The Case For Tariffs-Only

LewRockwell.com ^ | 14 Oct 2000 | Gary North

[AreaMan]

The Case For Tariffs-Only?

by Gary North

For over two centuries, one of the most useful litmus tests of economic rationalism has been the tariff test. Does a would-be economist support tariffs as the way to national wealth? If he does, he is probably a crank.

Probably is not absolutely.

Personally, I think tariffs are excellent as stand-alone revenue-generating devices. Why? Let me count the ways.

First, tariffs are sales taxes imposed on imported goods. The key political fact about sales taxes is this: they are flat taxes. They cannot be used to extract more wealth from one taxpayer than another. This is what state-loving, envy-succumbing economists and politicians call a regressive tax. It sounds terrible; it in fact is quite wonderful. A regressive tax is a tax that is imposed equally on every taxpayer. Regression means that every proponent of the tax will pay the same percentage as the next guy. It keeps voters a bit more honest.

Second, tariffs are almost impossible to impose on services. A cross-border service is hard to trace. The main way that governments track them today is through corporate income tax returns. Imported services are deductible from corporate income taxes. But I am recommending a world with no income taxes. Anyone in such a world who reports a service purchased abroad is saying, "Come and get me!" to the tax collector. The experts say that we live in a service economy. I say: "Then let’s impose taxes on goods." As few as possible.

Third, tariffs are imposed on a narrow class of goods:

imports. If we do not count services purchased from off-shore, imports account for well under 15% of the U.S. economy – probably under 10%. In a world of tariffs-only, most of the economy would get off Scot-free.

Fourth, tariffs are collected from commercial importers, not private citizens. In a world of tariffs, there would be no direct contact between me and a tax collector. Overnight, it would be 1912 again – America’s golden age: before the income tax and after indoor plumbing.

Fifth, tariffs on imported information would be almost impossible to collect. The Internet, coupled with encryption, would seal the doom for tariffs on imported information. We live in an information economy. This means that tariffs would apply to less and less of the productivity of most Americans.

Sixth, the U.S. is the richest free trade zone on earth. Geographically, China and Russia are larger, but not economically. Americans would prosper more than any other people in a tariff-only tax system.

Seventh, the U.S. Constitution prohibits internal tariffs: "No Tax or Duty shall be laid on Articles exported from any State" (Article I, Section 9, Paragraph 5). This means that national politicians would not be able to compensate for the loss of revenue by imposing internal tariffs. It would take a Constitutional amendment to legalize them.

Eighth, tariffs are not imposed equally on all goods. They are discriminatory. Some goods escape. This means greater freedom from taxes if we choose our imports well.

Ninth, because tariffs are never imposed equally on all imported goods, they would become a matter of intense political warfare. In a world where only tariffs generated revenues, this would keep politicians busy in allocating favors within a shrinking percentage of the economy. I call this the sandbox effect. Cats, toddlers, and politicians belong in sandboxes.

Tenth, hiking tariffs enough to increase revenues significantly would lead to consumer substitutions. Consumers would start looking for domestically produced goods. Unlike most taxes, tariffs are a tax that you can legally avoid paying, at some marginally higher price. Better to fill the coffers of some protected industry than to fill the coffers of the U.S. Treasury. I say, "Better a robber baron than a robber Congress." Who knows? Maybe my daughter will marry his son. There’s hope. Not with Congress.

Conclusion I believe in free trade, and the thing I’d like to trade most is the income tax for tariffs.

October 14, 2000

Gary North is the author of a ten-volume series, An Economic Commentary on the Bible. The latest volume is Sacrifice and Dominion: An Economic Commentary on Acts. The series can be downloaded free of charge at www.freebooks.com.

[AreaMan]

What do you all think about this?

[JohnGalt]

100% agreement.

[WOSG]

I could quibble about some of things said wrt political impact. IMHO, like any good sales tax, it should NOT be preferential, it should be a FLAT TAX. The main problem with tariffs today is that they are used as preferential and "protectionist" taxes. This is social engineering applied to trade, akin to our subsidies for fuel efficient cars in the income tax code. It distorts decision-making.

But the key point is the revenue impact.

Imports are about 20% of our economy. A rational tax on imports, no greater than say 20% or so, would generate about 4% of our GNP. This would be double our current "take" from tariffs, which is about 2% of GNP.
Any more and the ripple effect on trade could be a bit dangerous, ie, substitution effects that would make overall economy much less efficient could kick in. So you need low rates to make it a revenue generator and not an economy punisher - this holds for the income tax and import taxes equally (it's why the Reagan tax rate cut from 70% to 50% *gained* revenue in the 1980s, and why every time we cut capital gains taxes we also gain revenues overall; some even speculate that the total tax take is higher with a cap gains tax cut of zero, simply due to payroll taxes being higher from the higher economic activity. The upshot is: The rates must be low!)

So, with rates of 10%-20%, tariffs is a reasonable way to collect revenue. That is enough to run things if you have a Govt that spends at 4% of GDP.
America was like that prior to WWI, Federal Government spending was about 3% of GDP. But of course, the Federal
spends alot more than that - its close to 20% of GNP.

So this is suitable as a replacement to the income tax only if we drastically cut Federal spending - by about 7% of GNP to be exact! We would need to practically abolish our $60 billion in education, our $300+ billion in welfare spending, the $200 billion in miscelleneous other domestic discretionary spending (farm support, R&D, energy subsidies, foreign aid, etc). not to mention medicare and social security, and defense, which runs around $400 billion EACH.

So, the real roadblock to better tax system that doesnt take alot of our money is GOVERNMENT SPENDING.

I would add this: If we imposed higher tariff rates, we could cut the corporate tax rate by 1/3 to under 20% and the payroll taxes could be slashed by 1% of GNP. This could be done in a revenue neutral fashion. It also would shift taxation from PRODUCTION TO CONSUMPTION, an important enabler of better economic behavior.

[WOSG]

Ninth, because tariffs are never imposed equally on all imported goods, they would become a matter of intense political warfare. In a world where only tariffs generated revenues, this would keep politicians busy in allocating favors within a shrinking percentage of the economy. I call this the sandbox effect. Cats, toddlers, and politicians belong in sandboxes.

This is one point that IMHO is a negative. Prefential treatment causes CORRUPTION as the powers-that-be dole out favors in exchange for political/monetary support. This is bad in the income tax code, the corporate tax code, and is bad in the import tax code. Better to create a flat rate for all goods and leave it at that.

[waterstraat]

If we imposed higher tariff rates, we could cut the corporate tax rate by 1/3 to under 20% and the payroll taxes could be slashed by 1% of GNP. This could be done in a revenue neutral fashion. It also would shift taxation from PRODUCTION TO CONSUMPTION

Why not let foreign companies pay tarriffs to finance our governemnt, and really reduce/eliminate personal income taxes(like we used to do)?

[WOSG]

"Why not let foreign companies pay tarriffs to finance our governemnt, and really reduce/eliminate personal income taxes(like we used to do)?"

As I was trying to explain, the income tax give the Federal govt about 9% of GNP, and tariffs can only effectively raise about 3-4% of GNP.

Now I am all for making up the difference by cutting Govt spending by about $600 billion, but that is what it would take... if we want to use the 1901 tax system, we'll need 1901 spending levels (no New Deal or Great Society type spending).

[Willie Green]

I think Gary North is off target with both #8 and #0.
Other than the corrupting influence of special interests in Congress (a problem with ANY method of taxation), there is no reason why a uniform, flat-rate revenue tariff couldn't be applied across-the-board on ALL imported goods. Such a revenue tariff would raise significant funding for the Treasury, enabling reduction of other forms of domestic taxation, and promote economic development of our own internal resources.

And as James Madison asserted in enactment of our nation's very first revenue law, such a uniform tariff is also consistent with the principles of TRUE "free trade". (Not these complex and convoluted "agreements" that are hypocritically labeled "free trade" by their disingenuous advocates).

I might add, a true revenue tariff is essentially self-capping. At very low tax-rates, revenues increase when the tariff rate is increased. But if the rate is increased too high, then revenues begin to decline as trade also declines. Therefor, a true revenue tariff DOES NOT cut-off trade. Trade is necessary to continue receiving revenue. The goal should be to maximize the amount of tariff revenue received into the Treasury in order to minimize the amount necessary from other types of taxation.

[Willie Green]

Go put your bifocals on, WG.
I know you proof-read and even spell-checked your post,
but you missed the part that said "Gary North is off target with both #8 and #0."
That "#0" should actually be a "#9".

[bc2]

for later

[waterstraat]

Now I am all for making up the difference by cutting Govt spending by about $600 billion, but that is what it would take... if we want to use the 1901 tax system, we'll need 1901 spending levels (no New Deal or Great Society type spending).

Ok, that sounds fine, when can we do it?

[sixmil]

Heresy!