The Free Market Case for Revenue Tariffs

“Free Trade” isn’t.

For those who haven’t noticed: We live in a hugely expensive welfare state. Domestically produced goods are taxed from multiple angles. We have corporate income taxes at the state and federal level for corporate profits, and then tax the profits again when the owners sell shares or collect dividends. Wages are taxed via Medicare taxes, Social Security taxes, the federal income tax, and state income taxes.

Imports without tariffs aren’t free trade; they are subsidized trade.

Once upon a time our leaders knew this, and enacted low tariffs anyway. Much of the world was digging out from the rubble of World War II, and we feared a Communist takeover of the Free World if we didn’t lend a hand. Our low tariffs were an intentional subsidy to preserve democratic capitalism.

Today, the biggest beneficiary of this policy is nominally Communist China.

The People know there is something wrong, that our heartland is being economically gutted. They have been trying to get the Establishment’s attention for decades. Eventually they go so fed up that they elected a blatantly dishonest, foul-mouthed adulterer who has all the charm and manners of a pro wrestling heel to be our President.

It didn’t begin with Trump or the recently resurgent Racist Right. This has been fermenting for a while from both ends of the political spectrum. Remember H. Ross Perot? He might have become President if he hadn’t dropped out of the race for a bit, and then picked a running mate who was laughably unprepared. Remember the WTO protests? Those were Leftists.

The Establishments — both D and R — are losing out to those ignorant of textbook economics. Because the basic textbooks are dangerously wrong.

The Simple Textbook Case Against Tariffs

With the right premises the textbook argument against tariffs is logically impeccable.

Let us consider a simple case: an automobile tariff. Let’s consider a parallel universe where Toyota’s are still imported from Japan, Volkswagons from Germany, etc. Slap a 25% tariff on foreign made automobiles and what happens?

GM stockholders get a windfall. Consumer advocates complain about expensive unreliable gas guzzlers. Conservatives complain about uppity labor unions. Economists lament the resulting inefficiency: those extra workers building Oldsmobiles could be working on higher value goods such as solar panels, video games, or viral websites featuring cute kitten pictures.

Meanwhile, the government gets little revenue from the tax. The tax is easy to dodge: just buy from the Big Three.

In this scenario the tariff is indeed a net bad. It costs consumers while doing little for the Treasury. Score one for the Establishment.

But this scenario is artificial!

Here in the real world domestically produced goods are taxed too. The Big Three pay federal corporate income taxes — now only 21%. The factories in Michigan are subject to 6% state corporate income tax. Shareholders pay income tax on dividends — somewhere between 10% and 37%, which is a total profit tax between 29% and 50%. The workers pay between 10% and 37% marginal income tax rates, depending on their pay rates and deductions. For non executives, the entirety of their wages are subject to payroll and Medicare taxes (15.3% of nominal wages). Michigan auto workers pay a flat 4.25% state income tax on their wages.

That 25% tariff is starting to look a bit low by comparison.

(Astute readers will note that corporations don’t actually pay the full corporate income tax. In part this is because of overly generous depreciation schedules. The other reason is that today multinational corporations can move their profits to tax havens through accounting trickery. If tariffs are set at least as high as the corporate income tax rate, this cheat goes away. Liberals take note!)

A Different simple Scenario

Some readers might be troubled by my comparing tariffs to income and payroll taxes. After all, corporate income taxes are paid by corporations, payroll taxes by a combination of employers and employees, etc.

This is where reading the economic textbooks pays off. An income tax is a tax on the transactions that produce the income. A tariff is a tax on the transaction between purchaser and foreign producer. Exactly who takes the tax hit depends on “elasticity.” (Look it up.)

The picture would be clearer if we used consumption taxes instead of income taxes. Suppose we replaced the income and payroll taxes with a 30% across-the-board national sales tax, as the Fair Tax people advocate. (They cheat by advertising a 23% number. If you have a 30% sales tax, the tax is 23% of the total cost.) That 30% tax would fall on domestically produced consumer goods and Chinese imports equally.

A Fair Tax coupled with complete elimination of tariffs is the same as a 30% across-the-board tariff rate on consumer goods. In 2016, the Libertarian candidate was more protectionist than Donald Trump! (Gary Johnson endorsed the Fair Tax.)

I have a question for Free Traders: would the Fair Tax be unfair mercantilism? If we had such a tax should imports be exempt?

On Producer Externalities

One could answer: “Yes, domestic goods should be taxed more since producers consume government services.” Also, domestic factories are ugly, often smelly, require government infrastructure and protection, and require government regulators to protect us from dangerous chemicals. When we move production to China, we move away the pollution to somewhere out of sight and smelling range.

But domestic production produces positive local externalities as well. That Oldsmobile factory can turn welfare recipients into productive citizens. It can make manual laborers into middle class Americans who can afford to pay for their own health insurance.

I’d rather pay for an overpriced Oldsmobile than pay taxes for welfare and Medicare for All.

Comparative Advantage Nonsense

The advocates of Free Trade point out that when we replace domestic goods with imports we free up labor for higher value items. Just look how well that worked in Allentown, Youngstown, Detroit, Kannapolis…

Sometimes Creative Destruction isn’t all that creative.

Here’s a wakeup call to academia: not everyone is college material. Not everyone is suited to be a symbol manipulator. For millennia, the bulk of humankind has been hunters, fighters, and farmers. Symbol manipulation was for shamans and weirdos. We are short on hunting grounds, the farms have been merged, and job opportunities in the military are limited.

By subsidized outsourcing of manual production, we are freeing up locals to be gang members and spaced out druggies — along with the police and prison guards who take care of them.

I’d rather pay for an overpriced Oldsmobile than for an archipelago of prisons and security forces to protect me from the unemployable who aren’t in prison yet.

The Double Taxation Problem

Note that I am not calling for full on mercantilism, protection of special industries, or anti dumping laws. I am calling for flat, across-the-board, tariffs that are comparable to our domestic taxes. This is a neutral position, if we treat foreign nations as black boxes.

(And as someone who prefers to limit meddling in foreign lands, I think treating foreign economic policies as black boxes is a Good Idea.)

Astute economists will note a problem with my proposal: if nations use a mix of income taxes and comparable tariffs, international trade goods get double taxed. That Japanese Toyota gets taxed by Japanese taxes before it comes here to be taxed with my proposed tariff.

And so the wonks keep calling for a more optimal system: zero tariffs by everyone.

These days, I disagree with the wonks. Two reasons:

1. Free Trade Agreements are Unstable

Suppose two countries (A and B) agree to zero out import duties and only tax domestic labor and profits. This is fair and momentarily efficient.

Then Country A starts running a trade surplus with B for some reason (it matters not what). Country A gets a tax windfall. If a conservative government is running Country A, then producers in Country A get a tax cut — which encourages businesses to move their profit generating activities from Country B to Country A.

Meanwhile Country B loses tax revenue. They can either do without some government services, or raise taxes. The latter could drive away producers reducing the tax base further. (So could the former if the government services are actually useful for producers.)

We have an unpleasant positive feedback effect.

The impulse to cheat becomes enormous. Country B could resort to non tariff barriers. They could increase net revenues in the short run by subsidizing some of the remaining producers (while undermining the rule of law). Or they could switch from income to consumption taxes, and have tariffs under a different name.

To stop such cheating you need an international body with clout: neutral bureaucrats with the power to review a very wide range of domestic tax and regulatory policies. You need to disable democracy.

None of this is hypothetical. It has all happened in the European Union.

I’d rather suffer a bit of economic inefficiency than turn over government to globe trotting bureaucrats.

2. Redundancy is Robust

When the Big Three got fat and sloppy, consumers were rescued by quality auto imports from Japan. International trade was very useful.

But those high quality, high gas mileage, Japanese autos existed in part because Japan had a mercantilist economy which fostered the local auto industry. Had the Big Three been allowed in before the Japanese perfected their own brands, history might have been less pleasant.

Perfect Competition is only efficient in the short run. Perfect Competition creates a Winner-Take-All dynamic that leads towards monopoly and oligopoly.

Imperfect Competition preserves economic diversity. Having economic speed bumps around the nations of the world creates a home court advantage in each nation, nurturing businesses that aren’t currently world class. This makes the world more diverse and interesting. And as long as the speed bumps aren’t too high, we get to sample the diversity in the form of premium luxury brands, exotica, and extreme niche products.

(And where Comparative Advantage is truly compelling, the speed bumps are just another source of tax revenue.)

Tariffs vs. the Fair Tax

If everyone switched from income to consumption taxes, we could have stable trade without international bodies, and the speed bumps would be minimal.

But we would also have a tax system that is regressive. The rich can better afford to save. Wealthy families could accumulate wealth over generations without paying tax.This could be a problem.

Perhaps a combination of wealth and consumption taxes could work.

But I have one other objection: an across-the-board consumption tax would be fair. I don’t want to be completely fair. I actually want to subsidize imports from the truly needy nations of the world.

Sub Saharan Africa is currently experiencing the demographic explosion that just about every other region has experienced when making the transition to the modern world. If they don’t complete their Industrial Revolution at a breakneck speed, humanitarian and environmental catastrophes will happen soon.

I want to actively subsidize trade with these developing nations. So my preference is  flat tariffs for all, save for imports from the poorest nations.

Can Republicans Stomach the Idea of Free Money?

Since I left the Libertarian Party a decade ago, I have reverted to a more pragmatic and utilitarian vision of liberty, more Milton Friedman and less Murray Rothbard. Way back when I was in high school I was impressed with Friedman’s Negative Income Tax. Today, I want to simplify the idea and have a flat tax for The 99% coupled with free money for everyone.

But one of my favorite political pundits, P.J. O’Rourke, says NO. He says that a universal basic income is one of this month’s two worst political ideas. He points out that if his younger self had gotten a thousand dollar a month stipend, he would have remained an insufferable useless hippie.

He has a point. Some people will manage to live unproductive lives on a universal basic income, writing bad poetry, chanting Marxist slogans, crafting bad art, and sporting bad hair.

But people are doing this now, with much bigger government grants. We call them college professors, and fine artists.

P.J. makes a major mistake in applying the UBI idea to his younger self: $1000/month today would be far less than a thousand a month was back when he was an insufferable hippie. We had a rather serious bout of inflation in between then and now. To live as a happy hippie on a kilobuck/month today would require serious frugality, or even a bit of farming and other productive, if non-monetary, work. But under a UBI, unlike welfare, you could supplement your free government check with some legal monetary work without losing your benefits. Yes, you would pay taxes on that work, but the rate would be no more than what doctors and lawyers pay today — and they still show up for work from time to time.

Yes, this money is “unearned.” So are inheritances. I have a question for the Republicans in the audience: should inheritances be banned? I can say from direct experience that some who receive major inheritances do live lives of unproductive socialistic yammering. (I knew a few trustafarians back in my Asheville days.) Should we ban all inheritance to make such people get a job?

 

Draft Preface for My New Book

The U.S. political system is broken. The Democrats and Republicans have stopped talking to each other. Our legislatures lurch from one party rule by Democrats to one party rule by Republicans. We could really use a new political party, one capable of winning enough seats in Congress so that no party has a majority. Then our legislators would have to talk to each other instead of at each other.

Congress has a horrible approval rating overall, yet individual Congresshumans get re-elected as a matter of course. Our incumbents need some real competition in November to keep them honest and connected to The People. A viable third party — or several — would be very helpful.

The pendulum swings between red tape and environmental neglect, high crime and overflowing prisons, budget busting new programs and budget busting tax cuts for the rich, sloth-inducing welfare programs and mean-spirited benefit cuts. Who can we vote for to get a balanced budget? Who will give us environmental protection using sound economic principles? Who will simplify the tax code without more giveaways to the super rich than they even want? We need a new political party.

So why don’t we have a viable third party in this country? Why do new parties regularly fail to get off the ground? Why are we limited to zombie third parties that are too radical to win elections?

The answer: The U.S. political system is rigged against third parties. The Two Party System is built into the way we count votes.

But here is the good news: I have found a loophole. Two loopholes, actually. It took two decades to find them; two decades of exasperating argument, arduous effort, expensive experimentation, and humbling defeat to find these loopholes.

You can find these loopholes simply by reading this book, an effort thousands of dollars and hours cheaper. (Maybe I should charge more…) Exploit the loopholes within and you have a chance at creating a viable third party.

A chance.

Politics is a competitive game. You still need to play it well in order to win some races. The rest of this book contains a large collection of wisdom to help you do just that. I played the third party game for a quarter century, and got to pick the brains of many an experienced activist, including quite a few national chairmen. I have some lessons for you that you can learn the hard way, or learn from a book…

A Quick Political Resume

My claim is audacious. Perhaps some credentials are in order.

I played the third party game for a quarter century from many positions: solo activist to party meeting regular, obedient volunteer to local leader, callow radical to heretical reformer. I have planted signs, dropped literature, knocked on doors, worked booths, chaired a campaign, chaired a county party, and launched a PAC. I have done experiments, written polling software, and designed outreach literature. I have served on several national committees, and towards the end led a reform effort that caused a rewrite of the national platform. (Look up “Portland Plank Massacre of 2006.”) And along the way I had the privilege of discussing ideas and strategies with a wide variety of experienced activists.

All this was within the Libertarian Party, but don’t let that stop you if you aren’t a libertarian. This book is meant to be a general purpose guide. I want to see some third party Representatives in Congress even if they are members of a party I disagree with. (That said, many of the examples in this book do come from my Libertarian Party experiences.)

I also have a bigger hope. Since I left the Libertarian Party a decade ago, my own views have drifted considerably from true libertarianism. Though I still love liberty, I am game for certain active environmental and egalitarian measures. I am hoping some of you reading this book will succeed in creating a party I can enthusiastically join.

What’s Inside

This book is divided into seven parts, with multiple chapters in each:

  1. Political Science and Third Parties. Herein lies the Secret Sauce, the two loopholes that allow third party success despite some political science theorems that indicate otherwise. Heed the information here and you have a chance at success. Ignore the constraints, and failure is almost guaranteed — unless you start with a charismatic billionaire celebrity candidate.
  2. Branding and Positioning. Put on a well-tailored suit, have a three martini lunch, and light up some cigarettes; it’s time to go into Madison Avenue mode. Here we look at several possible market positionings that take advantage of the loopholes found in Part 1. What kind of people are likely to be an early adopter for your party? How do you reach them economically? How do you craft a brand that appeals to both your early adopters and future swing voters? Many possible party names are revealed. Feel free to commandeer one if you are serious. Or use the examples to inspire your own brand.
  3. A Strategic Framework for Third Parties. To truly succeed, you need be to between ten to a hundred times better than existing third parties. I’ll show you how this is theoretically reasonable using a bottleneck analysis. And we’ll explore ways to measure which bottleneck is the tightest.
  4. Lessons Learned in the Libertarian Party. High level strategy is all well and good, but the basic nuts and bolts of lower level strategy and tactics are still extremely important. Some things you can readily learn by trial and error. Other lessons require millions of dollars of experimentation. Fortunately for you, the Libertarian Party already spent the millions of dollars. I’ll give you a large collection of useful tips I picked up working with them. (The LP has a wealth of the nuts and bolts wisdom within. The party struggles because its base refuses to heed the lessons of Part 1 as a matter of principle.)
  5. Persuasion, Mindset, and Political Platforms. A quick sampling of persuasion “magic”, and suggestions on where it works and where you need to actually resort to rational argument. This is followed by tips on the art of crafting a viable platform and general outreach messages.
  6. Intent vs. Effect. Are you a progressive who likes to subsidize the rich? A conservative who likes breaking up families and increasing crime? A free market capitalist who looks forward to hyperinflation or another great depression? A libertarian who looks forward to war and dictatorship? An environmentalist who likes SUVs? If so, you can skip this part. Otherwise, read carefully to avoid mistakes common among political thinkers from all over the map. And you can find some creative solutions waiting for a new party to make them happen.
  7. Starting from Scratch. Some parting thoughts on how to get off the ground when you are starting with just a few people and extremely limited resources.

Promises and Caveats

If you are truly serious about starting a new political party, this guide can save you a great deal of time, money, sweat, and heartbreak.

  • The principles and examples in Part 1 and Part 2 can make the difference between creating yet another zombie political party, and creating a party that has a future of winning partisan elections.
  • The strategic insights and case studies in Parts 3-5 can save your party thousands of dollars in the early stages, and millions of dollars later on.
  • Should you actually succeed, the ideas in Part 6 can save the country trillions of dollars in counterproductive policies.

So how can you get all this at such a low, low price??

Answer: I cut some corners. This is a self-published book. Editing is limited.

  • This book does not conform to Egbert Quillfellow’s Anal Retentive Guide to Academic Style.
  • Capitalization conventions are archaic and inconsistent. Microsoft Word does not approve.
  • Citations are often imprecise or to secondary sources.
  • Some of the ideas are merely introduced. Further reading is required.
  • There is humor within. If you recently time traveled here from the Victorian Era, have a degree in Modern Indignation Studies, or devoutly believe that this country is secretly run by a coalition of Jewish bankers and lizard men, I will offend you.
  • There are at least three significant errors within. It is left as an exercise for the reader to find them.

Acknowledgments

The principles within follow readily for the philosophically trained thinker who starts with the correct a priori assumptions…NOT!!

True wisdom comes from a mix of reason and lots of expensive Trial and Error. The dedicated activists and donors within the Libertarian Party put in the millions of dollars and many thousands of hours trying out ideas in the field. Even where I criticize their current strategies, they deserve credit: it takes trying out ideas — while doing enough other things right — to find out what doesn’t work. Many thanks to Libertarians across the country with whom I have had the chance to argue strategy in person and online over the years. This includes ye radicals who disapprove of this book and my actions leading up to it. (Though I have left the Libertarian fold, I’d love to see ye elect 50 Libertarians to the House of Representatives. But are you willing to make the necessary adjustments?)

Special thanks to the Libertarian Party affiliates in Northern Virginia and Buncombe County North, Carolina. Thanks for the real world experience and for making my experiments possible. And thanks for the good times.

As for the ideas in Part 6, thanks need to go out to a very wide array of people. They are the result of testing ideas in recreational debate with people all over the political map: liberals, socialists, Republicans, gun activists, environmentalists, hippies, Democrats, Libertarians, and more. Ye forced me to reconsider ideas and hit the books many times — though sometimes a few years after certain discussions…

And finally, thanks to my family for patience while I wrote this book.

A New Series on Criminal Justice

Oops! I forgot to announce it on this What’s New blog: I have started a new series on the main site on criminal justice.

Besides the first page of the series, I now have one on the economics of crime, and one on criminal psychology; i.e., I go a bit beyond economics in modeling criminal behavior.

The goal is to make people aware of how we can reduce crime while restoring lost civil liberties at the same time.