As we noted in the first posting on this subject, there are three badly flawed economic principles which many people hold as absolute, unquestioned dogmas handed down from . . . well, it’s not entirely clear where they come from. In any event, that’s not important when one’s own ego and self-interest are the only fixed points in the universe.
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| David Ricardo |
Two of these flawed principles are general, but applied specifically in the third, regarding tariffs, which is what we will be looking at today, although not in any depth. We are only interested in what a tariff really is, not in what some persons in authority evidently believe it to be. In any event, and whatever the cause(s) or source(s) of this mindset, the principles are:
· Oneself Contra Mundum. You are the center of the universe. Everything you do not own or control, and everyone who does not support you, is either a threat or an enemy. What you do own or control, and anyone who supports you, is a tool to be used and discarded once its, his, or her utility is over.
· The Labor or Input Theory of Value. Under the labor or input theory of value, derived from the thought of economist David Ricardo, a thing is worth what it took to produce it, not, as Adam Smith and other classical economists of his school believed, its utility to the consumer or buyer. In common with Marx and Keynes, many people accept Ricardo’s zero-sum approach, and — as revealed in today’s insistence on “deals” — firmly and irrevocably believe you gain only by taking advantage of others, not by engaging in mutually beneficial efforts in which everyone wins.
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| Adam Smith |
· Failure to Understand Tariffs. A tariff is a heavily regressive tax imposed by an importing country on its own taxpayers. It makes foreign goods more expensive and discourages international trade. Some people, however, seem to believe tariffs are paid by the exporting country, and appears to view monies collected by the government of the importing country from its own taxpayers as a return of what was presumably stolen (“ripped off”) by the exporting country from the importing country through bad deals.
There seems to be the fixed belief in certain quarters of government that a tariff is a tax imposed on imports (completely true) levied on the country from which goods are being imported (utterly false). The rationale for imposing a tariff is that a foreign good is cheaper for domestic consumers than the domestic product.
To protect domestic producers, the domestic government imposes a tax on a foreign good. This tax is not paid by the exporter, but by the importer, and increases the importer’s cost of doing business, driving up the price to the consumer.
The idea is to make the foreign good at least as expensive as the domestic product. This will encourage domestic consumers to buy the now-cheaper domestic good rather than the now-more expensive foreign good.
Obviously, a tariff is not paid by exporters in the foreign country, but by the consumers of the importing country . . . if it is paid at all! You see, the idea of a tariff is not to raise revenue, but to induce people to purchase cheap domestic goods rather than expensive foreign goods. If no foreign goods are imported, then no tariff is collected. Thus, if a tariff is successful, the government imposing the tariff does not collect a single cent in increased tax revenue.
No (and this appears to surprise many tariff advocates today), everything else being equal, tariffs actually decrease overall tax revenue! This is because importers have a choice. They either absorb the cost of the tariff, thereby lowering profits and decreasing taxable income, or they pass the cost along to the consumer, thereby selling less, lowering profits, and decreasing taxable income.
What about spurring new investment in domestic production from foreign investment and luring capital investment back into the country after the jobs were exported?
Don’t count on it. One of the principles first or second year accounting and finance students learn (or used to learn) was never, never, never to make a major decision, especially one involving massive capital investment and fundamental changes in strategy and direction, based on the tax consequences.
Why?
Because major decisions in business can cost millions, billions, even trillions of dollars and take years to bring to fruition. Tax policy — as has been demonstrated recently — can change overnight, or even in minutes. No business executive in his or her right mind is going to risk the survival of the company, even the entire economy (to say nothing of his or her career and that lovely golden parachute) on what amounts to a whim that can change without warning . . . especially for a tax that EVEN IF SUCCESSFUL will decrease profits and endanger the existence of the company, anyway!
No, it is much easier to get organized, gather political power, throw the rascals out, and put some other, more rational, compliant, or competent rascals into office.
As for attracting foreign investment . . . again, no way. Foreign investors put their money to work in other countries because it is more profitable than investing in their own countries. Tariffs, however, act to reduce profitability in the countries imposing the tariffs. Rather than luring foreign investment capital into a country, tariffs act to drive out domestic investment as they make investing in other countries far more attractive than investing in one’s own.
A tariff is not an incentive to invest in a country, but a disincentive. A foreign investor will not invest in Country A with tariffs and an ROI of 5% when an investment in Country B without tariffs has an ROI of 10% or even 5.5% Similarly, a domestic investor will not invest in his or her own country that has tariffs and an ROI of 5%, when by investing in Country B without tariffs he or she will realize 10%.
Of course, this discussion assumes those in power know how a tariff works and are susceptible to reason. That is not always the case, as we will see next week in the discussion of how some people’s misunderstanding of tariffs bears a striking resemblance to a bizarre economic theory that despite its fundamental irrationality, continues to be held by many people even today.
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