Harvesting the Tariff Windfall

Most traditional economists frown on tariffs. And they have evidence. Though it is not popular to say so everywhere just now, the lighter tariffs of recent decades reduced many prices for consumers for long stretches of time. Freer trade cost some American jobs, though jobs lost to free trade are more than offset by those created by it. Freer trade also created many American jobs. As the same economists point out, tariffs interfere with global economic efficiency by arbitrarily handicapping natural competitive advantage. Tariffs raise costs to both end-user consumers and manufacturers trying to optimize their supply chain. Higher tariffs inevitably lower both return on investment and economic growth. Yet presidential candidate Donald Trump’s platform proposes an across-the-board 10 percent tariff. Is there any way to justify this beyond the populist goal of protecting otherwise uncompetitive American manufacturing jobs?Perhaps.The economic damage of this universal tariff would be minimized if the money raised from the new tariff is reinvested in other growth initiatives. That is to say, initiatives that might not get financed without those extra tariff revenues. Especially important are initiatives that would strongly stimulate our economy. A few examples: • Financing the full re-authorization of the Trump 2017 tax bill, parts of which are set to expire in 2025. • Allowing an immediate 100 percent write-off of Research and Development. If you want to really incent tech advances, make it 125 percent, or more, write-off.• Add write-offs for all capital expenditures, even those not covered under an extension of 2017 tax bill. to the extent not covered under the extension of the 2017 tax bill.• Index the capital gains tax for inflation — best of all. What are the benefits of these modest proposals? Start with the Trump tax cuts. These 2017 cuts to corporate and individual rates don’t get enough credit. If you are wondering why the American economy more or less powered through the Covid shutdown, the answer starts with these cuts. The rate cuts freed business to find its feet again in the rough Covid period.Key too were cuts to income taxes. The law pulled down the top rate to 37 percent from 39.6 percent, and lowered rates for other brackets. As important, the Trump law simplified payments, allowing more Americans to benefit from the standard deduction. The income tax cuts are set to sunset in 2025 — or just about in time for the next crisis, whatever that may be. We need them.As for research and development, it too contributed to our Covid resilience. These days research and development shoulders an invisible burden — increasingly heavy regulation. Regulation deters companies from investing time in more and better products. To offset that burden, it would help to lighten other burdens on capital. The most universal burden on capital is the capital gains tax. When capital gains taxes are heavy, individuals and companies don’t sell when they should, and therefore can’t buy when they should. That leads to distortions in the market. One factor that makes capital gains taxes so large is that the basis against which the gain is calculated is the original low purchase price. Reckoning capital gains’ basis at today’s prices, a more honest move, would narrow the amount due. To call capital gains indexation “best of all” is not quite accurate. Best of all would be total elimination of the capital gains tax. Then there we would remove a drag on the best use of capital. Capital gains elimination, though, is probably a political bridge too far. In any event, the point is simple. If the revenue generated by tariffs proposed were used for pro-growth tax changes, these tariffs might not be so bad.

Harvesting the Tariff Windfall

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