What I wonder about and haven't found good information on is the differential economic impact of tarrifs versus other taxes, especially as actually implemented. I've read quite a bit of research showing income taxes as implemented have very high negative externalities. Are these higher or lower than an equivalent tarrif?
As a general rule, more broadly based taxes impose lower costs per dollar collected. Consumer and producer surplus are areas, so roughly proportional to the square of the tax, change in quantity times change in price. Revenue is roughly proportional to the tax (somewhat less because of reduced quantity due to the tax). So if you collect the revenue from ten taxes the excess burden is about 1/10th what it would be if you collect it from one.
I'm not sure about the case of a general tariff, 10% on everything, but tariffs are usually on specific goods.
David did mention that. I thought once of how to make tariffs match; you look at last month's tariffs paid by American companies to each foreign country, set next month's rate for their imports as a percentage, and keep adjusting, month by month.
But that doesn't account for all the non-tariff obstacles David mentioned, like child labor, slave labor, environmental laws, subsidies, and so on. Those are entirely political.
What annoys me possibly most about this reciprocal tariff war is that the import tariffs collected ought to go towards paying off the tariffs American companies had to pay. They're supposed to balance, right? Instead they go right into the government coffers, more money to spend spend spend, when one of the common libertarian mantas is CUT SPENDING.
I do appreciate the semi-righteousness of reciprocal tariffs. I just don't think they are practical and only serve to enrich government and justify more nosiness and meddling.
Trump seems to have managed to do what no one in Indian policy making could do. Reduce tariffs on imported EV cars from 100% to 15%. This means Indians could now import EVs at more reasonable prices. Of course Indian bureaucracy can always redefine a car is and change the names of taxes to still make it impossible to import.
Indian bureaucracy perhaps saw this coming long ago. To ban the Chinese imports of say toys they created a standards body and demanded that any manufacturer who wants to export toys to India must undergo certification process (A bit like FDA/ FCC etc.). Then simply refused to certify any Chinese company or made the process to complex. This was a ban without the word tariff. Americans have been doing this for a long time with different products rejecting imports by claiming they are of "poor quality".
When Indian tobacco company introduced India's handrolled cigars called "bidi" in USA, they became popular. American tobacco lobby lobbied with Congress and FDA to roll out new standards that the Bidis could not adjust to but did not impact current players and got them banned. [1]
My bet is that most nations would adjust to this new reality where they wont impose tariffs but might come up with even more complex ways of restricting trade.
People aren't as mobile as you suggest, getting into a country typically requires approval and you can't choose where you're born or who your parents are.
I'm not sure it would attract a lot of good people, every service sector employee would need to pay $15,000 (using current size of government USA), just to be a citizen. Also, practically speaking, what happens when someone can't pay?
I think the system you're taking about might attract people try to be a tax resident there while not actually living there.
One thing I've never been convinced of is the idea that a so called trade deficit is a bad thing. If my household had a money printer at home and we used the money we printed to trade for goods and services from other households, we'd be pretty happy with that situation. So why would a country that is essentially in the same situation be so unhappy about it?
If foreigners just piled up US currency on a shelf it would be, as you say, good. But they use the currency to buy US assets that remain in the US — TBills, shares of stock, land — because currency pays no nominal interest and negative real interest. Whether that is good or bad depends on whether a capital inflow is good or bad, which depends what the capital is used for.
Perhaps one might consider that in the comparative-advantage framework: Americans are good at creating companies and the Chinese at creating goods, so by trading those, both parties end up better off.
I think that you are, like most Trump critics, being unfair to him by taking some of his words literally, rather than the entire body of what he says seriously.
To be fair, you ARE, especially here, indeed somewhat more open-minded about the possibility that he is trying to “do good” with his use of tariffs than most of the critics.
And I *do* grant that on this topic there is indeed *some* evidence of mercantilist and other bad economics beliefs coming from him.
But if you look at the vast majority of what he has DONE with tariffs, both his first term and this time around so far, it is to use them as leverage to negotiate a better deal. And since in fact he is not completely economically stupid, he does indeed understand that lower trade barriers make everyone better off. Just because he does not fixate on this point, and just because he talks of other things, and certainly just because he talks belligerently as part of his negotiating leverage, does *not* mean that he doesn’t understand this.
And unlike part of *your* proposed idea here, his threats with tariffs are not solely to have reduced tariffs percentages by the other side, but also to reduce or eliminate other non-tariff trade barriers (e.g. with China). And, of course, to get other non-trade concessions.
So I applaud your somewhat novel explication of “automated” tariff reduction, and give you credit for crediting Trump / his administration with this.
I just wish you would be more charitable with your interpretations on other action + pronouncements as well, rather than joining the “take Trump literally but not seriously” crowd.
P.S. Re: Vance, by contrast, based on reading one of the links you posted a few months back and listening to him on Rogan, I agree that he mostly *understands* the economics, but he has made it quite clear he does NOT value the efficient economics as highly as most of we classical liberals / libertarians do, or even as much as Trump himself quite clearly does.
I can't tell whether Trump understands the economics and pretends not to for tactical reasons or doesn't understand. The one problem with your reading of Vance is that I have not seen any argument from him to show that the policies he favors benefit people he cares about at the cost of people he doesn't, making them net positive for him even though net negative in efficiency. It's a logical possibility but to endorse those policies he needs a reason to believe it's actually true. His rhetoric seems to be based on the conventional misunderstanding of trade economics, either to support Trump's rhetoric or to convince people who share that misunderstanding.
Retaliatory tariffs are new to you, and you imagine they promote justice? How are their consequences different from any other tariff in harms imposed? What is the moral basis for government harming its own subjects?
More obviously than any other tax, tariffs are punitive in addition to generating revenue. If retaliatory tariffs are fine, then why not the national security pretext? Soon enough there are enough rationales to satisfy any politician.
Now that you’ve found one case, see if you can generalize it. What OTHER things might the leadership of a country do that benefit the politicians but hurt the people of that country?
You can go further and ask, “are there strategies that work where politicians in different countries cooperate with each other and defect against their people?”
There are two different categories. One is cases where doing something bad is politically profitable because most voters mistakenly think it is good, such as a minimum wage. The more interesting is one like the tariff where supporters correctly believe it is good for them, other people may know it is bad for them but have inadequate incentive to block it.
An example for your second case would be a negotiation where the people want it to succeed, the politicians want it to fail, and each country's politicians can blame the failure on the others.
Brexit was fairly close to being an example of the 2nd, where at least the people of the U.K. (narrowly) wanted it to succeed but most of the political class clearly did not. Nor the EU political class, of course.
I got into a discussion recently about the detrimental impacts of tariffs vs other forms of taxation.
I was arguing (admittedly from relative ignorance) that when comparing two taxation policies I would be much more interested the total tax burden than the mechanism of taxation.
I'm quite confident I'm correct in the extreme case, but I don't really have a good way of quantifying how much extra property tax could be justified to avoid any tarrifs.
I'd be quite curious on your thoughts, how far wrong could I go if I always chose the system which minimized the total tax burden?
There is a somewhat popular idea in these circle that all taxes should be replaced by a land-value tax, because such a tax would have no negative effects on economic activity. It turns out that this is not exactly correct, but I think it's close enough to being correct to be worth considering. Personally, I prefer the "everyone pays $X/year" system of taxation.
As far as I can see, all consumption and income taxes require an awful lot of auditing to detect cheaters. Show all your receipts, undercover agents to make sure all purchases generate receipts, no yard sales or trading dental work for deck work, etc etc etc.
The only taxes I can think of which do not require huge intrusive bureaucracies are head taxes and property taxes. Head taxes are flat rate, and the public simply will not stand for everyone, rich and poor, paying the exact same absolute value in tax. Any attempt to adjust it for wealth or income brings back that intrusive bureaucracy.
That leaves property tax, with the clear advantage that no one needs to know who owns property, only that the tax has been paid. If it hasn't, the government knows where the property is.
As for the value of the property tax, make it self-assessed, with the proviso that anyone selling the property for more than the self-assessed value owes back taxes, and if the buyer reports his self-assessed value as higher than the old seller's value, that means the seller lied; make him pay the back taxes, and make him pay the difference to the buyer. It's not perfect enforcement, it's delayed, and it encourages snitches, but it doesn't require any government snoops or bureaucracy. And the land value is roughly proportional to wealth, meaning the public is much more likely to accept it as fair.
Yes, it's a wealth tax. But it's based on a real purchase price, not some what-if estimate, and when you get right down to it, if the tax is the same amount, whether income, consumption, or property, it is the same amount. Either all are wealth taxes or none are.
An income tax doesn't require much auditing if the income is wages to employees of large hierarchical firms which need to keep track for internal purposes. One possible explanation of the increased size of governments over the past 150 years is the increased fraction of people who work for such firms.
Isn't the economy in general moving away from those kinds of jobs? I know people who do construction and such for cash. A garage I frequented always preferred cash, especially if I didn't want a receipt. Oil changes and some repairs were cheaper if I bought the oil and filters and parts. I never asked why and they never had to lie to me :-)
I have read articles about yard sales, and part of the justification for limiting them and monitoring flea markets was catching thieves selling stolen goods, in addition to collecting sales taxes and noting who earned a lot of money from them. I was never sure how much they collected or if it was just an excuse for more bureaucrats.
> As for the value of the property tax, make it self-assessed, with the proviso that anyone selling the property for more than the self-assessed value owes back taxes
That requires auditing to make sure the buyer isn't paying additional money to the seller under the table.
Last time I went through this, it seemed like the buyer would have to pay more under the table than he'd save on the tax. A bright moon and warm night woke me early, so if I mangle this, that's my excuse.
The back taxes and snitch fine are double the tax rate times the accumulated assessment discrepancy. The seller loses double what the buyer gains by reporting the true price, but the buyer pays more taxes each year. But snitching should work both ways, and if the seller snitches, the snitch fine cancels the back taxes and the buyer not only pays all that but his yearly taxes go up. The longer since the last sale, the higher the accumulated discrepancy.
There's probably some nice tidy formula, but my instinct is that the lure of those snitch fines outweighs any savings, and the fear of being snitched on makes trusting each other problematical. It sounds like the Prisoners' Dilemma game.
The scheme should let the seller re-assess and pay the last year's back taxes at sale time without penalty, both for fairness and to encourage belated honesty. It might raise eyebrows at the tax office to double a 10-year old self-assessment at sale time, but the true value can't be known until sold, and it reduces the incentives to snitch and blackmail.
Your property tax can be gamed by never selling (so the working class would pay taxes while the landed gentry wouldn't), and also, one would need to be able to calculate how the valuation changed over the years to calculate the back taxes. A less gamable alternative is to consider the valuation a legally binding offer to sell to anybody who offers that amount, or to create a public auctioning system where the highest bid would set the valuation.
Basically, you can refuse offers to buy at the self-assessed value by raising your self-assessed value until the would-be buyer gives up, then pay the back taxes. But how do you know the offer is real without actually accepting it? It ends in bluffs. Offers need to have some real skin in the game, such as a bond for the full offer, a penalty for withdrawn offers, etc, and I despise the idea of strangers forcing a raised self-assessment and higher taxes by threat of forced sale just as much as forced sales.
I think the real problem with the system is mentioned in those comments, which is that it is impossible to derive the value of the unimproved land from a bid on the improved land, so we end up with nearly the same assessment problem that we would have if government inspectors were to value the land.
I should have been clearer. The comment I paraphrased was an enforcement scheme for self-assessment in general, not just Georgist taxes. I frankly do not understand the Georgist land tax. How can you differentiate bare land value from improvements? What determines your neighboring property bare assessments which determine your tax? Every Georgist forum I've found and all the answers I've gotten seem so focused on excruciating detail that I conclude they don't know what they are talking about or defending, at least not consistently, and that they have lost sight of the forest for looking at the weeds. Maybe George's schemes would have worked in an agricultural society, I don't know, and don't really care. If Georgist fanatics can't explain it, then I really don't care.
And as clever as that enforcement scheme is, I still despise this forced sales or reappraisal by random strangers with little skin in the game.
1. I'd never thought about landed gentry, but that's a two way straight jacket: most inheritances are squandered sooner or later, and when that mansion does finally get sold at auction for bankruptcy, the seller will be even bankrupter from the back taxes going back 100 years or more. The children who don't inherit and have to buy their own fair market house are going to be pissed and make for uncomfortable family gatherings.
2. I despise those legally binding forced sale schemes, whether at the self-assessed value or at auction. They allow strangers to force people to move out for pure greed. Casino wants to expand its parking lot? Force the widow to sell and move out of the house she's lived in for 50 years. I utterly despise such schemes.
3. Yes, it would be "proper" to adjust self-assessments periodically based on surrounding comparables. But how? Unless they are all cookie cutter ticky tacky tract homes, there's so much variability that it seems to be begging for corruption. Maybe some formula is possible, such as having the "true" self-assessment per house and a tax self-assessment averaged over each block or a house and all its neighbors.
But even with such a group assessment, a property tax still has far less intrusive bureaucracy than any consumption or income tax.
Everyone paying $X per year seems obsurly unfair to me. If you think of the government as providing certain service, property right protection, protection from abroad, money supply, judicial system etc., then having a fixed dollar cost would mean the wealthy would receive substantially more services while paying the same amount.
If you mean X percent then I could see the argument.
No, I mean $X/year. I think a sovereign that offered that system would attract a lot of good people, while keeping bad people out. As for fairness, I think there are two perspectives one may reasonable have:
(1) No tax system is fair, as for any system, one can easily find some unfairness in it.
(2) All tax systems (except North Korea and such) are fair, as people voluntarily choose which one to live under.
A tariff of one million percent would hardly raise any revenue, but be rather disruptive to trade and the economy. Especially, it would be more disruptive than a revenue maximising tariff.
Yes, and (not remembering the exact figures) imports are *roughly* equivalent to income tax collected, meaning you'd need a 100% tariff to match income taxes, which would cut imports dramatically and revenue too. (Quibblers, I say *roughly*. The figure floating around in my memory was somewhere in the range 50% to 150%.)
Something less extreme like that isn't obviously worse than the existing system. (100% vs 1,000,000%). If the only possible source of tax was tarrifs the government would inevitably shrink, which is a good thing in my book.
Getting rid of all taxation in the US economy would have lots of benefits. It's not obvious to me that the reduction in imports would be more detrimental than the benefits within.
Especially for the United States which is diverse enough to produce almost everything it imports.
Might work out pretty well in the end, shrinking tarrif income starves the government, small government leads to little resources to enforce the tarrifs and we all live happily ever after.
If you can rub the bottle and do that, why not just zero out the budget and install a minarchy; or better yet, get rid of government altogether and install angelic honesty in all people to live happily ever after together? Skip the middle steps.
I've had second, happier, thoughts about Trump's tariff policies, too. My instinctual response was "madman policy", though not necessarily irrational. But the latest news suggest something more predictable.
Let us remember that the overall tariff cutting process came to an end ca. 1995 with the Uruguay Round. [It did leave the US holding a bit of a stick with EU agricultural protection, but leave that aside.] So the bargain "I'll cut if you cut", carried out 1947 - 1995, stopped working, I'm supposing because distributional concerns could not be adequately dealt with by trade policy instruments alone.
So now Trump comes along and threatens, credibly, the madman [:-)] I'll raise unless you lower, in which case I will lower. May well work.
I would add the technicality that as we can safely assume that the US is not facing fixed world prices, US tariffs will hurt the rest of the world. If they're not too high, they make the US better off. The rest of the world can retaliate, and make itself better off than without retaliation, or lower tariffs and make itself even better off than without retaliation if the US lowers tariffs.
I safely assume that a uniform US tariff depresses world prices for US imports. So one can say that foreigners pay part of tariff revenue. This is called the "terms-of-trade" argument for protection. Works only if the tariff is not "too high", and only if there is no retaliation. This "optimal tariff" is less than the revenue maximizing tariff.
True. If the supply of export goods is significantly inelastic you get some gain at the cost of your trading partners, although elasticity is usually greater in the long run than in the short so the gain may not last and the gain may be less than the efficiency loss. I usually describe this as using a tariff or export tax to cartelize consumption or production, convert multiple consumers or producers into a monopsony or monopoly. I discussed it in an earlier and more detailed post on the economics of tariffs.
That justifies "If they're not too high, they could make the US better off" but not that they will make the US better off. Do you have an argument to show that the ratio (efficiency cost to the US)/(monosony gain to the US) goes to zero as the size of the tariff goes to zero? Without that I don't see how you can defend your claim.
And, obviously, the claim is false if the supply is perfectly elastic.
Yes, one can describe "the optimal tariff" as exploiting market power one has as a collective of firms in one nation.
Mercy, I have to to dig deep: For any given non infinite elasticity of foreign supply, a small tariff will reduce foreign price, and a part of tariff revenue will be paid by the foreigner. The source of the gain is that the import price is an average price, and one wants to equate the marginal cost of imports with the marginal benefit of imports. And marginal cost here is above average cost. Keep raising the tariff, and things get better until the deadweight loss of the tariff equals the revenue gain from the foreigner. Raise after that, revenue goes up further, but welfare declines. Then revenue stops going up, too.
So, the size of the net gain does not go to zero as the tariff goes to zero. The net gain goes to zero when the optimal tariff level is reached.
Strangely, or not so strangely, it works just like the minimum wage argument in the presence of monopsony. Actually, it's the same argument.
But, summarizing, implementing the "optimal tariff" argument makes sense only if there's not retaliation, or, if as now, perhaps and hopefully, it's a strategy to reduce existing tariffs.
I think you are right. If the monopsonist buys dx less, his consumer surplus loss goes as the square of dx, his gain from the lower price goes as dx, so as dx goes to zero the ratio goes to zero. It's the same argument I use to justify partial equilibrium analysis. Not true, of course, if there is any fixed cost to the collection of a tariff.
He's smarter only in using them as weapons. But I recall him having two contradictory ideas: he wants to lower the trade deficit and raise foreign investments.
It's a heckuva a warrior who doesn't even understand his own weapons.
You are guilty here of the near-cardinal sin of taking Trump literally but not seriously.
In this case, an extremely plausible, very compatible answer is that he wants to reduce trade deficits (in goods and services - I’m being pedantic as you surely understand this term means exactly this) and increase foreign *direct* investment - e.g. in manufacturing facilities here.
In this quite likely scenario, he cares not about China investing in U.S. bonds.
I’m not saying that he is correct in terms of having the optimal economic goals here, but these two are not contradictory and not clearly economically bad.
I agree that it is logically possible for the trade deficit to decline, foreign investment in manufacturing to increase, while total foreign investment decreases because foreigners are buying fewer US bonds, but I don't see what policies Trump would use to get that effect. That's aside from whether the resulting rise in the interest rate in US debt would or would not be a problem for him.
Hmmm… seems to me the policies and tactics he is using are designed for exactly that combination.
Bully pulpit, plus actual bullying threats of companies and countries to reduce trade deficits and have more foreign manufacturing here.
I’m not endorsing the policy/ends, nor any bullying threats in this regard (I DO support such tactics when the purpose is to reduce other countries’ barriers to trade), to be clear.
In my opinion people who write about Trump, but do not know him, do not have his ear, and are not present when he speaks with his counter parts in China and Mexico and Canada privately are not worth the time it takes to read their comments. People who have not earned billions of dollars, have not negotiated successfully anything, and have not hired and fired thousands of people --- but presume because they have a PhD in economics that they know all about trade negotiations --- are either arrogant, dimly lit, or both. Chalk board economics and accounting identities aren't worth the time of day on the stage Trump plays on.
Here's a better reply, I hope. Sorry that my earlier response was less than it might have been. I think it's easy to disparage Trump; maybe he understands his weapons better than lots of folks think.
We can think of scenarios where the trade deficit could narrow while foreign investment increases. Perhaps Trump believes for good reason that he can negotiate some such.
Increased U.S. Exports: If U.S. exports rise significantly—perhaps due to a weaker dollar, higher global demand, or increased productivity—the trade deficit could shrink. Simultaneously, foreign investors might find U.S. assets more attractive due to growth prospects, higher interest rates, or policy changes that encourage investment.
Shift Toward Domestic Production: If the U.S. reduces its dependence on imports (e.g., through reshoring manufacturing) while foreign capital continues to flow into U.S. businesses, real estate, or bonds, the trade deficit could narrow as domestic production meets more demand.
Surging Productivity and Innovation: If foreign investors anticipate robust U.S. economic growth due to technological innovation or productivity gains, they may increase investments in American enterprises even as the trade deficit decreases.
Government Borrowing and Foreign Investment in Treasuries: Foreign investment could rise if the U.S. government issues more debt, attracting international investors due to higher yields or perceived safety. If this occurs alongside increased exports or reduced imports, the trade deficit could narrow while foreign investment still climbs.
These scenarios are possible. The historical pattern shows that typically larger foreign capital inflows tend to coincide with larger trade deficits because the capital inflows strengthen the dollar, making imports cheaper and exports more expensive. But these are not typical times.
"We can think of scenarios where the trade deficit could narrow while foreign investment increases."
I can't.
Where do the foreign investors get the dollars to invest if the US is not importing enough more than it exports to provide them? Number of dollars sold equals number of dollars bought is an accounting identity. The exchange rate is the price on that market and moves to the level at which quantity of dollars demanded (to buy US goods and take them out of the country or to buy US assets and leave them in the country) equals the quantity supplied (to buy foreign goods or assets). So the trade deficit equals the net capital inflow.
Trade deficits can decrease, and foreign *direct* investment in manufacturing facilities in the U.S. can increase.
As a populist more concerned with “good jobs” and not that much with the overall well-being of consumers, Trump is not particularly interested in the fact that Chinese/foreign investment in U.S. bonds would decrease in this scenario, putting pressure on interest rates.
Without suggesting his desired policy here is optimal, it’s not obviously inherently bad, and given how much the Fed has manipulated long term bond rates with its easing, QE, ZIRP etc., it’s not even clearly obvious that he is wrong to mostly ignore the reduced demand for U.S. bonds.
I’m thinking along the lines of (1) forward contracts and (2) the implications of the New Monetary Economics, and (3) the Black-Scholes option pricing model, and (4) the fact that the number of dollars is evidently not a number, but a variable, and no one seems to have a fabulous model for the variable we so easily insert into models as M.
Is it true that the number of dollars sold equals the number of dollars bought? Doesn’t seem to be true, necessarily, even though it is an accounting identity, given fixed definitions. I’ve always told my students that trade is a two-way street, otherwise, someone is giving a gift. Maybe the gift is a promise?
You buy something from China, the seller uses the dollars you pay for it to buy a promise from you to give him that many dollars when he visits the US. That claim against you is a capital asset.
For your argument it goes the other direction — He trades dollars for Yuan to buy export goods from you. You don't use the Yuan to buy Chinese goods goods because you want to keep down the trade deficit so you pile the Yuan under your bed. You now have a Chinese capital asset. If you have any sense you convert the Yuan, which don't pay interest, to Chinese bonds or stock that do, but it is still a capital asset if you don't.
What is the sequence of transactions that gives a net capital inflow to the US from Chin larger than the US trade deficit with China?
Your bragging does not impress me any more than your insults. My experience in life tells me that people who brag and insult, instead of answer questions, don't have answers but do have an inflated opinion of themselves.
What I wonder about and haven't found good information on is the differential economic impact of tarrifs versus other taxes, especially as actually implemented. I've read quite a bit of research showing income taxes as implemented have very high negative externalities. Are these higher or lower than an equivalent tarrif?
As a general rule, more broadly based taxes impose lower costs per dollar collected. Consumer and producer surplus are areas, so roughly proportional to the square of the tax, change in quantity times change in price. Revenue is roughly proportional to the tax (somewhat less because of reduced quantity due to the tax). So if you collect the revenue from ten taxes the excess burden is about 1/10th what it would be if you collect it from one.
I'm not sure about the case of a general tariff, 10% on everything, but tariffs are usually on specific goods.
These might be less bad than other tariffs. But they are still way worse than (unilateral) free trade.
Especially since they aren't as automatic as you make it sound: there's lots of judgment calls involved in whether certain policies count as tariffs.
David did mention that. I thought once of how to make tariffs match; you look at last month's tariffs paid by American companies to each foreign country, set next month's rate for their imports as a percentage, and keep adjusting, month by month.
But that doesn't account for all the non-tariff obstacles David mentioned, like child labor, slave labor, environmental laws, subsidies, and so on. Those are entirely political.
What annoys me possibly most about this reciprocal tariff war is that the import tariffs collected ought to go towards paying off the tariffs American companies had to pay. They're supposed to balance, right? Instead they go right into the government coffers, more money to spend spend spend, when one of the common libertarian mantas is CUT SPENDING.
I do appreciate the semi-righteousness of reciprocal tariffs. I just don't think they are practical and only serve to enrich government and justify more nosiness and meddling.
Trump seems to have managed to do what no one in Indian policy making could do. Reduce tariffs on imported EV cars from 100% to 15%. This means Indians could now import EVs at more reasonable prices. Of course Indian bureaucracy can always redefine a car is and change the names of taxes to still make it impossible to import.
Indian bureaucracy perhaps saw this coming long ago. To ban the Chinese imports of say toys they created a standards body and demanded that any manufacturer who wants to export toys to India must undergo certification process (A bit like FDA/ FCC etc.). Then simply refused to certify any Chinese company or made the process to complex. This was a ban without the word tariff. Americans have been doing this for a long time with different products rejecting imports by claiming they are of "poor quality".
When Indian tobacco company introduced India's handrolled cigars called "bidi" in USA, they became popular. American tobacco lobby lobbied with Congress and FDA to roll out new standards that the Bidis could not adjust to but did not impact current players and got them banned. [1]
My bet is that most nations would adjust to this new reality where they wont impose tariffs but might come up with even more complex ways of restricting trade.
[1] https://www.ndtv.com/india-news/us-bans-bidis-made-by-indian-tobacco-company-551557
People aren't as mobile as you suggest, getting into a country typically requires approval and you can't choose where you're born or who your parents are.
I'm not sure it would attract a lot of good people, every service sector employee would need to pay $15,000 (using current size of government USA), just to be a citizen. Also, practically speaking, what happens when someone can't pay?
I think the system you're taking about might attract people try to be a tax resident there while not actually living there.
One thing I've never been convinced of is the idea that a so called trade deficit is a bad thing. If my household had a money printer at home and we used the money we printed to trade for goods and services from other households, we'd be pretty happy with that situation. So why would a country that is essentially in the same situation be so unhappy about it?
If foreigners just piled up US currency on a shelf it would be, as you say, good. But they use the currency to buy US assets that remain in the US — TBills, shares of stock, land — because currency pays no nominal interest and negative real interest. Whether that is good or bad depends on whether a capital inflow is good or bad, which depends what the capital is used for.
Perhaps one might consider that in the comparative-advantage framework: Americans are good at creating companies and the Chinese at creating goods, so by trading those, both parties end up better off.
I think that you are, like most Trump critics, being unfair to him by taking some of his words literally, rather than the entire body of what he says seriously.
To be fair, you ARE, especially here, indeed somewhat more open-minded about the possibility that he is trying to “do good” with his use of tariffs than most of the critics.
And I *do* grant that on this topic there is indeed *some* evidence of mercantilist and other bad economics beliefs coming from him.
But if you look at the vast majority of what he has DONE with tariffs, both his first term and this time around so far, it is to use them as leverage to negotiate a better deal. And since in fact he is not completely economically stupid, he does indeed understand that lower trade barriers make everyone better off. Just because he does not fixate on this point, and just because he talks of other things, and certainly just because he talks belligerently as part of his negotiating leverage, does *not* mean that he doesn’t understand this.
And unlike part of *your* proposed idea here, his threats with tariffs are not solely to have reduced tariffs percentages by the other side, but also to reduce or eliminate other non-tariff trade barriers (e.g. with China). And, of course, to get other non-trade concessions.
So I applaud your somewhat novel explication of “automated” tariff reduction, and give you credit for crediting Trump / his administration with this.
I just wish you would be more charitable with your interpretations on other action + pronouncements as well, rather than joining the “take Trump literally but not seriously” crowd.
P.S. Re: Vance, by contrast, based on reading one of the links you posted a few months back and listening to him on Rogan, I agree that he mostly *understands* the economics, but he has made it quite clear he does NOT value the efficient economics as highly as most of we classical liberals / libertarians do, or even as much as Trump himself quite clearly does.
I can't tell whether Trump understands the economics and pretends not to for tactical reasons or doesn't understand. The one problem with your reading of Vance is that I have not seen any argument from him to show that the policies he favors benefit people he cares about at the cost of people he doesn't, making them net positive for him even though net negative in efficiency. It's a logical possibility but to endorse those policies he needs a reason to believe it's actually true. His rhetoric seems to be based on the conventional misunderstanding of trade economics, either to support Trump's rhetoric or to convince people who share that misunderstanding.
Retaliatory tariffs are new to you, and you imagine they promote justice? How are their consequences different from any other tariff in harms imposed? What is the moral basis for government harming its own subjects?
More obviously than any other tax, tariffs are punitive in addition to generating revenue. If retaliatory tariffs are fine, then why not the national security pretext? Soon enough there are enough rationales to satisfy any politician.
The case for retaliatory tariffs is as a mechanism to lead to no tariffs, as I think I made clear. I said nothing about justice.
> A tariff makes the country that imposes it worse off
What do you assume the alternative to tariffs to be when you say this? An income tax? A budget deficit?
Whatever alternative tax has the lowest excess burden. Or, better, spending less.
One might hope that the tariffs would rather replace that tax that has the highest excess burden.
Fair point.
The chances of (b) thru (e) not occuring under this Administration of Ptolemaic Trade theorists is essentially zero.
Now that you’ve found one case, see if you can generalize it. What OTHER things might the leadership of a country do that benefit the politicians but hurt the people of that country?
You can go further and ask, “are there strategies that work where politicians in different countries cooperate with each other and defect against their people?”
There are two different categories. One is cases where doing something bad is politically profitable because most voters mistakenly think it is good, such as a minimum wage. The more interesting is one like the tariff where supporters correctly believe it is good for them, other people may know it is bad for them but have inadequate incentive to block it.
An example for your second case would be a negotiation where the people want it to succeed, the politicians want it to fail, and each country's politicians can blame the failure on the others.
Brexit was fairly close to being an example of the 2nd, where at least the people of the U.K. (narrowly) wanted it to succeed but most of the political class clearly did not. Nor the EU political class, of course.
Giving each other bribes?
I got into a discussion recently about the detrimental impacts of tariffs vs other forms of taxation.
I was arguing (admittedly from relative ignorance) that when comparing two taxation policies I would be much more interested the total tax burden than the mechanism of taxation.
I'm quite confident I'm correct in the extreme case, but I don't really have a good way of quantifying how much extra property tax could be justified to avoid any tarrifs.
I'd be quite curious on your thoughts, how far wrong could I go if I always chose the system which minimized the total tax burden?
There is a somewhat popular idea in these circle that all taxes should be replaced by a land-value tax, because such a tax would have no negative effects on economic activity. It turns out that this is not exactly correct, but I think it's close enough to being correct to be worth considering. Personally, I prefer the "everyone pays $X/year" system of taxation.
As far as I can see, all consumption and income taxes require an awful lot of auditing to detect cheaters. Show all your receipts, undercover agents to make sure all purchases generate receipts, no yard sales or trading dental work for deck work, etc etc etc.
The only taxes I can think of which do not require huge intrusive bureaucracies are head taxes and property taxes. Head taxes are flat rate, and the public simply will not stand for everyone, rich and poor, paying the exact same absolute value in tax. Any attempt to adjust it for wealth or income brings back that intrusive bureaucracy.
That leaves property tax, with the clear advantage that no one needs to know who owns property, only that the tax has been paid. If it hasn't, the government knows where the property is.
As for the value of the property tax, make it self-assessed, with the proviso that anyone selling the property for more than the self-assessed value owes back taxes, and if the buyer reports his self-assessed value as higher than the old seller's value, that means the seller lied; make him pay the back taxes, and make him pay the difference to the buyer. It's not perfect enforcement, it's delayed, and it encourages snitches, but it doesn't require any government snoops or bureaucracy. And the land value is roughly proportional to wealth, meaning the public is much more likely to accept it as fair.
Yes, it's a wealth tax. But it's based on a real purchase price, not some what-if estimate, and when you get right down to it, if the tax is the same amount, whether income, consumption, or property, it is the same amount. Either all are wealth taxes or none are.
An income tax doesn't require much auditing if the income is wages to employees of large hierarchical firms which need to keep track for internal purposes. One possible explanation of the increased size of governments over the past 150 years is the increased fraction of people who work for such firms.
Isn't the economy in general moving away from those kinds of jobs? I know people who do construction and such for cash. A garage I frequented always preferred cash, especially if I didn't want a receipt. Oil changes and some repairs were cheaper if I bought the oil and filters and parts. I never asked why and they never had to lie to me :-)
I have read articles about yard sales, and part of the justification for limiting them and monitoring flea markets was catching thieves selling stolen goods, in addition to collecting sales taxes and noting who earned a lot of money from them. I was never sure how much they collected or if it was just an excuse for more bureaucrats.
> As for the value of the property tax, make it self-assessed, with the proviso that anyone selling the property for more than the self-assessed value owes back taxes
That requires auditing to make sure the buyer isn't paying additional money to the seller under the table.
Last time I went through this, it seemed like the buyer would have to pay more under the table than he'd save on the tax. A bright moon and warm night woke me early, so if I mangle this, that's my excuse.
The back taxes and snitch fine are double the tax rate times the accumulated assessment discrepancy. The seller loses double what the buyer gains by reporting the true price, but the buyer pays more taxes each year. But snitching should work both ways, and if the seller snitches, the snitch fine cancels the back taxes and the buyer not only pays all that but his yearly taxes go up. The longer since the last sale, the higher the accumulated discrepancy.
There's probably some nice tidy formula, but my instinct is that the lure of those snitch fines outweighs any savings, and the fear of being snitched on makes trusting each other problematical. It sounds like the Prisoners' Dilemma game.
The scheme should let the seller re-assess and pay the last year's back taxes at sale time without penalty, both for fairness and to encourage belated honesty. It might raise eyebrows at the tax office to double a 10-year old self-assessment at sale time, but the true value can't be known until sold, and it reduces the incentives to snitch and blackmail.
I hope that's not too mangled an answer.
The benefit to the buyer is that he also gets to pretend the property is worth less than it is for purposes of taxes.
Your property tax can be gamed by never selling (so the working class would pay taxes while the landed gentry wouldn't), and also, one would need to be able to calculate how the valuation changed over the years to calculate the back taxes. A less gamable alternative is to consider the valuation a legally binding offer to sell to anybody who offers that amount, or to create a public auctioning system where the highest bid would set the valuation.
Looking at my notes, I found this link in a Georgist discussion of David's.
https://daviddfriedman.substack.com/p/georgist-thoughts/comment/55126033
Basically, you can refuse offers to buy at the self-assessed value by raising your self-assessed value until the would-be buyer gives up, then pay the back taxes. But how do you know the offer is real without actually accepting it? It ends in bluffs. Offers need to have some real skin in the game, such as a bond for the full offer, a penalty for withdrawn offers, etc, and I despise the idea of strangers forcing a raised self-assessment and higher taxes by threat of forced sale just as much as forced sales.
I think the real problem with the system is mentioned in those comments, which is that it is impossible to derive the value of the unimproved land from a bid on the improved land, so we end up with nearly the same assessment problem that we would have if government inspectors were to value the land.
I should have been clearer. The comment I paraphrased was an enforcement scheme for self-assessment in general, not just Georgist taxes. I frankly do not understand the Georgist land tax. How can you differentiate bare land value from improvements? What determines your neighboring property bare assessments which determine your tax? Every Georgist forum I've found and all the answers I've gotten seem so focused on excruciating detail that I conclude they don't know what they are talking about or defending, at least not consistently, and that they have lost sight of the forest for looking at the weeds. Maybe George's schemes would have worked in an agricultural society, I don't know, and don't really care. If Georgist fanatics can't explain it, then I really don't care.
And as clever as that enforcement scheme is, I still despise this forced sales or reappraisal by random strangers with little skin in the game.
1. I'd never thought about landed gentry, but that's a two way straight jacket: most inheritances are squandered sooner or later, and when that mansion does finally get sold at auction for bankruptcy, the seller will be even bankrupter from the back taxes going back 100 years or more. The children who don't inherit and have to buy their own fair market house are going to be pissed and make for uncomfortable family gatherings.
2. I despise those legally binding forced sale schemes, whether at the self-assessed value or at auction. They allow strangers to force people to move out for pure greed. Casino wants to expand its parking lot? Force the widow to sell and move out of the house she's lived in for 50 years. I utterly despise such schemes.
3. Yes, it would be "proper" to adjust self-assessments periodically based on surrounding comparables. But how? Unless they are all cookie cutter ticky tacky tract homes, there's so much variability that it seems to be begging for corruption. Maybe some formula is possible, such as having the "true" self-assessment per house and a tax self-assessment averaged over each block or a house and all its neighbors.
But even with such a group assessment, a property tax still has far less intrusive bureaucracy than any consumption or income tax.
Everyone paying $X per year seems obsurly unfair to me. If you think of the government as providing certain service, property right protection, protection from abroad, money supply, judicial system etc., then having a fixed dollar cost would mean the wealthy would receive substantially more services while paying the same amount.
If you mean X percent then I could see the argument.
No, I mean $X/year. I think a sovereign that offered that system would attract a lot of good people, while keeping bad people out. As for fairness, I think there are two perspectives one may reasonable have:
(1) No tax system is fair, as for any system, one can easily find some unfairness in it.
(2) All tax systems (except North Korea and such) are fair, as people voluntarily choose which one to live under.
A tariff of one million percent would hardly raise any revenue, but be rather disruptive to trade and the economy. Especially, it would be more disruptive than a revenue maximising tariff.
Interesting point.
It's probably not a useful way of characterizing them at all, the revenue raised and harm of the tarrifs are not really comparable.
Yes, and (not remembering the exact figures) imports are *roughly* equivalent to income tax collected, meaning you'd need a 100% tariff to match income taxes, which would cut imports dramatically and revenue too. (Quibblers, I say *roughly*. The figure floating around in my memory was somewhere in the range 50% to 150%.)
Something less extreme like that isn't obviously worse than the existing system. (100% vs 1,000,000%). If the only possible source of tax was tarrifs the government would inevitably shrink, which is a good thing in my book.
Getting rid of all taxation in the US economy would have lots of benefits. It's not obvious to me that the reduction in imports would be more detrimental than the benefits within.
Especially for the United States which is diverse enough to produce almost everything it imports.
"Especially for the United States which is diverse enough to produce almost everything it imports."
If so the high tariffs would reduce imports and hence tariff revenue to near zero.
Might work out pretty well in the end, shrinking tarrif income starves the government, small government leads to little resources to enforce the tarrifs and we all live happily ever after.
If you can rub the bottle and do that, why not just zero out the budget and install a minarchy; or better yet, get rid of government altogether and install angelic honesty in all people to live happily ever after together? Skip the middle steps.
I've had second, happier, thoughts about Trump's tariff policies, too. My instinctual response was "madman policy", though not necessarily irrational. But the latest news suggest something more predictable.
Let us remember that the overall tariff cutting process came to an end ca. 1995 with the Uruguay Round. [It did leave the US holding a bit of a stick with EU agricultural protection, but leave that aside.] So the bargain "I'll cut if you cut", carried out 1947 - 1995, stopped working, I'm supposing because distributional concerns could not be adequately dealt with by trade policy instruments alone.
So now Trump comes along and threatens, credibly, the madman [:-)] I'll raise unless you lower, in which case I will lower. May well work.
I would add the technicality that as we can safely assume that the US is not facing fixed world prices, US tariffs will hurt the rest of the world. If they're not too high, they make the US better off. The rest of the world can retaliate, and make itself better off than without retaliation, or lower tariffs and make itself even better off than without retaliation if the US lowers tariffs.
"If they're not too high, they make the US better off."
Why? Except as a source of revenue they make the US worse off.
I safely assume that a uniform US tariff depresses world prices for US imports. So one can say that foreigners pay part of tariff revenue. This is called the "terms-of-trade" argument for protection. Works only if the tariff is not "too high", and only if there is no retaliation. This "optimal tariff" is less than the revenue maximizing tariff.
True. If the supply of export goods is significantly inelastic you get some gain at the cost of your trading partners, although elasticity is usually greater in the long run than in the short so the gain may not last and the gain may be less than the efficiency loss. I usually describe this as using a tariff or export tax to cartelize consumption or production, convert multiple consumers or producers into a monopsony or monopoly. I discussed it in an earlier and more detailed post on the economics of tariffs.
https://daviddfriedman.substack.com/p/ptolemaic-trade-theory
That justifies "If they're not too high, they could make the US better off" but not that they will make the US better off. Do you have an argument to show that the ratio (efficiency cost to the US)/(monosony gain to the US) goes to zero as the size of the tariff goes to zero? Without that I don't see how you can defend your claim.
And, obviously, the claim is false if the supply is perfectly elastic.
Yes, one can describe "the optimal tariff" as exploiting market power one has as a collective of firms in one nation.
Mercy, I have to to dig deep: For any given non infinite elasticity of foreign supply, a small tariff will reduce foreign price, and a part of tariff revenue will be paid by the foreigner. The source of the gain is that the import price is an average price, and one wants to equate the marginal cost of imports with the marginal benefit of imports. And marginal cost here is above average cost. Keep raising the tariff, and things get better until the deadweight loss of the tariff equals the revenue gain from the foreigner. Raise after that, revenue goes up further, but welfare declines. Then revenue stops going up, too.
So, the size of the net gain does not go to zero as the tariff goes to zero. The net gain goes to zero when the optimal tariff level is reached.
Strangely, or not so strangely, it works just like the minimum wage argument in the presence of monopsony. Actually, it's the same argument.
But, summarizing, implementing the "optimal tariff" argument makes sense only if there's not retaliation, or, if as now, perhaps and hopefully, it's a strategy to reduce existing tariffs.
I think you are right. If the monopsonist buys dx less, his consumer surplus loss goes as the square of dx, his gain from the lower price goes as dx, so as dx goes to zero the ratio goes to zero. It's the same argument I use to justify partial equilibrium analysis. Not true, of course, if there is any fixed cost to the collection of a tariff.
He's smarter only in using them as weapons. But I recall him having two contradictory ideas: he wants to lower the trade deficit and raise foreign investments.
It's a heckuva a warrior who doesn't even understand his own weapons.
You are guilty here of the near-cardinal sin of taking Trump literally but not seriously.
In this case, an extremely plausible, very compatible answer is that he wants to reduce trade deficits (in goods and services - I’m being pedantic as you surely understand this term means exactly this) and increase foreign *direct* investment - e.g. in manufacturing facilities here.
In this quite likely scenario, he cares not about China investing in U.S. bonds.
I’m not saying that he is correct in terms of having the optimal economic goals here, but these two are not contradictory and not clearly economically bad.
I agree that it is logically possible for the trade deficit to decline, foreign investment in manufacturing to increase, while total foreign investment decreases because foreigners are buying fewer US bonds, but I don't see what policies Trump would use to get that effect. That's aside from whether the resulting rise in the interest rate in US debt would or would not be a problem for him.
Hmmm… seems to me the policies and tactics he is using are designed for exactly that combination.
Bully pulpit, plus actual bullying threats of companies and countries to reduce trade deficits and have more foreign manufacturing here.
I’m not endorsing the policy/ends, nor any bullying threats in this regard (I DO support such tactics when the purpose is to reduce other countries’ barriers to trade), to be clear.
In my opinion people who write about Trump, but do not know him, do not have his ear, and are not present when he speaks with his counter parts in China and Mexico and Canada privately are not worth the time it takes to read their comments. People who have not earned billions of dollars, have not negotiated successfully anything, and have not hired and fired thousands of people --- but presume because they have a PhD in economics that they know all about trade negotiations --- are either arrogant, dimly lit, or both. Chalk board economics and accounting identities aren't worth the time of day on the stage Trump plays on.
People who pretend to understand economics, don't, and try to conceal the fact by bluffing are also not worth the time to read their comments.
As it happens, my PhD is in physics.
Here's a better reply, I hope. Sorry that my earlier response was less than it might have been. I think it's easy to disparage Trump; maybe he understands his weapons better than lots of folks think.
We can think of scenarios where the trade deficit could narrow while foreign investment increases. Perhaps Trump believes for good reason that he can negotiate some such.
Increased U.S. Exports: If U.S. exports rise significantly—perhaps due to a weaker dollar, higher global demand, or increased productivity—the trade deficit could shrink. Simultaneously, foreign investors might find U.S. assets more attractive due to growth prospects, higher interest rates, or policy changes that encourage investment.
Shift Toward Domestic Production: If the U.S. reduces its dependence on imports (e.g., through reshoring manufacturing) while foreign capital continues to flow into U.S. businesses, real estate, or bonds, the trade deficit could narrow as domestic production meets more demand.
Surging Productivity and Innovation: If foreign investors anticipate robust U.S. economic growth due to technological innovation or productivity gains, they may increase investments in American enterprises even as the trade deficit decreases.
Government Borrowing and Foreign Investment in Treasuries: Foreign investment could rise if the U.S. government issues more debt, attracting international investors due to higher yields or perceived safety. If this occurs alongside increased exports or reduced imports, the trade deficit could narrow while foreign investment still climbs.
These scenarios are possible. The historical pattern shows that typically larger foreign capital inflows tend to coincide with larger trade deficits because the capital inflows strengthen the dollar, making imports cheaper and exports more expensive. But these are not typical times.
"We can think of scenarios where the trade deficit could narrow while foreign investment increases."
I can't.
Where do the foreign investors get the dollars to invest if the US is not importing enough more than it exports to provide them? Number of dollars sold equals number of dollars bought is an accounting identity. The exchange rate is the price on that market and moves to the level at which quantity of dollars demanded (to buy US goods and take them out of the country or to buy US assets and leave them in the country) equals the quantity supplied (to buy foreign goods or assets). So the trade deficit equals the net capital inflow.
See my response above.
Trade deficits can decrease, and foreign *direct* investment in manufacturing facilities in the U.S. can increase.
As a populist more concerned with “good jobs” and not that much with the overall well-being of consumers, Trump is not particularly interested in the fact that Chinese/foreign investment in U.S. bonds would decrease in this scenario, putting pressure on interest rates.
Without suggesting his desired policy here is optimal, it’s not obviously inherently bad, and given how much the Fed has manipulated long term bond rates with its easing, QE, ZIRP etc., it’s not even clearly obvious that he is wrong to mostly ignore the reduced demand for U.S. bonds.
I’m thinking along the lines of (1) forward contracts and (2) the implications of the New Monetary Economics, and (3) the Black-Scholes option pricing model, and (4) the fact that the number of dollars is evidently not a number, but a variable, and no one seems to have a fabulous model for the variable we so easily insert into models as M.
Is it true that the number of dollars sold equals the number of dollars bought? Doesn’t seem to be true, necessarily, even though it is an accounting identity, given fixed definitions. I’ve always told my students that trade is a two-way street, otherwise, someone is giving a gift. Maybe the gift is a promise?
What say you?
You buy something from China, the seller uses the dollars you pay for it to buy a promise from you to give him that many dollars when he visits the US. That claim against you is a capital asset.
For your argument it goes the other direction — He trades dollars for Yuan to buy export goods from you. You don't use the Yuan to buy Chinese goods goods because you want to keep down the trade deficit so you pile the Yuan under your bed. You now have a Chinese capital asset. If you have any sense you convert the Yuan, which don't pay interest, to Chinese bonds or stock that do, but it is still a capital asset if you don't.
What is the sequence of transactions that gives a net capital inflow to the US from Chin larger than the US trade deficit with China?
Forgive me, but I do not follow your argument here. I get the accounting. It's an identity. Trump gets the accounting, too. Do you doubt that he does?
Do you think people are equally brilliant and dumb in everything they do? Your question begs an unfriendly answer.
No
Also, I proposed a reason why he's dumb about a basic Econ 101 definition. Am I wrong? Right? Somewhere in between?
Perhaps a real answer would be more useful.
Somewhere in between
Your bragging does not impress me any more than your insults. My experience in life tells me that people who brag and insult, instead of answer questions, don't have answers but do have an inflated opinion of themselves.
Sorry. I overreacted to your implied denigration of our President. Maybe that's not what you meant?
Did you not yourself insult Trump at least once earlier in this thread?