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.
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.