Taxation is often framed as a mundane policy dispute settled by bureaucrats, but while the intricacies of taxation have slipped from the minds of many Americans, its influence is only growing.

The origin of modern taxation can be traced back to the Great Depression. In 1933, unemployment was almost 25%, and economists grappled with how to increase government revenue and strengthen a fragile economy. Through this turbulence came the birth of Keynesian economics and prototypes of the Laffer curve, which hypothesized what tax rate would yield the greatest amount of revenue. But it took a combination of these monetary theories to lift America out of the Great Depression. The United States has since seen record-breaking domestic growth in the form of stock market growth and productivity boosts; however, its attention to the importance of taxation on the global economy has faltered. This is because of a shift in priority, as after the fall of the Soviet Union and the end to the Communist threat, U.S leaders saw less of a need to ensure global stability. They instead pursued policy centered around supply-side economics which, in theory, would ensure domestic prosperity, though this prosperity was defined by growth in the stock market and low unemployment, neglecting the fragility of the economy.

This model, however, may now be turning against American interest. As Harry Grubert, a research economist at the Treasury Department, explains that lower taxes on foreign income and investment, in the form of capital gains tax, may promote domestic growth, since part of that capital may be relocated back into the domestic market. This tax structure has, in some capacity, played a role in almost every presidential administration since the Reagan era, and it coincides with a shift in economic power away from America to China. But this comes at the price of a decrease in American international competitiveness, due to disproportionate investment in foreign markets – China, in particular. Lucrative Chinese investment opportunities have attracted U.S investors away from the domestic market. While American investors are generating capital from the domestic market, they relocate that capital to China instead of the United States. The motivation for this reallocation is due in large part to a 20-year downward projection in America’s aggregate demand, which projects long-term nominal growth for the United States. China, however, is poised for long-term growth based purely on marginal utility, as the need for employment is only growing. So, while American tax policy empowers U.S investors, their empowerment doesn’t correlate to domestic growth. Moreover, an empowered Chinese market serves the ability of the Chinese government to pursue its goals in affirming its own global hegemony.

Photo by Lance Cheung

The question then becomes: how can the United States change its current trajectory to better promote domestic investment? German Cubas, a professor at the University of Houston explains in an interview, a model that he believes “Would preserve American authority in the global markets.” “The American goal of maximizing profit for investors may have been sound thinking during the 1930s,” Cubas says, “But now it only serves to benefit emerging markets. To combat this, there must be greater empowerment of the populace.” Cubas proposes accomplishing this by changing the supply-side economic model to empowering investors and rural manufacturing to make domestic goods more attainable to communities hardly invested in.

This combination of economic initiatives would enable aggregate demand to grow since domestic markets are incentivized by increases in production, thus making goods more accessible and more attractive. The long-term implications of a consistent model centered around defying marginal utility and boosting aggregate demand are twofold. First, it stabilizes the global economy. Emerging markets surpassing America in the global economy present a clear problem. Emerging markets are more volatile, as they rely more heavily on domestic markets and are more easily influenced by external factors, such as trade conditions abroad and inflation in other countries, potentially rendering their trade as a net loss to the exporter. Overall, these countries suffer from a greater degree of uncertainty, and that economic fluctuation would ripple across the globe. But by shaping monetary policy around the orientation described by Professor Cubas, the United States can maintain its economic hegemony, which comes with a guaranteed level of security for global markets.

A prime example of this is that the world would have a secure reserve currency, which ensures that trade currency manipulation and/or inflation wouldn’t reduce a country’s ability to prosper. However, that standard would not exist if any other country replaced an American economic role. Again, take China for an example. They have repeatedly manipulated their currency for their own economic benefit in trade, so if they became the dominant hegemonic superpower, countries would be at the mercy of China’s currency. The second impact in maintaining American economic hegemony is that the United States has the leverage to set the global agenda, particularly in the field of human rights. The Human Rights Watch 2020 Report on China warns that in the absence of an alternative world superpower, China would fill that void. China dictating how the international community tackles human rights issues presents a clear danger, due to their own lack of concern for human rights, most recently shown by its treatment and detention of the Uighur Muslim minority in Xinjiang.

American refusal to change its tax policy isn’t just a matter of economics, it’s a matter of global market stability and human rights around the world. This influence isn’t an abstract concept; it has tangible impacts, and if the U.S can’t maintain its economic hegemony, it will impact people all across the globe.

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