Tariffs used to have a wonderful place in the financing of the US government. Through the 1800s, tariffs were responsible for as much as 95 percent of the federal budget, gradually becoming 30 percent just after 1900 as excise and use taxes took up the majority.
Then came the dark days of February 1913 when the Sixteenth Amendment was ratified. Somehow, the states thought it was wise to officially grant the federal government the power to indiscriminately levy an income tax on the citizenry, taxing individuals on their labor and successes.
Taxing people rather than trade became the norm and tariffs became something of an afterthought. Now their utilization is minimal at best (tariffs now account for less than 1 percent of the federal budget) and their non-use is something our leaders have negotiated in our various trade pacts.
House Speaker Paul Ryan is trying to change that. Earlier this spring he floated the idea of the Border Adjustment Tax (BAT), which is, despite the fancy name, nothing more than a tariff. It would tax at a 20 percent clip any imported goods (finished products or work-in-process materials) sold or used in the USA.
While it might sound good at first blush to those who voted for Trump on his trade policies alone (“Make America Great Again”) as well as those who work in US factories, when you look at it in greater detail it’s not that swell of an idea under our current system.
The BAT would be just another tax thrown atop the insidious amount of taxes (income, sales, excise, property, etc.) that we already pay. Every product and service would become much more expensive because of it. That would hurt the domestic consumer and not the importing corporation.
As for those companies, the tariff would not, as House leaders say, incentivize businesses to onshore their offices and production facilities. There’s no way that businesses would come back to America in droves because their consumers would have to pay more because of a tax, especially when there’s no way that we’re instantly going to start a smartphone manufacturing industry in the states, produce consumer electronics, make toys, dig for resources like rare earth elements, or do anything else that disappeared overseas for the long haul.
Only the relatively small number of companies making competing products here in the states (like Confer Plastics for example) would benefit from the tariff on a competitive standpoint and, again, only under a cursory glance. I’ve written here before about China-made rip-offs that we deal with on a daily basis. The BAT would take away any advantage they now have over us. But, I also know that I and every one of my coworkers would be paying dramatically more for everything under the sun and all of our customers would have less money to spend on our consumer and leisure products because the tariff would cut into their discretionary income.
Those companies we compete against and those that make items that face no US competition chose overseas venues because they wanted to retreat from a variety of embedded cost structures that make American production and back office more expensive, be it labor costs, regulatory issues, or the most impactful item of them all – the corporate tax rate of 35 percent, the highest in the developed world.
If that tax rate were to drop to 15 percent as President Trump has been championing, then you would see real substantive on-shoring that no tariff could ever accomplish. That’s because the tax rate directly affects those corporations (and substantially at that) rather than their consumers.
If this were the good ol’ days before the Sixteenth Amendment, I would argue for strong tariffs, because, frankly, it’s morally bankrupt to tax people on their efforts and hours worked as the income taxes do.
But, the income tax is never going way. It’s here to stay and it’s surely not getting any smaller. Don’t be surprised, too, if in the coming years, income taxes like FICA increase dramatically as resources get strained. Couple that with the modern era of a highly-integrated global economy, and we’re looking at what could be huge burdens on every household in America were the BAT to pass.
Believe me, I’d like to see my foreign competition destroyed, but not if American families’ pocketbooks suffer collateral damage that could easily trigger another recession.
From the 12 June 2017 Greater Niagara Newspapers