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 isĀ  flat tariffs for all, save for imports from the poorest nations.

Main Site Upgraded

Have a look at the main site. I’ve replaced the gradient buttons down the left sidebar with dropdown menus across the top. (For new visitors who wonder what the site used to look like, just add ?style=classic to the end of the url, like this.

An improvement?

In related news, I got a recent email asking if this site is still active. The answer is “yes, but so what?” All the content on the main site is meant to be evergreen. Yes, some of the older chapters are not as well written as I would like, but the info is still apropos.

As for new content, I have finally finished my chapters on liberty vs. Christianity (most of the “blue” article series), so I am now updating and adding elsewhere. Currently, I am in the process of rewriting the material currently found in The Balance of Wealth. Then, who knows?

Maybe you can influence me. If you hunt around on the main site, you can find some stubs — article series with just one chapter. I could expand these next. Other possibilities:

  • A liberty series on Democracy that Lasts. Given the amount of violence that follows failed democratic governments, this could be useful.
  • A synergy series on Tax Ideas. In the U.S. we have close to 20 trillion dollars of debt to pay off and the Baby Boomers are retiring. For those of us who want more liberty without a collapse of civilization, determining an optimal tax policy is rather important. (There are also environmental and family values implications, thus the placement under synergy.)
  • A synergy series on Better Retirement Plans. Social Security and Medicare dominate federal spending. To have any hope of small government, we need alternatives. This has egalitarian, environmental and family values implications as well, thus the Synergy category.

So, what would ye like to see next? And what do you think of the main site upgrade? Answer below, please.


The Eye of the Needle

Ironically, many very conservative Christians, Christians who despise the modern welfare system and our current President, are leery of personally practicing capitalism in a big way. They do in fact take the warnings towards the rich found in the New Testament seriously.

Well, if you aren’t going to have a socialist state, then somebody will end up being rich, and if those somebodies aren’t Christians, then non-Christians will control most of the institutions of the nation — unless middle class Christians do much more effective pooling of their resources than they are doing today.

And so I have continued my meditation on Christianity vs. Capitalism by asking, “Why is it harder for a camel [rope?] to pass through the eye of a needle than for a rich man to enter the Kingdom?” One possibility is that there are a rather large number of restrictions on Christian capitalists.

Follow the link to read the entire meditation.

Updating the Blog

I just installed the Headway Theme on the blog. As such I’m like a four year old kid who has been given a big box of crayons and markers. I can change box sizes, borders, colors, fonts, etc. on a page by page basis using a visual editor. And so I do so, and the results look like the artwork of the aforementioned four year old.

I’ll calm down and tidy things up in a few weeks, hopefully — after I play with all the permutations. Please bear with me.

In the meantime check out the new header. Pretentious, no? But relevant. The diverse reading list portrayed has affected my political thinking considerably. For example:

  • Quantum mechanics has taught me the futility of attempting to achieve absolute zero temperature, or absolute zero initiation of force. While we are certainly far from the achievable (or optimal) libertarian ideal, the achievable is far from that demanded by Lew Rockwell and his grumpy band of Praxeologists.
  • Paul Samuelson’s Economics describes the Keynesian paradigm clearly, with useful graphics. Critics of Keynes (such as myself) should at least try to understand him, or at least Keynesian Economics as it is understood by the mainstream.
  • My hobby of electronics and speaker building (re. The Art of Electronics) has taught me about feedback and stable and unstable filter functions. Adam Smith described negative feedback with his famous invisible hand metaphor. Karl Marx pointed out some unpleasant positive feedback loops in capitalism. I, alas, have come to the conclusion that we cannot blame all the instability of capitalism on the Federal Reserve. If we are going to get rid of the Fed, we need to address some of the positive feedback loops and unstable filters in our financial system.
  • The Dilbert Principle because freedom lovers need to be reminded that there is plenty of waste, fraud and abuse in the private sector. (And whenever we have a “too big to fail” situation, the private sector becomes as unaccountable for its failures as the government sector.)
  • Modern Chess Openings. Chess teaches the importance of getting the most out of each move. You need to consider attack, defense and long term strategic implications of each move to play well.

I leave it to the reader and/or future posts to figure out the relevance of some of the other books I put in the picture.

Are the Rich Over Taxed?

The Obama Administration annoys me. It legislates horrendously complicated healthcare legislation. It applies Keynesian pseudoscience to attempt to restart the economy, driving up our deficit ever higher.

Conservative talk show hosts annoy me even more. They pontificate over how bad Obama is about the deficit even though most of the deficit was inherited from the Bush Administration. Moreover, back when Clinton achieved a budget surplus (cash basis, not actuarial basis!) they whined about being overtaxed. Finally, they and the Republicans in Congress are fighting for tax cuts for the rich.

I am not so sympathetic to the plight of the rich. Yes, they pay a lot of taxes. But they have tax loopholes you can drive a truck through. They get protection of their wealth from the government, including restraints on competition. They get a subsidized return on passive investments because of the monstrous federal budget deficit. And don’t get me started about retroactive extensions of copyrights, and bailouts for the financial industry.

The rich are getting a fine return on the 15% tax they pay.

That’s right. 15%. That’s the long term capital gains tax. This is lower than the marginal tax rate for median income wage earners. Wage earners pay more than that in Social Security and Medicare taxes (14.2% effectively). A 10% income tax rate puts Joe Size Pack in a higher tax bracket than Bill Gates.

OK, the rich also indirectly pay corporate income tax on the stocks they hold. So does Grandma, on whetever she hold in her retirement account. This doesn’t strike me as progressive.

Here is my proposal:

  1. Fold FICA and Medicare taxes into the income tax to make a flat tax rate of 25% up to a half million dollars a year or so.
  2. Have a somewhat higher (but not outrageous) tax rate for higher than a half million per year. Maybe 35%.
  3. Treat capital gains, dividend income, wages, etc. equally.
  4. Replace all deductions and exemptions (other than charity) with a fixed amount of free money.
  5. Instead of an estate tax, treat gifts and inheritances as ordinary income…maybe.

The last provision is a bit harsh on farmers and small business owners. Clobbering people with taxes when a loved one dies is rather mean-spirited.

So here is a possible alternative: set the tax basis on all non-cash gifts and inheritances at zero. You pay when you cash out, if ever.