Tariffs Are Taxes On Americans, But Protectionists Pretend Otherwise – Analysis

By Ryan McMaken

During the 2016 and 2020 campaigns, Trump's opponents in the Democratic party (and elsewhere) often pointed out that Trump's protectionism hobbles private markets and the economy overall. Yet, the allegedly anti-protectionist Biden administration has done virtually nothing to end Trump's protectionists policies put in place from 2017 to 2020. The motivation is unclear, but it is possible that the Biden administration realized that protectionism is a useful political tool. These policies offer a way of punishing opponents, rewarding allies, and pandering to voters. 

Now that it's election season, the pandering side of the equation is in full swing. Biden this week called for "sharply higher U.S. tariffs on Chinese metal products." Appropriately, Biden included this new spate of protectionism in what Reuters calls "a package of policies aimed at pleasing steelworkers in the swing state of Pennsylvania." 

Biden's pandering will likely bear some fruit, politically speaking. Protectionism remains popular. But, as Henry Hazlitt put it, voter support for raising tariffs is "the result of looking only at the immediate effects of a single tariff rate on one group of producers, and forgetting the long-run effects both on consumers as a whole and on all other producers." Those who are incapable or unwilling to examine policies beyond their most short-term effects are easy targets for protectionist rhetoric.

The reason there are so many negative effects, of course, is that tariffs are nothing more or less than taxes and they produce the same effects as any other type of tax: when Country A imposes tariffs, Country A's government is enriched while both producers and consumers living in Country A must endure higher prices and a less productive economy. 

Even those voters who imagine themselves as opposed to taxes and "big government" often embrace tariffs—apparently fooled by the misconception that tariffs aren't taxes or that they are only paid by foreigners. Many conservatives and protectionist "libertarians" create a wide variety of ornate theories with big words designed to distract from the fact that American tariffs are taxes on Americans. Ultimately, however, these people are simply pushing for tax increases. 

It's Not that Complicated: Tariffs Are Taxes 

A tariff is a tax that is collected when a good crosses an international border. In the United States, as with any country that imposes tariffs, any good that is subject to tariff can only enter the country when the extra tax is paid upon entry. (This tax is in addition to any other taxes that must be paid down the line, such as sales taxes.) As with any similar transactional tax (e.g., sales taxes) the result is higher prices and fewer choices for consumers. It must also be noted that the "consumer" of imported goods need not be the retail consumer or end consumer. A great many imported goods are intermediate goods that are used in the creation and production of other goods produced and sold within the United States. That is, tariffs are often taxes on materials used by American entrepreneurs and business owners to produce American goods. 

Raising taxes (i.e., tariffs) raises costs for all these American producers and consumers. Yes, it is true that Americans do not suffer the full consequences of taxes on foreign goods. As with a sales tax, a tariff imposes some costs on the seller by raising prices and thus reducing total sales. But it is simply wrong to portray tariffs are taxes primarily on foreigners, since, as Murray Rothbard notes, "Tariffs injure the consumers within the 'protected' area, who are prevented from purchasing from more efficient competitors at a lower price. 

Yet, protectionists have long been in the business trying to explain that tariffs are not actually taxes on Americans at all. Or, as Rothbard puts it: 

Tariffs have inspired a profusion of economic speculation and argument. The arguments for tariffs have one thing in common: they all attempt to prove that the consumers of the protected area are not exploited by the tariff. These attempts are all in vain.

Old habits die hard, however. Even among readers of mises.org, one finds plenty of readers involved in the quest to convince others that raising taxes is a good thing. One such claim is that since other countries impose high import taxes on their own citizens, the US government must do the same. Consider this response to a recent mises.org article on trade. The reader states: "Baloney. Horse manure. 'Free trade' is a meaningless slogan. The issue of trade is much more complex than slogans. You can't have free trade with Japan and China, which uses massive protectionist policies to help its own workers and industries. The wages are not comparable!!!"

Translation: "The US government must raise taxes because of 'complex' reasons. Since other countries tax and exploit their own people on imports, the US must do the same." This is followed by an irrelevant statement about the comparability of wages between countries.

Or, consider this email from a reader "T.M.": "Free trade is characterized in modernity as weakness and kindness is mistaken for weakness by foreign elites, such as Mexico and Canada who use us to the detriment of our domestic economy."

This sentence can perhaps best be described as "word salad" or "gibberish." But, I will attempt to translate the less incoherent portions, keeping in mind that the phrase "free trade" is simply another term for low (or zero) taxation at entry. Thus, T.M. essentially writes: "low taxes are weakness and unless the US imposes high taxes on its own people, then Mexico and Canada will use this weakness to the detriment of our own economy." In other words, raising taxes on Americans is how the United States supposedly "owns the Mexicans." 

There are many ways to describe such a theory, but terms like "pro-freedom" or "small-government" certainly are not among them. 

The fact that so many people are confused into thinking that these import taxes known as tariffs must be framed in terms of international competition and "complex" geopolitical issues can be blamed partly on economists themselves. When speaking on tariffs, economists are often guilty of needlessly complicating the matter with terms like "comparative advantage" or "balance of trade." Yet, Rothbard notes this is not terribly enlightening on the matter of tariffs: "Economists have devoted a great deal of attention to the 'theory of international trade...attention far beyond its analytic importance." When discussing tariffs, what really matters is understanding whether or not raising taxes is a good thing for the taxpayers. Hint: it isn't. 

As Rothbard notes, a tax 

always ... distorts the allocation of resources in the society, so that consumers can no longer most efficiently satisfy their wants. ... government coerces consumers into giving up part of their income to the State, which then bids away resources [via government spending] from these same consumers. Hence, the consumers are burdened, their standard of living is lowered, and the allocation of resources is distorted away from consumer satisfaction toward the satisfaction of the ends of the government.

Taxes benefit the regime while impoverishing the rest of us. To favor "free trade" is to favor lowering taxes on Americans and depriving the regime of funds. To favor protectionism, whether it be for some foreign-policy crusade, or to "create jobs" is to simply be in favor of raising taxes and handing over more Americans' wealth to the state. 

Correlation Doesn't Prove Causation

To push for their high tax schemes, protectionists often resort to claiming that high taxes can be justified on utilitarian grounds. A typical example of this is an argument made by Patrick Buchanan in a 2018 article titled "Tariffs Made America Great." Buchanan writes: 

From 1869 to 1900, GDP quadrupled. Budget surpluses ran for 27 straight years. The U.S. debt was cut two-thirds to 7 percent of GDP. Commodity prices fell 58 percent. America’s population doubled, but real wages rose 53 percent. Economic growth averaged 4 percent a year.

Buchanan, of course, spent much of his career campaigning against high taxes. But here he argues in favor of high taxes. So how does he justify this? It's a consequentialist argument of "the ends justify the means." Specifically, Buchanan points out that in the second half of the nineteenth century—when tariff rates often ranged between 20 percent and 40 percent—the US economy was very robust. True enough. But here's the problem: correlation does not prove causation. Buchanan points to a period of US history when there was a gold standard and when there was no central bank. In that period, taxation as a percentage of GDP was only a fraction of what it is today. There was no income tax (except for the Civil War tax) and none of the alphabet federal agencies that were created during the New Deal. Yet, Buchanan tries to give credit to a tax for America's great economic performance in that period. Buchanan is here literally arguing that a tax "made America great."

As economist Frank Shostak has explained, this is the problem of trying to create economic theory out of financial statistics. Buchanan takes a handful of stats and concludes that taxes are good. Unfortunately, a few graphs showing correlations doesn't replace quality economic theory—and there is no sound economics that tells us that taxes create economic growth. 

Buchanan would have been on much more solid ground had he attributed the economic growth of that period to a generally low tax burden, low government regulation, and a gold standard. 

Unfortunately, many protectionists continue to cling to the idea that raising taxes is good for the economy so long as the tax is called a "tariff."

• About the author: Ryan McMaken (@ryanmcmaken) is executive editor at the Mises Institute. Send him your article submissions for the Mises Wire and Power and Market, but read article guidelines first. Ryan has a bachelor's degree in economics and a master's degree in public policy, finance, and international relations from the University of Colorado. He is the author of Breaking Away: The Case of Secession, Radical Decentralization, and Smaller Polities and Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre. He was a housing economist for the State of Colorado.
• Source: This article was published by the Mises Institute