El Ignaciano / September 2024

Tax, International Trade, and Immigration Policies

Lorenzo L. Pérez

In connection with the 2024 election year, proposals regarding taxes, tariffs, and immigration are being made in the United States. Specific measures are being proposed without presenting them within an overall well-reasoned strategy. This article presents the background and some of the current proposals in those three topics.  It assesses them from the perspective of Catholic Social Teaching (CST), keeping in mind the promotion of the common good and fairness, using conventional economic analysis, and empirical research results of reputable economic institutions.  

TAX POLICY

The first thing that policy makers need to acknowledge is that tax policy cannot be viewed in isolation from the overall fiscal situation. Currently, politicians avoid acknowledging the deteriorating fiscal situation due to the fact that their tax and expenditure proposals do not address the growing fiscal problem.¹  The Congressional Budget Office (CBO), which makes periodic projections for the federal budget going 10-year into the future, revised its projection for the federal budget in February 2024.  On current legislation, the CBO projected a deficit of $1.6 trillion for 2024 fiscal year (fiscal year runs from October 1 through September 30) which continues to rise annually to an eventual level of $2.6 trillion in 2034. In relation to the size of the economy, the federal budget deficit also expands from 5.6 percent of Gross Domestic Product (GDP) in 2024 to 6.1 percent of GDP, significantly larger than the 3.7 percent of GDP that deficits averaged over the past 50 years.  The CBO projections also show that debt held by the public rises each year in relation to the size of the economy reaching 116 percent of GDP in 2034 -an amount greater than any point in the nation’s history.  In the CBO projection from 2024 to 2034, increases in mandatory spending and growth in interest costs outpace declines in discretionary spending and growth in revenues and the economy, driving up the debt to GDP ratio. 

This projected increase in the fiscal deficits and the debt of the federal government does not present an immediate problem to the United States giving the deepness of capital markets and the federal government’s continued creditworthiness based on a market consensus that eventually a tax and spending correction will occur at some point.  But it certainly makes the economy more vulnerable to unexpected shocks like the costs associated with dealing with the effects of natural disasters or wars.  A change in expectations for the worse would affect the risk premiums assigned to new Treasury obligations and a vicious cycle of increases in interest rates and fiscal deficits could occur. This increased vulnerability of the federal government finances makes it a priority to look for measures to address the fiscal problem.  A debt crisis would affect negatively the population as a whole and, more seriously, low-income earners.

Measures to begin to get the fiscal problem under control include raising Medicare premiums, reducing the tax subsidies for employment-based health insurance, broadening the base upon which payroll taxes are imposed for Social Security and Medicare, reducing subsidies to some sectors like agriculture, and slowing down the growth in military spending.  But it is also clear that other tax measures will need to be applied including an increase of individual income tax rates and reducing itemized reductions for the personal income tax which would also reduce inequalities in the tax system, and the elimination of some unnecessary deductions and credits for corporations.  The introduction of an indirect federal tax designed as a value added tax with a small rate and with minimum exceptions can contribute substantially to the efforts to reduce the fiscal deficit.²  The takeaway from this discussion is that any sensible tax policy proposal needs to be framed within an overall strategy of addressing the fiscal deteriorating trend and having changes in taxes contributing to arrest the growth of public debt.

Tax proposals

One set of proposals from the current administration advocates a larger role of the government in the economy and proposes significant changes to the tax code to increase tax revenues to address safety net shortcomings affecting anti-poverty programs and to promote industries in key sectors like chip manufacturing and green energy.  In principle, this strategy acknowledges the need to reduce the projected fiscal deficits in the future, but it does not really present a strategy of fiscal consolidation since most of the increased tax revenue would go to finance new spending. The emphasis is to reform  the system of taxation to make the wealthy and big corporations pay its “fair share” while extending the 2017 tax cuts  of the “Tax Cuts and Jobs Act (TCJA)” for those earning less than $400,000 per year.³  The most straightforward tax proposal of this group is to restore the marginal tax rate on personal income to the Obama-era of 39.6 percent for single tax filers earning more than $400,000 per annum and for married filers earning more than $450,000. Capital gains would also be taxed at the same rate as wage income for those earning more than $1 million or more per year (the rate would rise from 20 percent to 39.6 percent).  Less straightforward are others personal tax proposals.  One is to impose a minimum 25 percent wealth tax on those with a net worth of $100 million or more.  This proposal uses an expanded definition of income which will also tax unrealized capital gains at 25 percent.  This wealth tax is a proposal that would be difficult to implement and unlikely to have congressional support. Regarding payroll taxes, this group envisages increasing Medicare tax for high income earners.   

Regarding corporate income taxes, the 2017 corporate income tax cuts of the previous administration have been criticized pointing that this tax cut has benefitted mostly the very rich and the biggest corporations.  Who actually bears the cost of corporation taxes can be debated: shareholders, employees or consumers.  Nevertheless, it is clear that businesses benefit from the infrastructure of a country and there are just, practical, and political reasons why they should pay tax.  At the same time, corporate tax is a burden that could reduce investment and economic output.  Governments need to design a tax system that supports investment and bears in mind the total tax burden borne by businesses.  Corporate tax rates have fallen from the high 40s-50s % in the 1980s to an average of 21.4% in 2018 according to a study of the Organization of Economic Cooperation and Development (OECD) of 88 countries.  While rates have fallen, the percentage of corporation tax to total tax take has increased as countries have broadened their tax base (from 12% of total tax take in 2000 to 13.3% in 2016)⁴ .  In the United States, corporate taxes account for about 10 percent of total tax take. The proposal is to increase the corporate statutory income tax rate from 21% to 28% which is well below the 35% that long prevailed prior to the 2017 tax cut.  But the new 28% rate would put the US into the top 10 countries in the OECD with the highest corporate tax (the world average is slightly less than 25%).  Additional corporate taxes are being considered, including increasing the new 15 % alternative minimum tax rate on corporations earning $1 billion or more per year to 21%.  

Some of the additional revenue would be used by these proponents to finance additional tax credits. One proposal would make permanent the American Rescue Plan’s 2021 expansion to the earned income tax credit for childless-low-income workers and expand the child tax credit from $2,000 to $3,000 per child aged 6 years and older and to $3,600 per child less than 6 years old. After the change of presidential candidate of this group in July 2024, the new presidential candidate has advocated in addition the tax credits just mentioned, a $25,000 in down-payment assistance to every first-time home buyer for four years and directing $40 billion construction companies that build affordable housing.  In addition, health insurance subsidies will be enhanced and income tax lower for the middle class.  It is not clear whether these spending proposals will be covered by tax increases or spending cuts. The Committee for a Responsible Federal Budget has estimated that the plans proposed by the new presidential candidate at the time of this writing, August 2024, would raise the federal deficit (not including the reduction of income tax for the middle class) by $1.7 trillion over the next ten years, if not paid for.⁵

Proposals of the opposing party considers the TCJA of 2017 a path breaking piece of economic legislation. With several provisions of the TCJA set to expire at the end of 2025, maintaining the tax cuts is at the top of this group’s economic policy agenda.⁶ For personal income taxes, this would imply an extension of current tax rates for all taxpayers.  There also have been press reports that this party will propose to cut the income tax rate further for the very rich and a reduction in the statutory corporate tax rate from its current 21% to 15%.

Other tax ideas have been floated in the second set of proposals of the opposing party such as  discussing the possibility of replacing the income tax with a universal 10 percent import tariff (which would pose a major disruption to the economy and bolster the wealth of the richest Americans), exempting tipped wages from taxes, and cutting the payroll tax that funds Social Security and Medicare as a means of giving relief to the middle class. All of these proposals will widen the fiscal deficits in the future as the 2017 tax cuts did.  More recently, the candidate of this group has noted that the increase in import tariffs could be as high as 20 percent and also advocated the elimination of the federal income tax for social security benefits.  The Committee for a Responsible Federal Budget estimates that all the tax cuts proposed by this group could add $7 trillion to the deficit over a decade, with only some of which would be offset by tariffs or by a repeal of tax breaks introduced by the current administration.

Takeaway from these tax proposals

The tax proposals reflect the views on the role of government that each group has. Proponents of the first group of tax proposals are concerned about the fairness of the tax system and the need for more resources to address directly the needs of the poor and improve their prospects to join the middle class. The other group that wants to reduce taxes believe that the size of the government should be reduced and leave more resources for private investment that would eventually benefit all. They believe that public investment in areas like green energy are not necessary.  It is clear is that both groups are not presenting a clear strategy on how to arrest the fiscal deterioration. In this context, however, the approach of raising new tax revenue to pay for new spending appears to be a more fiscal responsible one than proposing further tax cuts without recommending specific offsetting measures.  Also, efforts to increase the fairness of the tax system may help reduce poverty and arrest the recent deterioration in income inequality.

TRADE POLICY

For many years after the Second World War, there was support in the United States for free trade and for a multilateral approach in formulating trade rules and resolving trade disputes.  There were exceptions like in the agricultural sector, and disagreements in certain issues like the multilateral dispute settlement mechanism, government procurement, and intellectual property.  But the idea that countries should produce those goods that they can produce more cheaply, sell them to buyers in other countries, and in return buy the goods that are more cheaply produce abroad guided trade policy in the world economy.⁷  Free trade also encourages innovation and competition resulting in productivity increases in all countries. Countries that have adopted a strong liberalization program have experienced an export boom and strong growth. It has become clear over the years that trade protection helps the few at the expense of the general public and it also harms workers by limiting growth. The protection of import-competing producers is also discriminatory against exports when the imported good, such as steel or a textile product, is used in producing machinery or clothing that may be exported. This may force exporters to increase their prices and lose competitiveness vis-à-vis foreign producers.

All these arguments are well known, but policy makers sometimes give in to powerful corporate or union interests and impose trade restrictions. More recently, it has become fashionable to criticize globalization and use nationalistic rhetoric to point to problems caused in communities when plants close due to foreign competition while ignoring the benefits to the majority from free trade.  It is true that in the United States the trade adjustment programs to help displaced workers due to foreign competition have proved ineffective. The implementation of these programs faces the reality sometimes that job dislocation comes from factors other than trade, such as technological change or changes in consumer demand. Consequently, many times workers do not qualify for assistance.⁸ 

More recently, during and after the Covid pandemic, concerns have risen regarding supply chain disruptions and the need to promote production of inputs close to the home market.  The concentration of production of some key manufactured products like computer chips in Taiwan have also raised concerns due to the possibility of hostility from China towards the island and called for the need of the government to promote chip manufacturing at home.  

Finally, there is the fear in the United States that China may prevent the development of new sectors like electric cars by flooding the US markets with much cheaper electric cars whose production is subsidized by the Chinese government.  This fear has called for increased trade barriers on these imports.

Alternative Trade Views

Departing from the view that free trade and low-to-no tariffs was the best policy to bolster the world economy, including that of the United States, the trade policy goal of the current administration can be described as one of raising domestic production in key sectors, and creating jobs for working-class Americans. Trade policy is viewed as an instrument to help build a sustainable infrastructure and a clean energy future. The administration has not entered into new trade agreements or made multilateral efforts like strengthening the dispute mechanism of the World Trade Organization.⁹ 

Additional sweeping tariffs imposed on China in 2018 and 2019 by the previous administration which affected some $380 billion worth of goods have not been lifted. The current administration has used a more focused approach to trade with China and recently announced additional tariffs on imports allegedly necessary to protect national security and prevent supply chain disruptions.  The press release announcing the tariffs said they were put on specific goods because China’s unfair trade practices concerning technology transfer, intellectual property, and innovation are threatening American businesses and workers.  The import taxes cover only a few narrow but strategically important product categories, such as semiconductors, lithium batteries, and electric vehicles.  The magnitude of tariff increases is large.  For example, tariffs on Chinese semiconductors and solar cells are up to 50 percent and tariffs on electric vehicles were raised to 100 percent.

The competing group to the administration has been a proponent of trade protectionist policies for a number of years.  It also has great concern about the large bilateral trade deficit with China which led to the already mentioned increase in tariffs in 2018 and 2019. Although this faction has publicly shown interest in negotiating new free bilateral agreements, little was achieved on new agreements when they were in power before although they did renegotiate the trade agreement with Canada and Mexico, but with no significant changes.  There was no support for the WTO.  The “American First Economic Policy” of this group calls for stopping outsourcing, turning the US into a manufacturing superpower, and rebalancing trade with a robust plan of protection.  The platform calls for the extraordinary measure of revoking the Most Favored Nation (MFN) Clause for China.¹⁰  As mentioned earlier the idea of a 10 percent tariff (more recently a 20 percent tariff) in all imports and a 60 percent tariff on all Chinese goods have been floated.  The current average tariff rate of the United States is less than 2 percent and increased tariffs across the board will increase consumer prices.

Takeaway from the trade policy proposals

The existing trade policies and proposals raise concern for the world trading system.  The current administration’s policies are more moderate, and some the actions taken to promote some strategic sectors and ensure a stable supply chain can be defended.  However, these actions in the context of a growing industrial policy would need to be implemented carefully to avoid waste and abuses. Also, some of the tariff increases are unnecessarily large -e.g. a 100 % tariff on imports of electric cars.

The competing group’s views are clearly protectionist and ignore the lessons of the 1930s when trade restrictions contributed to the Great Depression.  The obsession with the trade deficit with China can lead to an open trade war with China reducing unnecessarily the population’s welfare in both countries.  A cancellation of the MFN clause for China could unravel the world trading system that has been put together over several decades through difficult trade negotiation rounds. 

IMMIGRATION POLICY

Few issues have been as dominant and enduring in political and public discourse in recent years as migration.¹¹  Around the world, but especially in Europe and North America, international migration has come into sharp focus, becoming one of the most prominent wedge issues.  Unfortunately, immigration discussions have been hijacked by those who peddle misinformation on immigrants and migration. People migrate to other countries for a number of reasons: political oppression with grave human right violations in their countries of origin, violent living conditions typically associated with the drug trade, and extreme poverty conditions in their home countries many times caused by misguided government policies. The largest migration corridor in the world is Mexico to the United States which has existed over many decades and where citizens of countries other than Mexico have been using more in recent years.  Immigrants who seek political asylum are normally required to provide evidence demonstrating either that they have suffered persecution in the past, and/or that they have a “well-founded fear” of future persecution in their home country.

Between February 2021 and October 2023 under the current administration, government agents’ encounters with those trying to enter the US between border legal ports of entry in the southern border without authorization grew.  This increase in encounters put enormous pressures in border towns in the American side and in cities like New York City and Chicago that were originally very receptive to receiving immigrants and provide aid to the new arrivals.  Government statistics show that in the initial processing of millions of encounters at the border, 2.5 million have been released into the US and 2.8 million have been removed or expelled.¹² In addition, a little more than 700,000 migrants arrived at the port of entry without authorization to enter the US.  There are certainly others who have crossed the border by evading the authorities. The Department of Homeland Security (DHS) estimated 660,000 “getaways” or unlawful entries in fiscal year 2021. The migrants who seek asylum and are released into the US can spend years waiting for a court date.  It is taking four to five years to asylum seekers to get to court. According to Justice Department statistics, less than 15% of those seeking asylum were ultimately granted it in fiscal years 2022 and 2023.¹³ It is very likely that many of those who are not granted political asylum try to stay in the US illegally.

After October 2023, the number of illegal crossings shot up through the end of the year.  In December 2023 nearly 250,000 migrants were apprehended, an all-time high. More recent information shows that illegal crossings at the US-Mexico border have declined in 2024.  In July 2024, illegal crossing in the US-Mexico border dropped to the lowest levels in 4 years in part reflecting the measures taken by the current administration this year and actions taken by Mexico at the request of the US to stop migrants before they get to the US border.

In assessing the migration policies, the CST can shed some light.¹⁴ The first principle of the CST on migration is the right not to be displaced or emigrate -a right to remain in their native country.¹⁵  This principle calls for international pressure on governments which cannot guarantee a safe living environment for its citizens and thus force them to emigrate.  The principle also casts a harsh light on governments which suppress human rights and/or those who compel its citizens to emigrate because incompetent economic policies. A second principle suggests that when there is conflict, persecution, violence, hunger or an inability to subsist or thrive, the individual has natural and absolute rights to migrate and a natural right to seek sanctuary and membership within an alternative safe political community. A third principle (implied by the right to migrate) is that there is a moral requirement upon existing political communities, especially the most materially privileged, to receive migrants and hear and assess with justice their claim for admission or transit.

The third principle is nuanced by a fourth principle: the right of a sovereign political community to regulate its borders and control migration.  The CST sees borders as a relatively good thing only insofar as they protect the common good of the established community and are humane enough to offer hospitality and recognize its part in a common good that lies both within and beyond itself. Political communities are expected to include within the exercise of sovereignty the establishment and oversight of just measures for those who arrive seeking sanctuary. Pope Benedict XVI called for legitimate sovereignty to be exercised always with reference to three prior principles: the universal destination of all goods, recognition of prior and inalienable moral unity of human kind, and the requirements to regulate borders according to basic conditions of social justice.¹⁶ A fifth and last principle proposes that the recognition of the social and political nature of the person implies a need for immigrant integration as full and dignified members of a community and therefore a shared responsibility on immigrants, civil society, and the state to enable a meaningful participation of immigrants in the host community.

In the encyclical Fratelli tutti, Pope Francis addressed the ideological barriers to ethical migration, naming isolationism and populism as ideologies that have increased cultural hostility and fueled public policies that have proved deadly to migrants in transit.¹⁷ In the fourth chapter of Fratelli tutti, Pope Francis argues for both concrete practices of welcome, protection, promotion and integration, and a wider disposition of reciprocity, gift exchange, and gratuitous openness to others.

Alternative immigration policies 

In 2021, a border wall building program initiated earlier was stopped by the incoming administration and after the federal public health emergency of Covid ended, in May 2023, the use of Title 42 (a public health law used during the Covid pandemic to stop migrants entering the US) was also ended. Title 42 had permitted to expel border-crossers, but without any criminal consequences which likely incentivized repeat attempts to enter the country.  Instead, a new program was introduced in 2023 through which foreigners who want to seek political asylum can apply through an app as long as they do it outside the USA. Not much information is available on this program and there are reports of the difficulties in accessing the app. In addition, a humanitarian parole program was introduced for people fleeing Venezuela, Haiti, Nicaragua, and Cuba, who can potentially stay in the United States for two years if they have a sponsor who applies for the program. There are 30,000 slots per month available. However, this program has been halted due to reports of fraudulent applications. In June 2024 two additional measures were taken: new safeguards -including work permits and protection from deportation- for people who had been living illegally in the country for 10 years but are married to American citizens.  After a bipartisan bill on immigration was turned down by the opposition party in the House of Representatives¹⁸, an executive order was issued that would bar from receiving asylum all those who cross between ports of entry when migrants encounter at the southern border exceed an average of 2,500 a day.  That threshold would be easily met. Asylum seekers would be returned to Mexico or deported to other countries until arrests fall below 1,500 a day. This executive order has an uncertain future because it will be challenged in court and would need to have Mexico’s cooperation.

The opponents of the policies described above have accused immigrants of being criminals and coming to the country to take American jobs.  Intentions for closing the border and expel illegal and criminal immigrants have been expressed. They have announced the intention of beginning the largest deportation in American history and to reverse the “open border policies” of the current administration that according to the opposition party have allowed criminal gangs and illegal aliens to come in into the country. No mention is made, however, of finishing to build a border wall.

Takeaway from the competing immigration policies

There is a big difference in the approaches of the two groups to immigration policy with one extreme group with an inflexible opposition to migration while the other having a more open approach but one that reacts to different political and international pressures. The current administration support for the bipartisan bill on immigration derailed in the House of representatives makes their position more in line with the CST to the extent that the legislation attempted to create the conditions to hear the asylum applications more expeditiously and permit the US to better control its borders. Inflexible opposition to immigrants does not recognize the contribution that immigrants make to the American economy.  Mass deportations of illegal workers in the millions will seriously disrupt many sectors like agriculture and construction and may end up costing American jobs as entrepreneurs reduce their business operations due to the shock produced to their business by the deportation of illegal workers.¹⁹ It would also gravely disrupt the lives of many families with American citizens.

At the end, immigration will need to play an increasing role over the medium and long term in maintaining an adequate size of the labor force given the decline in the American birth rate and the increasing aging of the population. It is possible that in a few years there will be strong competition among rich countries to attract foreigners for their labor forces, including low skill workers. Common sense and ethical considerations suggest that the way forward must be a revamping of the border policy with a more just and capable system, the promotion of legal migration, and the establishment of a legal path to allow foreigners who have lived many years honorably in the country and established roots to become legal citizens. This approach will need to be supplemented by greater political and diplomatic efforts to get the countries of origin of immigrants to improve the conditions in their countries so that their citizens can exercise their right to stay in their countries of origin. 

[I] For a more detailed discussion of the fiscal problems of the United States, see the author’s article on possible measures to address the fiscal problems in the March 2024 issue of El Ignaciano.
[II] Perez, op.cit.
[III] Moody’s Analysis:  Assessing the Macroeconomic Consequences of Biden vs. Trump, June 2024.
[IV] World Economic forum, Forum International:  Is corporation tax good or bad for growth? January 8, 2020.
[V] The policy proposals situation from this group is fluid at this time given a new presidential candidate. At the time of this writing, another idea that has been floated is to work with hospitals to eliminate medical debt but details need to be fleshed out regarding this proposal.
[VI] Moody’s Analysis, op.cit.   
[VII] See Lorenzo L. Perez: “ The Common Good and Trade Policy:  Does Support for Free Trade Still Make Sense?, El Ignaciano, September, 2021 for a more complete discussion of the case for free trade.
[VIII] The United States would benefit from imitating practices of some other developed countries like Nordic countries and Germany where all the various labor support programs are brought under one agency and provide labor market integration programs for those looking for work, including the unemployed for whatever reason, the underemployed, and those searching for a better job.
[IX] The dispute court of the WTO has not been functioning for many years because the US has not supported the filling of judge vacancies.
[X] The Most Favored Nation (MFN) clause calls for any tariff reduction negotiated by WTO members to apply to all the trading partners of the country doing the reduction. The MFN is one of the key underpinnings of the WTO.
[XI] World Economic Forum:  5 Charts to bust some myths about migration, February 21, 2020.
[XII] Lori Robertson:  Breaking down the Immigration Figures, FactCheck.org, February 27, 2024.  Information is based on data of the Office of Homeland Security Statistics.
[XIII] Robertson, op.cit.
[XIV] See Lorenzo L Perez:  Catholic Social Teaching and Migration, El Ignaciano, June, 2023.
[XV] Pope John Paul II:  Erga Migrant Caritas Christi (May 2004) which summarizes Vatican II Gaudim et spes paragraph 65.
[XVI] Benedict XVI’s Caritas in Veritate, 2009, paragraph 62.
[XVII] Anna Rowlands:  Towards a Politics of Communion, Catholic Social Teachings in Dark Times, page 84.
[XVIII] Among other things, this bill would have increased the number of border guards and resources to better control the border and increased the number of border judges to help reduce the backlog of asylum cases.
[XIX] The Peterson Institute for Internationals Economics has an ongoing research project on migration.  Its economic modelling show that for every 8 illegal workers deported one American job is lost.

Lorenzo L. Perez, PhD. in Economics, University of Pennsylvania, is a retired economist who worked for over 30 years at the International Monetary Fund (IMF), and prior to that worked at the Agency of International Development and the U. S. Treasury Department. Member of the Editorial Board and nonresident columnist of El Ignaciano.