax expenditures that aren’t ludicrously tilted toward the rich, but may still be nonetheless regressive, the Budget for Shared Prosperity follows the theme of trading them for direct government spending. We institute an ambitious early child care and childhood education initiative instead of the child and dependent care credit. We invest in affordable college education, teachers and schools, and early childhood education in lieu of various education credits and deductions. We reduce child poverty substantially by replacing the child tax credit with a child allowance. We do away with regressive tax benefits for 401(k) retirement plans, but boost spending on Social Security. And we spend a substantial amount guaranteeing health care for all through a public single-payer plan, which makes the exemption of employer-sponsored health insurance unnecessary.

Our plan taxes economic ‘bads’

Another tenet of good tax policy is levying Pigovian taxes, which ensure that the prices consumers face on certain goods reflect the true cost their production and consumption imposes on society. We include a whole host of these that have small impacts on revenue, including increasing or instituting taxes on cigarettes, sugar content of beverages, alcohol, and motor fuel. We also impose a tax on “systemically important” (i.e., “too big to fail”) financial institutions as a hedge against the costs of government bailouts. But, by far, our Pigovian taxes that are projected to generate the largest revenues are a financial transactions tax (FTT) and a carbon tax.

A little background on the rationale behind an FTT: There is little evidence that the extreme rise in the financial sector’s share of the economy has provided economic value-added. Instead, much of the activity undertaken in the finance sector largely constitutes a zero-sum redistribution from households to the financial sector (Bivens and Blair 2016a). This means that an FTT, even if it didn’t bring in as much revenue as estimated, would benefit the economy by crowding out wasteful financial transactions.10

Unlike FTTs, the direct incidence of carbon taxes is regressive. Combating climate change will require a suite of policies—in particular, publicly financed and directed green investments. But we don’t think that the regressive nature of a carbon tax should preclude its use to combat climate change—we’ll need every tool we can muster. So to ensure that a more efficient price is placed on carbon, while ensuring a progressive net effect, we refund 200 percent of carbon tax revenues on a lump-sum, per-capita basis.11

The Budget for Shared Prosperity isn’t out of the ordinary on an international scale

The U.S. government taxes and spends substantially less than other OECD countries. U.S. general government revenue (including federal, state, and local government revenues) made up 33.3 percent of GDP in 2015, or the fourth-smallest among OECD countries (OECD 2019b). U.S. general government spending of 37.9 percent of GDP in 2015 put the U.S. in the bottom quarter of OECD countries (OECD 2019c). And U.S. spending on family benefits is especially low, at a second-smallest 0.6 percent of GDP compared with an OECD average of 2.0 percent in 2015 (OECD 2019a). While the policies in the Budget for Shared Prosperity are ambitious relative to the current size of U.S. government revenue and spending, they certainly would not make the U.S. anywhere close to an outlier on an international scale. Boosting government revenue by around 15 percent of GDP and boosting government spending by about 11 percent of GDP would put the U.S. into roughly the top quarter of OECD countries in both categories. The child allowance, paid leave, and early child care and childhood education programs in the Budget for Shared Prosperity would boost spending for family benefits by about 1.8 percent of GDP, for total family benefits spending of 2.4 percent of GDP, putting the U.S. above the OECD average.

Likewise, our budget’s support for a universal health care program with a broad tax base also falls in line with the practices of other OECD nations. Unlike the U.S., most OECD countries provide universal health care, with a large majority of the financing coming from public sources. They also typically raise revenues from a broader base of taxes, in particular through value-added taxes (VATs). On average, OECD countries raise about 10.8 percent of GDP from taxes on goods and services, while the U.S. raises just 4.4 percent of GDP from those sources (OECD 2019d). While our budget doesn’t include a VAT to cover this spending, we do significantly broaden the tax base with our health care payroll tax, our income-based health insurance premium, and our abolition of non-EITC tax expenditures.

Conclusion

The U.S. economy faces significant challenges going forward, ranging from widening income inequality and stagnant wages for the vast majority to a dearth of public investments and an inadequate social safety net. The Budget for Shared Prosperity meets these challenges head on by considerably increasing the government’s fiscal footprint while maintaining good economic and tax policy.

The spending in the Budget for Shared Prosperity includes extensive increases in the size of the social safety net and public investments, along with the spending necessary for a Medicare for All public health care system. This health care spending is an outlier in terms of budgetary costs and therefore requires that we implement a broader base of taxation, beyond just taxes aimed at those at the very top of the income distribution. But a broader base of taxation does not just have to mean additional payroll taxes, health care premiums, or VATs. An enormous amount of revenue can be made available by simply eliminating deductions and closing loopholes in the tax code. When combined with the higher rates on top incomes that maintaining the broadest base of taxation allows for, these policies have the potential to raise very large amounts of revenue.

We call for such bold measures in the Budget for Shared Prosperity in order to highlight how dated and constraining typical discussions of tax policy are among Washington policymakers—and how much revenue we are losing out on as a result. For example, the conventional wisdom that tax reform should “broaden the base to lower the rates” is flat-out wrong. A broader base, created both through the repeal of tax expenditures and by keeping rates on different forms of income similar, should be coupled with higher rates, not lower rates. Further, worries about the effects of top marginal tax rates on behavior should include discussions of whether the rates are high enough to blunt the incentives for top earners to bargain hard over income gains at the expense of everyone else in the economy. Finally, the light taxes we currently levy on capital incomes should be far higher. Setting capital income taxes closer to marginal rates on earned income will make it much more difficult for wealthy taxpayers to avoid paying their full tax bill—they will no longer be able to simply shift income into a different category to get lower rates. The economic literature on this point is clear: If policymakers are concerned about equity, higher rates on capital incomes make sense.

In truth, with a deficit of 1.7 percent of GDP in 2049 and an average deficit of 1.1 percent of GDP over 2040–2049, our plan might raise more revenue than is strictly needed even to pay for our ambitious spending plans.12 If policymakers wanted to use our plan as a model for an actual budget, there would likely be room to pare back some taxes—particularly the new payroll taxes and the income-based health premium. In addition, the falling debt-to-GDP ratio implied by our plan over the next 30 years also provides more than ample room (even in narrow political terms) to take on substantial amounts of debt to aggressively fight any recession that should occur in that time frame. Policymakers often use debt-to-GDP ratios that are high in historic terms as an excuse for inaction in fighting recessions with sufficient vigor. Under our budget, they would no longer have that excuse.

Endnotes

1. See Peter G. Peterson Foundation 2019a, 2019b; Bivens 2019a.

2. For further information on our view of deficits, see our forthcoming report on the topic (Bivens 2019b).

3. Author’s analysis of unpublished Total Economy Productivity data from Bureau of Labor Statistics (BLS) Labor Productivity and Costs program, Bureau of Economic Analysis National Income and Product Accounts, and TPC 2019.

4. In theory, less savings can, in the long run, push up economywide interest rates, which can in turn lead to decreases in capital investments that can increase productivity.

5. “Tax base” refers to the total amount of income or assets taxed by the government. When certain income is excluded from taxation—e.g., through itemized deductions—the tax base is narrowed. The tax base is also narrowed when certain types of income are subject to lower taxes. The tax base can be broadened by eliminating tax exemptions and ensuring that different types of income are taxed at similar rates.

6. Saez (2016) provides further evidence that the extraordinary rise in top income shares is real.

7. This top labor tax rate of 59.3 percent includes the proposed top marginal tax of 49 percent, a 7.2 percent payroll tax (composed of the current 2.9 percent Medicare payroll tax, of which half is paid by the employer, plus the current 0.9 percent additional Medicare tax for high-income earners implemented under the Affordable Care Act, plus our plan’s 3.0 percent employer health care payroll tax, plus a 0.4 percent paid leave payroll tax, of which half is paid by the employer), and average state income taxes taken from Diamond and Saez (2011). Since employer payroll taxes are deductible for both federal and state income taxes, we calculate the total top tax rate to be (0.49 + 0.029 + 0.009 + 0.03 + 0.004 + 0.0586)/(1.0145 * 1.03 * 1.002) = 0.593.

8. The 6.2 percent employer Social Security tax is deductible for both federal and state income taxes, therefore we calculate the total top tax rate to be (0.49 + 0.029 + 0.009 + 0.03 + 0.004 + 0.0586 + 0.124)/(1.0145 * 1.03 * 1.002 * 1.062) = 0.67.

9. The top tax rate on capital income of 52.8 percent includes the proposed top marginal income tax rate of 49.0 percent plus the 3.8 percent ACA (Affordable Care Act) surtax on investment income.

10. For a more detailed summary of the rationale for and benefits of an FTT, see EPI 2018.

11. For simplicity, we assume that carbon revenues are refunded at double the amount collected the previous year. In practice, households would also need to receive a refund in the first year the carbon tax is imposed so that they won’t be harmed economically by the tax. To determine refunds for the first year of implementation, we recommend using an estimate of revenues to be collected that year.

12. For further information, see EPI’s forthcoming report on deficits (Bivens 2019b).

References

Bach, Laurent, Laurent E. Calvet, and Paulo Sodini. 2015. “Rich Pickings? Risk, Return, and Skill in the Porfolios of the Wealthy.” Working paper, December 2015.

Bivens, Josh. 2013. Why the Bipartisan Commitment to Public Investment Should Go Beyond Mere Rhetoric. Economic Policy Institute, June 2013.

Bivens, Josh. 2019a. “Presenting EPI’s ‘Budget for Shared Prosperity.’” Working Economics Blog (Economic Policy Institute), June 11, 2019.

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Nevermind that Friedman starts his column by invoking the “cliff” metaphor so common in fiscal policy debates these days, and then riffs off it to decry the mounting public debt of the United States. But [and imagine my hand slapping my forehead] surely everybody knows by now that the danger of the “fiscal cliff” is one of debt rising too slowly, right? And nobody disagrees about this.

The bigger problem is his outsized claim that a too-small ($20 per ton) carbon tax could cut 10-year deficits in half. That sounded high to me, so, I looked up the report he references. It scales the $1.2 trillion raised over 10 years by a $20 per ton carbon tax against the $2.3 trillion in accumulated deficits projected to occur under the current law when the report was written (Sept. 2012).

Even back then, however, most analysts didn’t use this “current law” baseline as a realistic projection—in large part because it assumed that all the Bush-era tax cuts would be allowed to phase out on schedule, something that neither Democrats nor Republicans had supported. It also assumed an austerity-induced recession resulting from deficits closing too quickly.

Largely because of this expiration of the Bush-era tax cuts embedded in it, this “current law” baseline actually shows an extraordinarily rapid decline of deficits and debt in the near- and longer-term (see this quick summary): a return to primary surpluses by 2015, a rapidly falling ratio of debt to GDP, and all public debt fully paid off by 2069. See the red line on the graph below, showing the debt/GDP ratio—does that really look like a scary cliff showing too much debt growth?

It’s obvious why Friedman chooses this particular baseline even when another baseline, more realistic but which would make for much-less impressive numbers for this level of carbon tax as a fiscal savior, is available in the same report (see the figure below). It makes even a too-small carbon tax look like a deficit game-changer to an un-careful reader.

But, this level of carbon tax only cuts a large portion of the projected deficits relative to a baseline where these deficits are already very small and shrinking.

Worse, Friedman assumes that every penny of revenue raised by the carbon tax should just go to reduce the deficit.

Look, we like, no, we lurve, carbon taxes. But we think that lots of the revenue raised by them should be recycled to hold low- and moderate-income households harmless from what is, after all: a not-very progressive consumption tax. And some more should be spent on energy efficiency investments, the goal of this exercise is, after all, to mitigate carbon emissions. But the case for carbon taxes should rise or fall on their own merits as a device to slow global climate change, and not be bundled in with a lot of baseless fear-mongering about deficits.