In yesterday’s posting, “The Two-Part Tariff Question,” we took a look at the question of whether President Trump actually has the power to impose a tariff. A tariff, after all, is a tax, and under the U.S. Constitution the taxing power is reserved to the people through their representatives in Congress. Obviously, we are not experts in Constitutional law, but it seems to us the issue ought to be raised.
|Not a new issue, nor restricted to the United States.|
Where we are expert, however (meaning we’re from out of town), is in what should be considered as a serious alternative to tariffs and trade wars. After all, war doesn’t seem to be the answer, no matter what, except as a last resort. A trade war with Japan in the 1930s contributed to the Japanese attack, while the so-called “War on Poverty” petered out in an expensive holding action.
Looking at a tariff as a tax — which it is — what is its purpose? We can answer that in general terms: raise revenue to run government. That is the sole purpose of any tax. It’s not “social engineering” or to adjust the amount of money in circulation as the Keynesians assume (that’s another whole can of worms), nor is it to ensure that private businesses can save enough out of profits to finance growth, or cut alcohol or tobacco consumption, or punish other countries for their trade policies, however desirable (or undesirable) any of those things may be.
|Not "social engineering" NO!|
No, the purpose of any tax is to fund government. Period. We happen to believe that the most just and efficient tax is a flat tax on income over whatever amount is needed to meet ordinary living expenses adequately, including not merely food, clothing, and shelter, but also education and healthcare.
We’ve discussed this before, so we won’t do more than say we think that amount is probably about $30,000 for a non-dependent and $20,000 for a dependent. That would mean that the “typical” family of four (two adults, two children) would not pay any tax on anything until aggregate family income exceeded $100,000. At that point, the same tax rate would apply on the amount over the exemption, whether it was $1, or $250 trillion.
And the tax rate? It should be set at whatever rate is needed to meet ALL expenses of government at all levels of government, local, state, or national, plus a reasonable amount to pay down existing debt. Any new debt, by the way, should come out of existing savings, not be used to create new money. All government borrowing should be short term to meet unexpected shortfalls in tax collections and should be retired as soon as possible.
|Yes, ultimately, all taxes are income taxes.|
And why an income tax? Because, if you stop to think about it, ALL taxes are “income taxes”! What else are you going to pay them with? A property tax does not pay itself, i.e., you don’t reduce the property you own unless you have no other recourse. No, you pay it out of the income generated by the property if it is productive property, or you get the money from other income. A property tax not an income tax? Don’t kid yourself.
And a tariff? Here is the bad news: foreign countries don’t pay tariffs. Nor do domestic businesses. You know who pays a tariff?
That’s right. When one country exports to another (actually, when businesses in one country sell to customers in another country), the price is “X.” If the government of the customers’ country imposes a 10% tariff, the price the importer pays is “1.1X” (X plus 10% of X). The 10% added on goes to the government of the country that imposed the tariff.
|We've actually been through all this before.|
The importer is not going to absorb that cost, however. No, he or she will raise the price charged to consumers, Y, by at least the amount of the tariff, and probably more to compensate him or her for the additional trouble and because the traffic will bear it, and to make up for the lost profit because as the price of something goes up, the demand for that something usually goes down.
The bottom line is that foreign countries don’t pay tariffs imposed by our government, WE do, in higher prices, while businesses get hit with lower demand, lower profits, and reduced sales.
Looking at it that way, yes, there is clearly an alternative to tariffs . . . but only if you agree that the sole purpose of taxation is to fund government. If you’re worried about other goals, however, is there a way to achieve them in a less harmful (or even beneficial) way?
We’ll look at that next week.