of an election campaign, candidates can direct their advisers to
come up with numbers that sound good. Once elected, how
ever, officials, including the president, cannot just conjure up
revenue that will meet the estimates.
As this new president will learn, probably rather quickly, the rich will not play dead when confronted with the prospect of higher tax rates. They will–through their political allies and tax accountants–find ingenious ways of dulling the impact of the greater tax bite directed at them. President Clinton soon will realize the fact that the higher tax burden he contemplates must be shared by people way down the income ladder, an insight that is likely to dampen his interest in "soaking" anyone, certainly not those he has promised a free ride.
If he persists with his tax plans to soak the rich, by the end of Clinton's first term the federal tax burden will once again have moved down the income distribution, a reversal of the experience of the 1980s. In the '80s, the share of all federal taxes paid by the fifth of all households with the highest incomes went up at the same time their marginal and average tax rates went down.
Clinton was never as absolute in his anti-tax stand as was George Bush, but he did say, repeatedly, though not in so many words: "Read my lips, no new taxes on the middle class." He has said that he will scale back his expenditure plans before he will raise the taxes on his favored income classes. He will be shackled, in part, by his own words–and he may have to endure their haunting him in much the same way that George Bush had to endure Clinton's endlessly repeating the words that George Bush had so glibly let roll from his lips in the heady days of the 1988 convention.
Of course, inflation is a potential problem, but even inflation is no longer the government revenue engine that it once was. The power of "bracket creep" has been muted by indexing and the collapse of the tax schedule. Furthermore, bond markets can be expected to rapidly convert higher inflationary expectations into higher interest rates the federal government pays. One of the unheralded legacies of the buildup of federal debt during the 1980s is that federal interest payments loom large in the budget (accounting for about a fifth of it). Any increase in interest payments spawned by higher inflation rates can quickly soak up any additional real tax revenue garnered from higher rates of inflation. Besides, Alan Greenspan will head the Federal Reserve for almost all of Clinton's first term.
Fourth, if Clinton persists with his plans for mandated benefits, economists will learn that the perverse effects of labor-market mandates will not be as severe as many have envisioned. Employers will work diligently to soften the impact of such mandates. Workers will learn that it is they, not their employers, who must foot the bills, and that lesson is likely to muffle their enthusiasm for mandates.
Employers who face competitors not covered by the mandates, both domestic and foreign, will be forced to pass on the cost of mandates to their employees in the form of lower wages and other fringe benefits and greater work demands. Some employees will undoubtedly be replaced by robots unburdened by the cost of mandates, or by foreign workers who obtain the jobs driven off shore by costly mandates. These employees will see the mandates as bad deals, festooned with political goodies not worth their personal economic costs. The higher cost of employing workers who will likely take advantage of the mandates will reduce the market demand for such workers and the wages they can secure.
Finally, the Clinton presidency will be severely checked by global market forces that have been acknowledged, albeit reluctantly and belatedly, by even his most liberal advisers. For example, in the early '80s Robert Reich, one of Clinton's top economic advisers, wrote a book that was full of venturesome proposals to tax, regulate, protect, and subsidize American corporations. To Reich, making American firms more competitive by way of federal aid (and a variety of other industrial policies) was then crucial if our industries were to meet the challenges of "the next American frontier."
More recently, Reich has acknowledged (without really saying so) that many of his earlier proposals will not work. He has written, quite effectively, in The Work of Nations about the emergence of the global economy in which capital can move around the world with ease. As a consequence, he now believes the focus of federal policies should not be "industries," because it is too easy for companies to transfer the benefits of government largess abroad. He has corrected his belief and now recognizes that the true wealth of a country is its people, who should be the object of any future government largess.
However, he succumbs to the faulty reasoning that largess for the many who are not so wealthy should be financed by taxes on the few who are wealthy. What he and others in the Clinton camp do not seem to realize yet is that the human capital at the disposal of the wealthy is more fugitive on a global scale and less subject to government expropriation than the physical capital of corporations. Physical capital can only be shipped across the globe at the slow pace of boat travel. Human capital in the form of brainpower can travel to any point on the globe at close to the speed of light through the world's interconnected network of computers and satellites.
International money markets and integrated world stock and bond markets will teach on a daily basis our country's leaders lessons that they now seem to resist. National elections conducted every four years will remain important. But votes of confidence and approval will be taken daily in the world markets, which because of the country's ties to them can be ignored only at great peril. Clinton has already sought to assure markets that he intends to make markets work better. If he doesn't hold to that promise, the next four years will prove interesting, a test of the relative power of domestic politics and global markets in shaping national policies.
An undeniable fact of the modern global economy is that capital has been transformed. Over recent decades, capital has become smaller and lighter, less physical, more transportable. Capital, in the form of brainpower and information (which is no more tangible than electronic impulses on computer disks), can be sent around the globe at the speed of light and for the cost of a telephone call. Capital has become as slippery as quicksilver, as difficult for governments to tax as it is for them to define and harness it, and this quicksilver capital is primed to move to more cost-effective venues at the slightest government provocation. To shape and constrain government policies, quicksilver capital need not move; it need only threaten to move.
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