Tag Archives: economy

The tariffs are a needed blow to the “progressive” tax system

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Democrats think Americans pay too little in taxes. More specifically, they think “rich” Americans fail to pay their “fair share.”

They play fast and loose with those terms “rich” and “fair share.” Their unstated definition of “rich” is people who make more than the Democrat hurling the allegation. And they never do define “fair share.” It’s always just more, more, more on the rich, rich, rich.

Never mind that the top 1% of earners pay 40% of federal income taxes, the top 5% pay 61%, and the bottom 50% pay only 3%.

There’s another kind of tax in the news this week. President Trump announced tariffs on imported goods. The tariffs vary by country and by goods, but the broadest one is 10%. Some things are exempt from the new tariffs, and some things are subject to a higher one.

Democrats argue that these tariffs are, in effect, a sales tax on American consumers. The argument is that foreign manufacturers importing their wares into America will simply pass the tariff cost on to American consumers in the form of higher prices.

That’s approximately true but not entirely, for several reasons. For one, the foreign manufacturers will probably absorb some of the tariffs themselves by taking it out of their profit margins. To the extent that happens, the tariff is a tax alright, but it’s a tax levied on foreigners.

I like the idea of foreigners paying some of Americans’ taxes.

For another thing, Americans will probably shift their buying habits somewhat away from foreign goods once tariffs make them more expensive. It’s hard to predict how much of that will happen.

For simplicity, let’s assume what the Democrats and their media allies have assumed – the worst. Let’s assume that the quantity of imports does not decline, that this 10% winds up getting levied on all of them, and that the whole 10% gets passed on to American consumers.

What would that add up to in dollars?

America imports about $4 trillion worth of goods annually.  Therefore, under those assumptions, a 10% import tariff would cost Americans about $400 billion in higher prices.

The Democrats would have you believe that this $400 billion goes up in smoke. It does not. Like any other tax, it goes to the U.S. Treasury.

Even Democrats know this. (Well, maybe AOC doesn’t.) But they nonetheless rail against this particular tax, while supporting all other taxes.

I suspect that their real opposition is not to the tax, but to the taxer. The Democrat’s mantra is Orange Man Bad, and so everything he says and does is bad, even when he proposes something they usually love – a tax increase.

Now here’s an interesting connection. In Trump’s first administration eight years ago, the Republicans passed sweeping tax cuts. Tax cuts benefit the people who pay real taxes. Duh.

As pointed out above, the people who pay real taxes are largely the people who make real money. Double duh.

And so, the Trump tax cuts benefited real people who make real money and therefore pay real taxes. They didn’t much benefit people who don’t make money and therefore don’t pay taxes. Triple duh (and let’s get out the tiny violin).

Those Trump tax cuts are set to expire at the end of this year. If that happens, the result will be a tax increase amounting to about $400 billion/year.

If that number sounds familiar, it’s because it’s the same number mentioned above in connection with the tax revenue that will be realized by the new tariffs.

That’s right, the tariffs will approximately pay for extending the tax cuts. A coincidence? I think not.

There’s another twist. The people who will benefit from extending the tax cuts are not the same people who will pay the tariffs that offset the cost of them. The tariffs will be paid by everyone buying imported goods – people who buy Japanese cars, Korean electronics and South American vegetables. In short, they’ll be paid by pretty much everybody.

But extending the tax cuts will benefit people in proportion to how much they pay in taxes. The people who pay a lot of tax will get a lot of benefit. As pointed out, those are people who are wealthy.

An apt slogan might be, “To each according to what was taken from each.” Apologies to Karl Marx.

The end result is to chip away, a bit, at the progressiveness of the tax system – the system where wealthy people not only pay more because they make more, but also pay at a higher percentage.

That progressive tax system is how we got into an arrangement where the bottom 50% pay only 3% of federal income taxes while the top 1% pay 40%.

You may like this outcome, or not, depending on where you fall on the income spectrum.

But as a matter of social policy, it’s clear that our current progressive tax system leaves the bottom 50% as non-stake holders. Those non-stake holders naturally push for higher taxes because they know they themselves won’t have to pay them. They get to free load.

Democrats have pandered to those free loaders for a long time. That’s been successful for the Democrats, but destructive to the nation.

A modest defense of tariffs

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From publications like The Wall Street Journal, you might conclude that tariffs as an economics practice is in the same category as piracy, slavery and child labor, but worse.

Economists’ main complaint with tariffs is not that they’re destructive and immoral. Economists don’t make moral judgments, after all. There’s a reason they call their profession “the dismal science.”

No, economists’ main complaint about tariffs is that they’re stupid. “Tariffs are stupid” is Economics 101. It’s a given. It’s econo-dogma. The Pope may or may not be Catholic, but popular business publications preach from their printed and pixeled pulpits that tariffs are indisputably, irrevocably, universally, invariably stupid.

In the spirit of Protestantism and economics contrarianism, let me offer a defense of this much-maligned practice. At the outset, I’ll stipulate to some things.

First, it’s true that tariffs are much like a sales tax. Adding a tariff to imported goods tends to raise the price of those goods, just as we saw a few years ago that adding a sales tax on Amazon goods adds to the check-out price of those goods.

If the U.S. government slaps a 10% tariff on, for example, imported steel, it’s logical to expect the price of imported steel to the U.S. consumer to rise about 10%.

But that’s not always the case, because, while tariffs are much like sales taxes, they aren’t exactly the same. A tariff applies not to all goods, but to specific goods – ones that are imported from overseas and specifically designated for the tariff.

Those tariffed goods compete with other goods such as domestic goods that are un-tariffed and other imported goods that are un-tariffed. A steel importer who simply passes his tariff along to the consumer will thereby put his goods at a competitive disadvantage, pricewise.

For that reason, the importers might absorb some of a tariff in their profit margins. Assume the importer has a profit margin of 30%. A 10% tariff could cut that to 20%. The importer might raise prices by the entire 10% in order to maintain his 30% profit margins, and thereby disadvantage his product pricewise, or he might raise prices only 7% and absorb the other 3% in his margins so that he winds up with margins of only 27%.

To the extent the foreign manufacturer absorbs the tariff in his profit structure, it’s he, not the consumer, who is paying the tax.

He would do this not because he’s a good guy, but because he wants to maintain market share vis a vis his un-tariffed competitors. The invisible hand works, even in an artificial market.

To the extent the tariff does get passed onto the America consumer, it’s worth considering what that consumer is currently paying. Apart from certain French wine and Italian sports cars, I’m always amazed how inexpensive foreign-made “stuff” is.

Consumer electronics are a good example. You can get a new, perfectly serviceable smart phone that puts the world at your fingertips – something you couldn’t buy for a billion dollars a generation ago – for $300. That’s about what a house-call by a plumber to fix a toilet cost you last week.

Americans are wealthy enough to pay a few dollars more for foreign-made “stuff.” Especially if that stuff is made under difficult conditions by exploited and sometimes underaged workers who deserve better pay and conditions.

Second, let’s stipulate that trade wars can be bad. If we impose a tariff on wine that Europeans export to us, we should expect the Europeans to impose a retaliatory tariff on something we export to them, such as American whiskey and Harley Davidson motorcycles.

That was exactly what happened in President Trump’s first term. And that was only one salvo in the trade war. It began with a squabble over long-standing European government subsidies to European aerospace companies which put American companies such as Boeing at an unfair disadvantage. Where that trade war will end depends on the mood of the governments and the power of lobbyists – two forces that are often both unpredictable and unconstructive.

The most famous trade war was launched by the Smoot-Hawley Tariff Act. Passed in the wake of the 1929 stock market crash, the 40% American tariffs imposed by Smoot-Hawley and retaliatory tariffs imposed by our trading partners crippled world trade and slashed business profits, leading to bank failures worldwide, the Great Depression and, arguably, World War II.

Let’s not go there again.

That said, there are several legitimate uses of tariffs that even economists would approve of. One is to protect industries that are strategically important. If steel is a strategic industry (and it is) then protecting that industry from being decimated by cheap foreign imports is a legitimate use of tariffs. It’s entirely possible that America will someday need Pittsburg steel again, and I don’t mean the football team.

(This is not to say I approve of President Biden blocking the sale of U.S. Steel to Nippon. That’s a complicated question. After all, Nippon proposed not to end American steel production but to maintain it in America while improving efficiencies – which could lower prices and strengthen the industry here, not weaken it.)

Another legitimate use of tariffs is to protect an industry that is culturally important. In rural France, for example, winemaking is culturally important. The argument can be made that the French winemaking culture ought not be at the mercy of mass-produced wine from, say, Romania.

Or maybe it should be, to produce better wine and lower prices for all. But that’s a judgment for a culture to make. Tariff protections for isolated industries such as winemaking will not to cripple the world economy.

Another legitimate use for tariffs, most economists would agree, is to threaten them without imposing them. Threatening to impose a 25% tariff on French wine if the French don’t quit unfairly subsidizing their aerospace companies that compete unfairly with Boeing, is fine by me.

Of course, such threats are credible, and effective, only if they get carried out once in a while. The next thing you know, we’re punishing American whiskey makers for the French unfairly subsidizing their aerospace companies.

Those are my stipulations on the subject. Now back to tariffs as a sales tax.

In the world of economics, activities are either productive or consumptive. Productive things are good, because they produce resources. They grow the pie. The bigger the pie, the more for everyone at the table.

In fact, productive things are actually double-good because what they produce, in turn, is often productive in its own right. It’s a virtuous circle.

In contrast, consumptive things are viewed as bad in the world of economics. They don’t grow the pie; they eat the pie. They use up resources. It’s fine to eat a little of the pie, but recognize that then there’s a smaller pie. Eat too much of it, and there won’t be any for a hungry day.

Let’s contrast sales taxes in the form of tariffs with other taxes. Income taxes are thought to be bad because they punish people for a productive activity – working. That’s how you obtain income, after all. Punishing people for working is bad economics policy (even if – especially if – it helps certain class warfare politicians get elected).  

Investment taxes like capital gains taxes are even worse. They punish people for making investments. If people don’t make investments, then new businesses are denied the capital they need to grow and innovate.

Apple Computer started in a garage. Without capital investments, it would still be there.

And so, economists generally favor sales taxes which discourage consumption, over both income taxes and investment taxes which discourage production and investment.

Crafting our sales taxes as tariffs might be an especially good approach because we can imbue them with some nuanced policy considerations. Much as liquor and gasoline get taxed extra-high because we want to discourage their consumption, we could extra-tariff such things as, well, Chinese steel if our desire is to avoid over-relying on it.

Ah but, you say, then the Chinese will retaliate by slapping tariffs (notice how tariffs always get “slapped”) on our imports to them, such as . . .

. . . um, I can’t think of any.

OK, but, you say, SMOOT-HAWLEY.

Fine, I agree that we should not slap, or even place, 40% tariffs on all our imports. We don’t want a trade war, global economic disruption, bank failures, a Great Depression, and World War III.

I submit that it’s not one or the other. I submit that we have a lesson to learn from Smoot-Hawley, sure enough, but perhaps we’ve learned it too well.

Is “cheap stuff” the right goal for our trade policy?

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Economists – who have predicted seven of the last four recessions – will tell you that trade tariffs are bad. The reason tariffs are bad is that they make imported goods more expensive. The money for the tariff has to come from somewhere, so it gets built into the price of the product.

So, the effect of an American tariff on, say, televisions made in China is to raise the prices to the American consumer.

OK, I buy that. But what does that mean in real life?

It means that a family in Peoria that would like to buy a 60” TV might have to settle for a 52” screen.

That strikes me a something less than catastrophic. If that’s a “global trade war” then these economists never studied the lead-up to World War Two.

But still, I admit that settling for a 52” TV rather than a 60” TV is not a positive. It’s a negative. Especially if you combine it with settling for a phone with a camera having 2X zoom rather than 3x zoom, and settling for a car that goes 0-60 in 5.9 seconds rather than 5.6 (both of which are way faster than the muscle cars of yesteryear, by the way), and settling for a dishwasher that you can turn on and off easily but not from France.

So, I do acknowledge that tariffs entail some cost to people who like to buy stuff – and we all do like to buy stuff. But that’s not the whole story. Credit Donald Trump and J.D. Vance for starting a discussion on this.

There are several legitimate reasons for tariffs. One is to protect a strategic American interest. Steel is used throughout industry, from buildings to tanks. Sure, we could import all our steel from China, for now, but what happens when we close our steel mills and then have a conflict with China and they cut off our supply?  

A second reason for tariffs is to use them as a bargaining chip. Foreign countries sometimes unfairly protect their industries from American goods, whether it’s the vineyards in France or the chip-makers in Taiwan. We can unilaterally remove our own trade barriers while they retain theirs, but a smarter approach is to threaten a tit-for-tat where we impose barriers unless they remove theirs. This typically works.

Everyone admits both of these reasons. Weighing and applying them can be complicated, but there’s no doubt about their legitimacy.

A third reason for tariffs is more subtle. It’s to protect American culture – and French and Italian and Korean culture.

Economists will tell you that the best economy is the one that’s the most efficient. That sounds logical. It means that if wine can be produced most efficiently in Italy, then that’s where is should be produced. If steel can be produced most efficiently in China, then that’s where it should be produced. If AI software can be produced most efficiently in America, then that’s where it should be produced.

The reason that efficiency trumps everything else, the economists will say, is that the efficient production of goods leads to the lowest prices for those goods. Low prices mean greater availability to poor people. What could be more important than globalized trade that results in cheap goods for poor people?

Culture, that’s what. And the best culture is not necessarily the most efficient one.

Maybe good wine can indeed be produced more efficiently in Italy than in France (my own judgment notwithstanding). Does that mean the French vineyards should be put out of business?

Maybe cars can be produced more efficiently in Korea than in Italy (which is surely the case). Does that mean the car factories in Italy should be demolished so that they can be made into vineyards and we should all drive a KIA and not a Ferrari?  

An economist would answer “yes.”

But an economist knows the cost of everything and the value of nothing. Destroying those French vineyards exacts a cultural toll on the French countryside and its people that is impossible to assign a Euro value to. Destroying those Italian car factories that build automotive works of art is almost like destroying Florence.

And what about the personal toll on the workers and their families?

What’s that you say? They should “learn programming?” But AI is putting programmers out of business too.

Economic efficiency is not the highest and best goal of a trade policy, especially in a rich culture. The loadstar of our trade policy – and our foreign policy – should be something more than that.