Tariffs Can't Replace Income Tax AND Discourage Importation of Foreign Goods
Killing the goose that lays the golden eggs.
We can’t count on money from tariffs if we don’t import any goods. We have all heard the statements: 1) Don’t kill the goose that lays golden eggs. 2) You can’t have your cake and eat it too.
We would do well to think about those statements as we look at tariffs. The rhetoric can be especially harmful. If trade diminishes with our trading partners, there will be less money coming in from tariffs. That said, let’s look at tariffs.
A creative person who had his product produced in China made the statement, “Trump could make the tariff 100%, I’d still buy from China. The price is that different.”
“Trump’s tariffs are going to drive up inflation,” someone else told me. I replied, “Interesting that the same people who think raising minimum wage has no effect on prices are convinced tariffs will.”
Most economists make a case against tariffs. I bought a course on economics last summer. The teacher started with jokes about economists. They are frequently wrong. However, I enjoyed the course, and the teacher made a case against tariffs. I think the argument goes that when we protect our workers with a tariff, we discourage innovation. Workers do not become more productive, and their wages do not increase as a result. That is a unilateral tariff. If the tariff is bilateral, it hurts both nations.
I’m more of a free-market thinker. I view tariffs as an intervention in the market. I see insurance as another intervention, but that is another story. However, as I’ve gotten older, I’m trying to see the benefits of intervention in the free market.
Think of tariffs as a tax. We would like taxes to be progressive. We want rich people to pay more tax as a percentage of income than poor people. That is why our income tax system is graduated. Rich people pay a higher percentage than poor people.
Think about sales tax. Sales tax is progressive even if the percentage is the same for all. Rich people buy more stuff. In fact, if we would not tax food, healthcare and rent, we would be giving the poor a break and the more affluent would be paying nearly all tax.
Did you know that Washington State has tariffs? We call it a cigarette tax. The tax is $30.25 per carton. The tax is due when the cigarettes enter Washington State. Sales tax still applies and that is over 8% depending on where they are bought. If you go to datapanda you find the cost is $11.21 per pack or $112.10 for a carton in 2024. The cigarette tax is about 27% of price.
Why tax cigarettes? We want people to stop smoking. So, we tax cigarettes to make them more expensive and encourage people to stop. We also reap a pretty significant financial reward. In 2021, the cigarette tax brought in $317,992,000.
Washington State does not have an individual income tax. We do have Business and Occupations Tax (B&O) that is based on gross revenue. I remember when I first started my business. My accountant called to remind me to pay my quarterly B&O tax. I told him, “I haven’t made any money.” He replied, “Did you take in a dollar?” I said, “Yes.” He said, “Well the governor wants part of it.” I couldn’t believe it.
Point is that Trump seems to want to take the Federal government in the same direction as Washington State. He wants to do away with income tax and make up for it with tariffs. He also wants the tariffs to discourage importing foreign goods. It is similar to wanting to make money off of cigarettes while wanting people to stop smoking. It can’t do both.