by Peter Schiff, Euro Pacific Capital:
Donald Trump’s critics have heaped scorn on his calls for protective tariffs to deal with America’s widening trade imbalance and the resulting loss of higher–paying blue color jobs. Some have accused him of trying to turn back the clock in pursuit of a cheap populist ploy and have said that he simply refuses to acknowledge that America is now an information and service economy for which large trade deficits are the new normal. But voters are sensing that The Donald is right to sound alarm bells, and that something radical needs to be done to revive manufacturing to make America great again. But his tariff solution is hardly the best medicine. To be honest, given the even worse solutions that are being offered by the left, Trump’s instincts may be preferable.
Ironically, in the late 19th and early 20th Centuries, the elimination of tariffs was a populist issue. A little more than a century later, the polls have reversed completely. Prior to the introduction of the income tax in 1913, tariffs were the Federal Government’s principal source of revenue. During the long and contentious campaign to enact the 16th Amendment (which allowed the government to tax incomes for the first time since the emergency Civil War-era 3% to 10% income tax), proponents argued that the passage of a “soak the rich” income tax would allow the government to repeal the tariffs and thereby transfer the tax burden from the working class, who paid the tariffs through higher prices on imports, to the ultra-wealthy, who were the sole target of the income tax as it was originally conceived, packaged and sold.
(The tax originally imposed rates from 1% to 7%, and only applied to fewer than 1% of Americans. The 99% supported its enactment solely because they believed they were getting something for nothing, in this case, government services paid for by the rich. In fact, in 1895, when the Supreme Court bravely declared the government’s first attempt to replace tariffs with an income tax unconstitutional, the justices were personally vilified as defenders of the rich.)
But once the Federal Government got its foot in the door, it rapidly raised the tax rates and expanded the base of taxpayers, ultimately subjecting the middle class to rates far higher than anything originally contemplated for the Rockefellers, Carnegies, or Vanderbilts. If this does not provide a sterling example to the legions of Democrats “Feeling the Bern” of how class warfare can backfire on the class waging the war, I don’t know what does. Ironically, no single tax has done more harm to the middle class than the income tax.
So while the populist movement of the early 20th Century demanded the removal of tariffs, the populist movement of today wants to bring them back. But Trump is not talking about replacing income taxes with tariffs. He simply wants to add tariffs to the existing tax structure (though he does want to lower the rates). This will only compound our problems and make our economy far less competitive. It will not bring back our jobs; it will only increase the tax burden on the American economy, destroying even more jobs. If we want to undo the deal we made with the devil over 100 years ago, we need to repeal the income tax as well.
If that substitution were on the table, I would argue that tariffs offer the lessor burden. Tariffs are a much simpler form of taxation that do not require armies of accountants, lawyers, and tax preparers, who are needed to comply. And while we are repealing the income tax, we should repeal most of the other federal taxes (particularly the payroll and estate taxes) and laws enacted since then as well. But that is not what is being discussed.
Our trade deficits do not result from bad deals but bad laws. Put simply, the amount of taxation and regulation that have been layered on our business owners and their employees have made it impossible for American firms to compete with foreign rivals. Contrary to the currently popular talking points, low wages are not the only means to establish successful trade balances. America became the dominant exporter in the world in the 19th and 20th centuries while our currency was strengthening, we were paying the highest wages, and our workers enjoyed the world’s highest living standards.
Germany is doing so today. Strong economies compete with quality, innovation, efficiency, and flexibility. Those capacities have been stifled by government policies that have nothing to do with trade agreements and have everything to do with domestic policies. We need to repeal those laws. Trade deficits are not the problem. They are the consequence of the problem. The problem is big government, financed largely by the income tax, which has made America uncompetitive.
But it is unlikely that tariffs alone, or even a broad-based national sales or value-added tax, could bring in all the revenue generated by the direct taxes we should eliminate. To survive on excise taxes, as the founding fathers envisioned, requires making the Federal Government a lot smaller.
But Trump is not promising to make government smaller. If anything, he is promising to make it even bigger. He has made no promises to cut government spending across the board, including popular “entitlements” like social security, which Trump has promised not to touch.
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