No. of Recommendations: 25
Mungofitch:
the already very large rise in the weighted average US tariff rate will undoubtedly reduce both US imports AND exports, making the US poorer.
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Meanwhile elsewhere you have pointed out that a tariff is just a sales tax on imports, or did you say imports and exports? It is obvious it is a sales tax on imports, would be interested in how it is a sales tax on exports if is a claim I remembered correctly.
My question is: if tariffs are a sales tax, are they any worse or better than other sales taxes on other things? That is, if we want to raise $100billion in taxes, do we expect a worse result if we do it with tariffs than if we do it with a more universally applied sales tax?
Sure, a tariff is a sales tax on imports. It's not a tax on exports, but the end result is the same. Though it is not at all obvious, a set of import tariffs is economically exactly the same as a tax on exports in terms of its effect on wealth, trade, resource allocation, prices and so forth. This is a result of the Lerner Symmetry Theorem which was published a very long time ago and has held up well. The theorem does not hold up 100% in an economy that is dominated by tourism or foreign-owned assets or fixed exchange rates, but that doesn't describe the US. Most importantly, import tariffs or export tariffs will each reduce both imports AND exports, and make the country poorer as a result. Trade creates wealth.
Are tariffs (or equivalently, export taxes) better or worse than simple sales taxes? Worse, for a few reasons. First, they reduce trade and wealth, as mentioned above. Everybody (not just the exporter) is better off if each country does relatively more of what it's relatively good at, and trades for the other things, even a country that isn't the very best at anything. It's also a problem because tariffs are usually extra-distorting because they are virtually never the same rate for all goods from all countries, the version that would be most defensible. A follow-on problem from that is that tariffs, because they are so varied, are commonly used for corruption from special interest groups or unscrupulous persons local or remote. The are an gilt-edged invitation to state capture.
The two main goals for any tax raising policy are to get the most tax revenue for the least amount of damage to the economy (the most feathers from the goose with the least hissing), and with the fewest economic distortions. So far, history seems to show that a single-rate tax on ALL goods and services, produced locally or elsewhere, is closest to that. Often accompanied by some sort of offsetting but relatively constant credit for the poorest, as current spending makes up a larger part of whatever income they have.
The best argument for tariffs (or equivalently export taxes) is in a small economy which is overwhelmingly dependent on exports of just one or just a few goods, which leads to concentration risk. The very distortions that make everyone poorer can occasionally be a good thing if they make everyone safer by avoiding crises. It's better to make $98 every single year than to make $100 for many years then $0 for five years. Efficiency is a valid goal most of the time, but in some circumstances it is the enemy of resilience. I think the US has a sufficiently diversified economy that this isn't a concern.
Jim
