The Price of Civilization_ Reawakening American Virtue and Prosperity - Jeffrey D. Sachs [41]
One of the key realities of the new globalization is the ever-expanding range of competition between U.S. and emerging-economy workers. Half a century ago, American workers did not have to fear much competition from abroad, least of all from low-wage countries. Transport and logistics costs were simply too high for American firms to source in Asian low-income countries. Moreover, most of those countries were closed to investment from the United States. Yet as transport, communications, and logistics costs began to fall, and as those economies opened to trade and investment, some low-tech industries could relocate factories abroad. As costs fell further, it became possible for even high-tech industries, such as computer and other advanced machinery manufacturing, to relocate just parts of the value chain—for example, final assembly operations—abroad. As costs fell still further, due mainly to the Internet, it became possible to shift back-office jobs, such as accounting and human resources operations, from the United States to India (favored over China because of its English-speaking workers), all enabled by the Internet. Now American workers compete directly with their counterparts in the emerging economies without companies’ needing to shift physical capital, only to have online connectivity.
A key result of the new globalization has therefore been a huge change in income distribution in the United States. Capital owners have been the big winners, enjoying a rise in pretax returns and a cut in the tax rates levied on them. Workers with low educational attainments have tended to lose, as they are directly in the line of competition from the emerging economies. And the federal government has exacerbated these trends. First market forces raised the incomes of the rich, and then the government, caught up in a race to the bottom with counterparts, cut both personal and corporate income taxes, thereby giving an added boost to the rich, while turning around to slash public spending for the poor.
Throughout the high-income economies, governments have cut the effective average tax rate (EATR) on corporate income, and the spread in effective tax rates across countries narrowed as well. Both the decline of EATRs and the narrowing of the spread of EATRs are shown in Figure 6.2 for nineteen high-income countries, including the United States. The careful statistical study from which this figure is taken demonstrates that “increased capital mobility (FDI) has a negative impact on the corporate tax rate.”12
The effective U.S. corporate tax rate shows the same decline as in other high-income countries. America’s EATR declined from 30 to 40 percent during the 1960s to less than 30 percent from the mid-1970s onward, and is currently under 20 percent (Figure 6.3). One part of that decline reflects the greater ability of U.S. companies to hide their profits in offshore tax havens, with the implicit or explicit support of the Internal Revenue Service. The upshot is a decline in the share of GDP paid in federal corporate taxes, from an average of 3.8 percent in the 1960s to just 1.8 percent in the 2000s.13
Figure 6.2: Effective Average Tax Rate in High-Income Countries, 1979–2005
Source: Data from Alexander Klemm, “Corporate Tax Rate Data,” Institute for Fiscal Studies, August 2005.
Figure 6.3: U.S. Corporate Taxes, 1950–2010
Source: Data from U.S. Bureau of Economic Analysis.
The race to the bottom exists not only in falling corporate tax rates but in many other aspects as well, such as the weakening of labor standards, financial sector deregulation, and lack of enforcement of environmental standards. As one consequential example, New York and London were in a dramatic race to the bottom regarding financial deregulation during the past twenty years, to the delight of the financial firms on Wall Street and in the City of London. The end result was to feed the massive