Tariffs Do Not Work

A Rejigger of The Way the US Collects Taxes Will

In President Trump’s first term, he used the bull whip of tariffs to threaten trading partners and try to punish them.  He declared that they worked.  They didn’t.  American consumers and businesses were punished instead.

Tariffs cause domestic industries to stay or become less competitive.  Often, domestic producers will raise prices in sympatico with the tariff rate.  If the foreign producer still has demand after the tariff is applied because their product is that much better, demand doesn’t wane.  They just pass along the cost of the tariff to the consumer.

It acts like an increase in taxes to you.

In some cases, people have pointed to the growth of foreign corporations building manufacturing sites in the United States as being an outgrowth of the tariff.  The issue is that in many cases, those plants were already built before Trump’s tariff binge. In other cases, the company already had significant demand in the US and it made sense to shorten supply chains even absent the tariff.  With the tariff, the foreign manufacturer could charge more for their US-produced products than they otherwise would have.

In his current campaign, Trump has said he wants to impose a minimum of a 10% tariff on many imported products.  It remains to be seen how high tariffs could go on the products that don’t receive the 10% minimum.  Trump is right about many things but he is wrong on tariffs. That would be a 10% tax on you.

Biden also has used tariffs and they didn’t work for him either.

What happened the last time Trump engaged in tariffs?  He started trade wars.  The same will happen again. Tariffs can “save” jobs in America at a cost of $800,000 per job.  Any objective cost-benefit analysis results in tariffs being a terrible idea for employees and consumers.

The other punishing tax that no one examines is the income and payroll tax system the US uses.  The current tax regime punishes any US company that wants to engage in exports while rewarding foreign producers that import goods to America.  US goods can cost as much as 15% to 20% more due to the way they are taxed domestically.  Tariffs can’t fix that negative externality. 

There is a simple solution.  It’s counterintuitive.

First, repeal all tariffs and duties charged on foreign goods that are imported to the US.  That makes all goods imported to the US cheaper and will help the inflation rate.  In return, many countries will repeal the tariffs and duties they charge to US companies making those products more competitive.

The next thing to do is scrap the US antiquated income tax system.  Get rid of the IRS.  Get rid of all federal taxes and income tax filing.  Our tax system is very inefficient.  We spend millions of dollars figuring out the best way to avoid taxes.  Economists from all kinds of non-government institutions argue about the best way to adjust the current tax system to make it “fairer”.  It’s all whittling into the wind and every tax change devolves into lobbied political arguments that put power in the hands of regulators and legislators and take it away from citizens.

The current US system is regressive and hurts the poorest people the most.  Consumption taxes are not regressive.  When you spend, you pay.  Everyone also gets relief from all payroll and income taxes under this system, which benefits the struggling lower middle class and poor the most.

Economist John Cochrane has written and advocated for the most efficient way to tax people and businesses.  It is through a consumption tax.  He argues that we would have done this in 1917 if we had the technology to track consumption.  We didn’t.  This is easily done today.

What happens to US goods with a consumption tax? The prices of US exports will drop and make them more competitive.  Goods that are imported will only be forced to compete on the same level as US-produced goods, charging the same consumption tax. 

That will lower prices for American consumers since all extra and unseen taxes go away.  It also makes the market more competitive and competitive markets lower prices. 

The World Trade Organization (WTO) is an international organization that advocates for free international trade.  The WTO evaluates taxes and regulations based on whether they conform to WTO principles. WTO rules require that taxes and regulations affecting international trade should not be applied in a manner that discriminates against foreign products or provides an unfair advantage to domestic products.

The WTO has encouraged the repeal of tariffs and duties and embraces the idea of consumption taxes over income taxes. The United States is the only member of the WTO that doesn’t utilize consumption taxes.

Everyone wins if the US ends the IRS and income tax system in favor of a consumption tax. We know if a U.S. tariff is applied to imports, our trading partners, will reciprocate with a 10% tariff on U.S. products imported into their country.  This 10% tariff will be added to the selling price of the product and paid by American consumers when they purchase the product or a product containing the tariff product.

The U.S. exporter is already exporting goods whose prices are inflated by 15%-25% because of the cost of the income/payroll tax system.  Now the price of his product is increased by both the foreign VAT taxes and an additional 10% tariff tacked on in the receiving country.

Contrast the current dismal situation with life under a simple consumption tax. 

·       Goods will be between 15%-25% cheaper because the cost of the income/payroll tax system is no longer included in their prices.

·       Goods will be 15%-25% less expensive in the U.S. and 12%-25% less expensive when exported because the US consumption tax only applies to new retail sales and retail services in the U.S.

·       Imports will be subject to the same consumption tax as domestic products.  This will eliminate a huge advantage foreign producers have over U.S. producers selling products in the U.S.

·       Getting rid of all taxes and establishing one consumption tax will lead to more production and jobs in the U.S.

There is no need for tariffs. There is no need for a trade war paid for by the U.S. consumer.