Peter Schiff
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 collar 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.
To make America great again, we need to recreate the free-market
environment that made her great in the first place. It’s not just
oppressive direct taxes that must go. It’s all the regulations that have
driven up the cost of doing business, and labor laws that make
employing workers so expensive and risky that business does all it can
to create as few jobs as possible.
But contrary to Trump’s stump speeches, our trading partners are
not taking advantage of us; we are taking advantage of them. They give
us their products and we give them nothing but our debt. They expend
scarce resources (land, labor and capital) to create consumer products
for us to enjoy, while we just conjure intrinsically worthless dollars
out of thin air. But years of excessive regulation and taxation have
resulted in an accumulation of trade deficits that has transformed
America from the world’s largest creditor to its largest debtor. Our
once mighty savings financed a high-wage industrial economy that has
been hollowed out, replaced by a weak, debt-financed, low-wage service
sector economy.
Trump is right. This is a big problem and it needs big solutions.
If tariffs were offered as a replacement to our ridiculous and
destructive personal and corporate tax, and payroll and estate taxes,
then America may become more competitive and our greater efficiency may
even allow us to overcome the tariffs that other countries would likely
impose on us in response. But slapping tariffs on imports, while doing
nothing to improve the conditions for business efficiency, simply means
that prices for American consumers will rise significantly, without
sparking a revitalization of American manufacturing prowess. Don’t
forget the global market contains over 7 billion consumers, the U.S.
market just under 320 million. Insulating our manufacturers from this
larger marketplace guarantees that we will never become globally
competitive.
Tariffs or sales taxes will drive up the cost of goods for
consumers, a fact that Trump seems to ignore. If he would acknowledge
this issue, he could offer the counter argument that if we could couple
tariffs with income tax relief that Americans would also have higher
incomes to pay those higher prices. But even if incomes rise, higher
prices will inevitably lead to less consumption and more savings,
especially if we allow interest rates to be set by the free market
rather than the Federal Reserve. More savings and less spending is
exactly what we need if we want the capital to rebuild our industry.
Protective tariffs alone will not work, especially when there is little
industry left to protect.
So instead of criticizing Trump for his misguided advocacy of
tariffs as a panacea, we should at least give him credit for recognizing
a serious problem that so many others ignore. The real criticism should
be directed at those who would allow America to continue down this
self-destructive path.
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