Republicans have gone from being corporatists to entertaining every hair-brained populist economic scheme that panders to the “working class.” The greatest fear of the modern Republican is being called an “elitist.”
However, the first thing to remember about former President Donald Trump’s proposal to replace the federal income tax with tariffs is that it’s never going to happen. The chances of Congress overturning the tax code are nil.
The second thing to remember is the idea is completely bonkers, and we shouldn’t encourage madness.
Years ago, before most Republicans recalibrated their economic views, fans of Trump would assure me that the president merely wanted to leverage tariffs to compel other nations to enter fair deals with the United States.
Implicit in this framing was an admission that punitive tariffs are a tax on Americans, undermine innovation, spike prices, create needless trade wars, and destroy good jobs. Perhaps tariffs could be used to pressure a nation into a better deal, or maybe it was needed to protect an industry in the national interest. However, they would be used sparingly.
Nowadays, though, Trump says there will be a 10% across-the-board tariff, or maybe 20 or 50, or even 60%. Who knows? Sometimes, he says we should eliminate income tax altogether in favor of tariffs. The word “tariff,” he says, is “more beautiful than ‘love,’” and promises that the “U.S. can become rich with the proper use of tariffs.” One of our greatest former presidents, Trump tells us, was William McKinley.
Nineteenth Century mercantilism is all the rage.
Tariff champions tend to frame their arguments in nationalistic terms. Not long ago, for example, the Republican National Committee spokeswoman Anna Kelly said, “[T]he notion that tariffs are a tax on U.S. consumers is a lie pushed by outsourcers and the Chinese Communist Party.”
Now, I realize that some of the dead-eyed partisan zombies in the GOP will just repeat whatever Trump says, but this is idiocy. For one thing, tariffs are literally a tax, as they are paid by U.S. corporations and consumers. Secondly, the difference between the price of goods today and the price added by a tariff is called “tax incidence” or “the let’s screw consumers surcharge.” Sooner or later, consumers pay every tax.
Indeed, Kelly and her partisan allies are the only ones arguing that we embrace Chinese policies.
It’s easy to promise voters that you’re going to save an antiquated “manufacturing” sector or promise to “bring back” Third World jobs. It’s easier to blame foreigners for stealing a job than it is a machine. As the infamous commie apparatchik Thomas Sowell once explained, “Protectionists always seem to have the advantage. They seem to have the simpler, more easily understandable argument.”
The fact is that Trump’s first-term economic success was predicated largely on Reaganesque deregulation, tax cuts, and old-fashioned gridlock, not barriers to trade because it works.
However, Trump is right about one thing: Trade isn’t fair. Americans should pray it never gets fair.
I’m sure the billions of people in developing nations who work tedious menial labor jobs probably don’t find it “fair” that Americans use the savings found in trade to help build unprecedented wealth. They probably don’t think it’s very fair that some people sit atop vast amounts of fossil fuels and farmland and live in freedom while others sit on arid or barren land, lorded over by corrupt oligarchs.
The idea that Malaysia, Vietnam, India, or those nefarious Swedes and Danes are taking advantage of us is silly. Trade isn’t a zero-sum proposition.
Reciprocal tariffs, which virtually everyone claims to support, allow countries with far lower living standards and technological capabilities to dictate how we tax American consumers. They want high tariffs because they’re unable to compete.
Of course, getting into trade wars with wealthy nations who have a comparative advantage is also self-destructive.
Trump likes to whine about the trade deficit, which soared under his presidency because the country was doing relatively well. However, the U.S. runs a trade deficit because it is infinitely wealthier and larger and can spend more on foreign-made goods and services than others can spend on our goods and services. An average person in China, which many Americans wrongly believe is our close economic rival, has a $12,600 GDP per capita, while Americans enjoy $81,695 per capita GDP. A part of that wealth is built on the ability to import affordable goods, parts, and energy. Because many of the imports help American manufacturers make things.
If we ever have a trade surplus, something has gone wrong. The last time we did was in 1975, in the midst of debilitating stagflation.
Though high across-the-board tariffs would definitely feel like stagflation.
Most arguments for high tariffs are based on emotional appeals, so its defenders are often compelled to engage in revisionist history.
Under Trump’s hero McKinley, for instance, the federal budget was somewhere around 2.5% of the GDP. It now stands at over 20% of GDP. Imports make up 15.59% of GDP (which might be surprising to the “we don’t make anything anymore!” crowd.) A tax on foreign goods would need to be more than double the cost to even begin replacing income taxes.
Since we’re running $1.7 trillion yearly deficits, and no one has the guts to deal with the debt bomb and reform Social Security or Medicare, the price will only go up. His tariff idea would never work.
“We took down our tariffs,” Howard Lutnick, a member of the Trump transition team, told the crowd at the former president’s Madison Square Garden rally. “We taxed Americans so we could export the power of our economy and save the rest of the world.”
I mean, yes, we saved the world. Even after the Smoot Hawley tariffs of 1930 plunged the nation into the Great Depression. By the time tariffs were eased in the U.S., we experienced the greatest wealth creation in the history of mankind. By every quantifiable economic measure, life had improved dramatically for most Americans, including, if not especially, for the working class.
No, we don’t live in a utopia. Brave virtue signalers will tell you they’d be happy to pay a bit more to save some antiquated manufacturing job in the Rust Belt. However, that’s not what they’re doing. Tariffs are regressive, disproportionately landing on consumers who rely on affordable goods. Trade allows average working-class Americans to buy all kinds of things they could not otherwise afford because of trade. Forcing working-class Americans to make things foreigners or machines can make cheaper only undermines the creation of better jobs for them and their children.
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Now, perhaps a national consumption tax would work better than an income tax. I’m sympathetic to the idea. However, tariffs are a tax only on foreign goods — though the lack of competition would ensure that the cost of American-made goods would also rise. What happens, though, if a utopian populist’s dream of everything being “made in America” comes to fruition? Who is going to buy imported goods that are marked up 200%, and when they don’t, who is going to pay Trump’s national tax?
Now, obviously, I realize few people care about economic freedom anymore. It’s elitist and stultified, etc. However, a tariff punishes a consumer simply for buying a product they prefer over one the state demands they buy. Or, as author Albert Jay Nock once pointed out, it is “the exploitation of the domestic consumer by a process indistinguishable from sheer robbery.”
This article was originally published at www.washingtonexaminer.com
