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