Executive Summary
Trade barriers and immigration restrictions create large collateral damage; such “cures” are worse than the disease. If economic nationalism is not the answer, what is? We need better policies for supporting workers and communities, as well as true tax reform that ensures the gains from economic growth are more widely shared. We also need to modernize the tax system to suit our global, technologically sophisticated economy. Beyond these steps, we need to rethink society’s partnership with the business community. Our aim should be to balance the needs of business with those of society, recognizing their mutual interdependence.
We are at a crucial moment in our economic history. Thirty-five years of rising economic inequality and wage stagnation have left too few Americans benefiting from economic growth. While GDP per person has risen strongly, median household incomes have been left behind. This economic record has fueled economic discontent and the search for easy answers. The Trump administration’s response has primarily been to blame our trading partners and immigrants, raising barriers and walls.
But we believe nationalistic economic policies are dangerous to both peace and prosperity. Trade barriers and immigration restrictions create large collateral damage; such “cures” can be worse than the disease.
If economic nationalism is not the answer, what is?
In my book, Open: The Progressive Case for Free Trade, Immigration, and Global Capital, I argue that we need better policies for supporting workers and communities, as well as true tax reform that ensures the gains from economic growth are more widely shared. We also need to modernize the tax system to suit our global, technologically sophisticated economy.
Beyond these steps, we need to rethink society’s partnership with the business community. Our aim should be to balance the needs of business with those of society, recognizing their mutual interdependence. Today’s declining trust in business is largely a symptom of its role in disappointing economic outcomes like wage stagnation and income inequality. Of course, most business leaders realize that trade barriers and immigration restrictions are not good policy answers. How, then, can businesses contribute toward a healthier economy where the interests of business better coincide with those of society in general?
I see five areas of focus for improving the partnership between business and society. As a whole, this package should be able to garner considerable support from business. If corporate America wants to maintain its legitimacy, it needs play a role in ushering in these reforms.
Advocate for an open economy. Companies are dependent on global supply chains to be competitive in the world economy. International capital markets provide an important source of finance. A welcoming immigration policy provides both vital sources of entrepreneurial talent as well as skills that are in short supply in the U.S. workforce. That’s why many companies have loudly rejected protectionist rhetoric and policies.
However, business leaders need to do a better job of connecting their arguments to public welfare. An open economy is also ultimately in the interests of most workers. Tariffs introduce new sources of labor market shocks; when prices on steel rise because of a tariff, someone at a U.S. firm that uses steel as an input may lose their job. When trading partners retaliate against our tariffs, American farmers are hurt. As for consumers, tariffs are regressive consumption taxes — they make products more expensive, lowering the purchasing power of workers. Finally, lower immigration flows mean fewer new businesses hiring, lower innovation and growth in the United States, and higher demographic burdens due to the aging of the population. These are arguments that companies need to be making.
Embrace fair regulations. Regulations are important to ensure health, safety, and environmental protection. But they should also be constantly streamlined and improved to meet the needs of society, as was the aim of past initiatives such as Reinventing Government during the Clinton administration. In some places, green taxes can take the place of regulations. For instance, a carbon tax encourages both conservation and innovation in alternative energy sources, while providing businesses price signals they can easily understand and respond to. Tax revenue from this source allows tax rates to be lower elsewhere in the system. Companies will continue to lobby and to provide information about how regulations affect their business. But when they attack regulation in general, or overstate the harms from regulation, they damage their reputation as a productive partner in society.
Pay a fair share in taxes. The business tax cuts of the recent 2017 tax law (known as the Tax Cuts and Jobs Act) were too large to be affordable; both Republicans and Democrats had previously suggested more responsible revenue-neutral reforms. However, given the new baseline created by the 2017 law, we will need to increase taxes on the business community. As a starting point, I would suggest both repealing the pass-through income deduction (which artificially distorts investments across sectors) and strengthening our international tax rules (which favor both profits and investments in low-tax havens relative to the United States). By closing loopholes, revenue can be raised without resorting to excessively high rates.
I also suggest more transparency on taxation, and in particular, a sunshine tax report, requiring companies to share with the public basic aggregates (sales, employment, income, and taxes paid) in every country and state in which they operate. Companies are reluctant to share this information, in some cases because they have an embarrassingly large amount of income booked in tax havens. Yet that is precisely why such disclosure is important. By giving investors, consumers, and workers information on company tax practices, it serves as a market-friendly nudge toward viewing tax payments as a social responsibility, rather than simply a cost that should be relentlessly minimized. Sunshine tax reports would be available on a uniform, annual basis to any interested party, reported on a government website.
Provide a sunshine labor report. Similar to the report I proposed for taxes, a sunshine labor report would require companies to publicly report information about pay structure and labor representation. This could include information on executive pay, pay distribution throughout the company, and methods of labor inclusion such as employee stock ownership or employee representation on boards. (Some measures along these lines, like worker-to-CEO pay ratio disclosures, were a requirement of Dodd-Frank.) Again, this is a market-friendly nudge that would give companies reputational “cover” when they want to improve the lives of their workers, since consumers, investors, and potential employees would pay attention to the reports. While companies might resist such transparency, they would certainly prefer it to more intrusive regulations that would limit executive pay directly or constrain companies hiring and firing decisions. (Of course, in some areas changes in labor law are needed, in order to provide employees with more predictable work hours and to adapt to changes such as the “gig” economy.)
Rethink antitrust laws. There are many indications of increased company concentration across sectors. The market power of corporations is rising, and the corporate sector has increased its share of total savings by about 30 percentage points. Antitrust laws have often focused on the effects of market power for consumers, but antitrust laws should also focus on how market power affects labor markets and innovation. Protections such as the Consumer Finance Protection Bureau should be expanded, not weakened. Companies can play a role in these reforms; small- and medium-sized firms should join the conversation around rising market power and industry concentration.
As a package, these five ideas provide a balance between the needs of society and the needs of business. I recognize that many of these ideas will be fought tooth-and-nail by elements of the business community. But business benefits from an open economy, global market access, productive labor, prosperous consumers, inclusive economic growth, and simple, fair regulations and taxes. In return, society benefits from less tax avoidance (and more tax from some businesses), more tax and labor transparency, more support for labor, necessary regulations, and robust antitrust laws. If corporate America wants to avoid a turn to more harmful policies, such as protectionism and excessive regulation, they need to be partners that are capable of compromise.
In the end, it is important to recognize that the interests of society and business often coincide. An open economy with an economically healthy middle class and strong and stable institutions can benefit everyone.
This article is adapted from Open: The Progressive Case for Free Trade, Immigration, and Global Capital.
Source: Harvard Business Review