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OPINION > FINANCE
THE VIEWS EXPRESSED BY CONTRIBUTORS ARE THEIR OWN AND NOT THE VIEW OF THE HILL
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President Trump’s new favorite word is “tariffs.” Like a kid with a new shiny
toy, he seems fascinated and has declared that “tariff” is “the most beautiful
word in the dictionary.”
5
As is often the case, Trump’s loose use of language complicates
understanding. But there seems to be several things at work in his
fascination with tariffs and promise to impose massive taxes on virtually all
U.S. imports, about $4 trillion a year.
6
Trump’s fixation on tariffs appears motivated in large part by the U.S. trade
deficit — that is, the fact that we buy more from our international partners
than we sell to them. There are multiple reasons for this, and trade deficits
reflect U.S. consumers enjoying the benefits of foreign goods.
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Obviously, a completely balanced trade with every nation is impossible, and
the comparative advantage that drives international trade is a boon to all
trading nations, making all of us wealthier. But when foreign government
policies promote the trade deficit, it is unfair to American workers and a
cause for serious concern.
Increasingly, Trump is fixated on other nations’ value-added taxes as the
real source of the deficits (although he sometimes simply mislabels them as
tariffs). And foreign value-added taxes do pose a serious economic
challenge for American companies.
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DC Bureau: Tariffs update, Thurs. eve.
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Value-added taxes are common around the world; they are a type of
consumption tax, similar to a sales tax. The difference is that they are
collected at every level of production, not just final sale.
For example, a company making bikes might buy $50 of metal and parts
and sell the bike to a wholesaler for $100. Having added $50 in value, a 10
percent value-added tax would charge $5. When the wholesaler sells to a
retailer for $150, the wholesaler also pays $5. When the retailer sells to a
consumer for $300, having added $150 in value, the tax is $15.
In theory, these taxes are easier to monitor and collect, with clear paper
trails that minimize fraud. In broad terms, the alternative to funding the
government with such consumption taxes is to impose income taxes, the
primary federal revenue source in the U.S.
What makes value-added taxes relevant to trade deficits is that nations
refund them on exports and impose them on imports. Exports are thus
encouraged, and imports are made to bear part of the nation’s tax burden.
This appears to be what motivates Trump’s tirades.
And he is correct that the use of value-added taxes by many of our trading
partners disadvantages the U.S. in world trade.
Even so, his proposed solutions make little sense.
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First, Trump blusters about imposing across-the-board massive tariffs on all
imports, but the problem varies greatly from country to country. In Canada,
the value-added tax (called a goods and services tax) is only 5 percent;
provinces add their own value-added taxes for a combined rate as high as
15 percent. Obviously, U.S. states also impose their own taxes that have to
be added to federal obligations to make a fair comparison.
In Europe, value-added taxes range from 18 percent to 25 percent in the
European Union to only 8 percent in Switzerland. Even this is simplistic, as
reduced rates are available for many imports. In Korea, it is generally 10
percent, but is also subject to exceptions; the same is true in Japan.
Regardless, the fact that the United States depends primarily on income
taxes while our leading trading partners rely on value-added taxes does
disadvantage U.S. trade and should be a matter of serious consideration in
Washington.
Of course, the U.S. could respond by imposing one of its own, encouraging
exports with refunds while discouraging imports.
Unfortunately, tariffs are a poor substitute for a value-added tax. For
starters, the United States has entered into numerous international
agreements binding our tariffs at current levels. Imposing new tariffs not
only violates our legal obligations but undermines the international trading
system that has served the United States, and the world, well.
Trade wars will diminish our wealth, and the world’s. It is worth
remembering that the Smoot-Hawley Tariffs played a part in the Great
Depression.
If Trump is serious about addressing the issue, he would demand the
Republican Congress consider a value-added tax. That, though, would raise
a very serious problem for the United States.
Both tariffs and value-added taxes are consumption taxes, imposed on
goods and services that people buy. But consumption taxes are generally
regressive — meaning that poor people end up spending a higher share of
their disposable income on taxes than do rich people (who put money into
savings or consuming items not subject to such taxes, for example,
expensive foreign trips).
By comparison, the very nature of an income tax is progressive: People with
higher income — having profited immensely from the success of the
economy — pay a higher rate. Although some new studies seek to show
that consumption taxes are not as regressive as economists generally
understand, they certainly do not have the progressive characteristics of an
income tax.
While it may make sense for the United States to discourage imports and
encourage exports with a value-added tax, such a system or higher tariffs
both threaten to increase the already exploding American wealth inequality
gap. Such concerns must be addressed.
America’s wealth gap – the difference between how much of the nation’s
wealth is held by the rich and other classes — is exploding. It accelerated
massively with Trump’s 2017 tax cuts that almost all went to the wealthy —
tax cuts for the rich that Republicans are planning on renewing, further
ballooning the wealth gap.
This is not simply a matter of the rich earning well-deserved success. Today,
in the United States, the richest one-tenth of one percent (320,000 people)
has six times the wealth of the bottom 50 percent ($160 billion). The top 1
percent had essentially the same wealth as the bottom 90 percent.
This type of wealth inequality is dangerous in a democracy.
Thomas Jefferson saw it, warning of “the consequences of this enormous
inequality producing so much misery to the bulk of mankind.” Jefferson
understood that if inequality ran rampant, if American citizens did not feel
that they were sharing in the nation’s success, it threatened political
stability. If inequality exploded, “legislators cannot invent too many devices
for subdividing property.”
Having seen terrible poverty and obscene wealth in France, Jefferson
begged America to avoid that disaster. If wealth inequality grows too large,
we should “exempt all from taxation below a certain point, [and] … tax the
higher portions of property in geometrical progression as they rise.”
If Trump continues to focus on increasing consumption taxes as he cuts
taxes for the super-rich, the wealth gap will continue to blow up. This is
exactly what would happen with his proposal to eliminate the income tax —
creating a tax system for the rich by the rich.
Jefferson lived through the beginnings of the French Revolution, and he
understood that exploding wealth inequality would not end well. When
ordinary people see that they are no longer sharing in the nation’s success,
they will demand action. What he saw in France suggests that Luigi
Mangione may be just a start.
A government by billionaires for billionaires may make sense to the
billionaires, but it is dangerous to Americans.
Trump’s fixation on tariffs feeds that danger.
John Ragosta, Ph.D. represented U.S. industries in international trade
disputes for 20 years before earning his Ph.D. in American-constitutional
history. Formerly the acting director of the International Center for Jefferson
Studies at Monticello, his most recent book is “For the People, For the
Country: Patrick Henry’s Final Political Battle.”
TAGS CANADA CONSUMPTION TAX DONALD TRUMP EUROPE INCOME TAX IN THE
UNITED STATES POLITICS OF THE UNITED STATES PRESIDENT DONALD TRUMP
RECIPROCAL TARIFFS SWITZERLAND THOMAS JEFFERSON VALUE-ADDED TAX
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