Posts Tagged ‘taxation’
“What protectionism teaches us to do to ourselves in time of peace is what enemies seek to do to us in time of war”*…
This post, written on July 29, is dropping on August 1, the deadline set by President Trump for the imposition of “reciprocal tariffs.” Here, in spirit of a search for a silver lining, Paul Kedrosky with an argument that, while the traiffs are both prima facie and fundamentally a bad idea, they could lead to a good place…
Tariffs are dumb. They distort trade, favor inefficient local producers, cause trading partners to retaliate, and make people worse off than a world without them. On these points, economists almost universally agree.
But tariffs are not useless. They may even be sort of, almost, kinda, a … good idea in these very weird U.S. circumstances.
Hear me out, because three things are going on, so it can get messy:
- The U.S. is, as the line goes, an insurance company with an army, which has straitjacketed its budget, which I’ve written about previously.
- The U.S. hates taxes, and most voters are innumerate, so it finds silly ways to hide them.
- Tariffs are a kind of horrible, second-best solution to the above problems.
The first two points are mostly self-explanatory. Entitlements plus defence are now around 70% of the U.S. budget—see also, insurance company with an army—leaving little room to do much other than cut, unless you find new revenue. But new revenue is hard, because Americans hate income taxes, and have long resisted carbon taxes or a value-added tax (VAT). They aren’t coping well with what I’ve called life under 2%.
Enter tariffs. They raise money because consumers buy things. We can argue about whether the producing companies pay the tariff (they mostly don’t), or whether consumers pay it via higher prices (they mostly do), but the effect is the same: consumers buying things increases government revenue. That is tariff income.
So far, so … suboptimal. Because tariffs aren’t a good tool for this. I will come to why they aren’t very good in a few paragraphs, but they distort, create weird incentives, invite retaliation, etc.
A much better tool is a value-added tax (VAT), a broad tax applied to consumer purchases of goods and services. Most countries have one, including all of the OECD except for the U.S.
It is generally agreed that VATs are a good idea, that they can be less distorting than income taxes. And, most importantly, if you’re a government, they produce gobs of income for countries that have them. How much income? The average nation’s VAT income is around 6% of GDP.
So, why doesn’t the U.S. have a VAT of its own? After all, the country has what are often obfuscated as significant long-term fiscal challenges. These mostly revolve around trying to run a costly modern social democracy on a low-tax system. This mathematically intractable “challenge” is made worse by a healthcare system unrivaled for all the looting intermediaries demanding to be seen instead as paragons of competition and capitalism.
There are various reasons for having no U.S. VAT, but the most important is in the name: it is a tax. And Americans hate taxes. Just ask them. The U.S. government cheerily indulges them in their hatred of taxes by cutting the taxes they can see, like income taxes, and hiding the ones they can’t, like the pre-tax corporate deductibility of healthcare premiums (costing $300b and 1.5% of GDP). This has costly & malign effects, like a 6+% structural budgetary deficit and the most screwed-up and expensive healthcare system in the world…
… The U.S. is foregoing approximately $2.8 trillion annually in potential VAT revenue at an OECD-average rate. Even at half that rate—because, America!—a U.S. VAT might produce, all else equal, around $1.4 trillion a year.
To put that in a kind of context, the current U.S. budget deficit is around $1.8-trillion a year. A VAT set at even half of OECD average levels would nearly zero out the U.S. deficit. (And, of course, reforming U.S. healthcare by eliminating premium pre-tax deductibility, instituting universal Medicare Lite, and requiring catastrophe insurance would flip the U.S. to surpluses, but I digress.)
Let’s now turn to tariffs. Like a VAT, they are broad consumption taxes, just not applied defensibly. They are applied only to imports, not to everything bought and sold in the country. This makes no sense, unless you think tariffs aren’t taxes (they are), and you think tariffed companies pay them (they don’t). So, Americans.
But tariffs are a species of VAT, albeit a poorly designed one. A universal tariff on imported goods—say, at 15%—would raise VAT-lite revenues. Based on recent data, U.S. annual imports are around $4 trillion. Applying a uniform 15% tariff to manufactured goods, which is 80-ish% of that. might yield roughly $300-$400 billion annually. While this is a fraction of the revenue of an actual VAT, it is real money. The choice then is not between a perfect VAT and an imperfect tariff, but between an imperfect tariff and continued reliance on deficit financing or distortionary taxes on labor and capital income.
Whoa, whoa, whoa, you might rightly protest. This is just a bad solution. Sure, but it is, in practical terms, a “second-best solution”, even if it is also perhaps the second-worst.
We should want more second-best solutions, economics tells us, if the alternative is doing nothing. There is a framework, with which I won’t bore you, that says it’s okay to do something less than perfect, if by doing so you counteract some of the problems preventing you from doing the best thing.
In this case, American politics prevents an actual VAT from happening, so perhaps tariffs aren’t so bad, if the alternative real distortion is structural deficits. To that way of thinking, distorting trade via a uniform tariff (a second distortion) may increase overall welfare relative to the status quo (deficits), despite being shitty trade policy.
And, if we want to spitball here, tariffs could even lay the groundwork politically and psychologically for a future transition to an actual big-boy VAT. Citizens and businesses might recognize that consumption taxation you can see is better than consumption taxation that you can’t. A future administration could leverage dissatisfaction with tariffs to propose replacing them with a more economically efficient and lower-rate VAT. Politically, the VAT would then become not a “new” tax but rather a tax cut (in rate terms only) eliminating import tariffs.
The debate over tariffs versus VATs is about the current structural problem in U.S. budget, a refusal to recognize life under 2%. Economically ideal policies frequently fail politically, leaving policymakers with second-best solutions. Tariffs, undeniably flawed and distortionary, are a usefully ugly compromise. They generate meaningful revenue, shift some production domestically, and potentially serve as a stepping-stone toward a VAT.
[Lest we got our hope up too high… Kedrosky is addressing the revenue half of the equation. But where and how that money is spent (whether raised by tariffs or a VAT) obviously matters absolutely. It’s clear from the examples he cites along the way, that Kedrosky would see that income most usefully applied to the social infrastructure that, as he observes, we have (to put it politely) neglected. Sadly, the “Big Beautiful Bill” and the rhetoric that surrounds it suggest that the Trump administration has other, darker plans, beefing up Defense and Homeland Security and creating a “sovereign wealth fund“… all of which could all-too-easily (and obviously) go horribly wrong, creating more damage in the form of social infrastructure destruction, and souring the public on the very idea of Federal action. Still, as Kedrosky concludes…]
Hey, a boy can dream, can’t he?…
Tariffs are a bad idea.. but could they lead somewhere good? “Tariffs are Dumb Enough to (Almost) Work,” from @paulkedrosky.com.
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As we search for silver linings, we might recall that it was on this date in 2023, that Justice Deartment Special Counsel Jack Smith unveiled the case alleging that then-former President Donald Trump broke several laws in his attempts to overturn the 2020 election…
On June 8, 2023, a grand jury in the Southern Florida U.S. District Court indicted Trump on 37 felony counts, including charges of willful retention of national security material, obstruction of justice and conspiracy, relating to his removal and retention of presidential materials from the White House after his presidency ended. Thirty-one of the counts fell under the Espionage Act.
On August 1, 2023, a grand jury for the District of Columbia U.S. District Court issued a four-count indictment of Trump for conspiracy to defraud the United States under Title 18 of the United States Code, obstructing an official proceeding and conspiracy to obstruct an official proceeding under the Sarbanes–Oxley Act, and conspiracy against rights under the Enforcement Act of 1870 for his conduct following the 2020 presidential election through the January 6 Capitol attack.
Trump pleaded not guilty to all charges in both indictments. Trials were scheduled but never held.
On July 15, 2024, U.S. District Judge Aileen Cannon dismissed the classified documents prosecution against Donald Trump, siding with the former president’s argument that special counsel Jack Smith was unlawfully appointed.
On November 25, 2024, Smith announced that he was seeking to drop all charges against Donald Trump in the aftermath of Trump’s victory in the 2024 United States presidential election. The Justice Department, by policy, does not prosecute sitting presidents of the United States.
Smith submitted his final report to the Justice Department on January 7, 2025, and resigned three days later…
… [In fact] The special counsel prepared a two-volume final report: the first volume about the election obstruction case, and the second volume about the classified documents case.
Trump’s lawyers were allowed to review Smith’s final report from January 3–6, 2025 in a room where they could not use their electronic devices. They objected to the report’s release. On January 6, Walt Nauta and Carlos De Oliveira (who could still face criminal charges in the classified documents case asked the 11th Circuit Court of Appeals to stop its release to avoid influencing their case, and the next day, Judge Aileen Cannon blocked the report’s release until three days after the 11th Circuit decided. Later in the evening on January 7, the special counsel provided both volumes to the attorney general, and the next day, the Department of Justice said it would release the first volume publicly and may provide a redacted version of the second volume for a limited review by select members of Congress. On January 9, the 11th Circuit allowed the release of the first volume, and on January 13, Cannon said she would likewise allow it, given that her own authority was limited to the classified documents case. On January 14, the 137-page first volume was released.
– source
The 137-page report that was released is here.
The matter did not, of course, rest there. In 2024, in Trump v. United States, filed in response to the Smith indictments, the Supreme Court determined that presidential immunity from criminal prosecution presumptively extends to all of a president’s “official acts” – with absolute immunity for official acts within an exclusive presidential authority that Congress cannot regulate. (In practice, as we’ve seen in 2025, his immunity seems to extend even to things that Congress is supposed to regulate.)
“He said that there was death and taxes, and taxes was worse, because at least death didn’t happen to you every year”*…
There are lots of questions that surround taxation: how much? on what? for what? Scott Galloway (@profgalloway) explores a couple of others: how efficient? how fair?
* Terry Pratchett
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As we ruminate on returns, we might recall that it was on this date in 1920 that the U.S. Supreme Court decided a case on the constitutionality of the income tax for the second and last time (so far). The Income tax had been authorized by the Sixteenth Amendment in 1913, and created later that year via the Revenue Act of 1913. In 1915 stockholders filed a brief in the U.S. Supreme Court, which arguing that the Sixteenth Amendment covers “many taxes other than on income”; in 1920, the Court affirmed the constitutionality of an income tax. Then came a second suit…
The United States Supreme Court last decided a federal income tax case on constitutional grounds in 1920, a century ago. The case was Eisner v. Macomber , and the issue was whether Congress had the power under the Sixteenth Amendment to include stock dividends in the tax base. The Court answered “no” because “income” in the Sixteenth Amendment meant “the gain derived from capital, from labor, or from both combined.” A stock dividend was not “income” because it did not increase the wealth of the shareholder.
Macomber was never formally overruled, and it is sometimes still cited by academics and practitioners for the proposition that the Constitution requires that income be “realized” to be subject to tax. However, in Glenshaw Glass , the Court held in the context of treble antitrust damages that the Macomber definition of income for constitutional purposes “was not meant to provide a touchstone to all future gross income questions” and that a better definition encompassed all “instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.”
In the century that has passed since Macomber , the Court has never held that a federal income tax statute was unconstitutional. This behavior of the Court constitutes a remarkable example of American tax exceptionalism, because in most other countries income tax laws are subject to constitutional review and are frequently ruled unconstitutional…
Reuven Avi-Yonah, “Should U.S. Tax Law Be Constitutionalized? Centennial Reflections on Eisner v. Macomber (1920)“
“We do not inherit the earth from our ancestors, we borrow it from our children”*…
… and the interest rate on that loan is rising.
There’s much discussion of what’s causing the sudden-feeling spike in prices that we’re experiencing: pandemic disruptions, nativist and protectionist policies, the over-taxing of over-optimized supply chains, and others. But Robinson Meyer argues that there’s another issue, an underlying cause, that’s not getting the attention it deserves… one that will likely be even harder to address…
Over the past year, U.S. consumer prices have risen 7 percent, their fastest rate in nearly four decades, frustrating households and tanking President Joe Biden’s approval rating. And no wonder. High inflation corrodes the basic machinery of the economy, unsettling consumers, troubling companies, and preventing everyone from making sturdy plans for the future…
For years, scientists and economists have warned that climate change could cause massive shortages of major commodities, such as wine, chocolate, and cereals. Financial regulators have cautioned against a “disorderly transition,” in which the world commits only haphazardly to leaving fossil fuels, so it does not invest enough in their zero-carbon replacements. In an economy as prosperous and powerful as America’s, those problems are likely to show up—at least at first—not as empty grocery shelves or bankrupt gas stations but as price increases.
That phenomenon, long hypothesized, may be starting to actually arrive. Over the past year, unprecedented weather disasters have caused the price of key commodities to spike, and a volatile oil-and-gas market has allowed Russia and Saudi Arabia to exert geopolitical force.
“This climate-change risk to the supply chain—it’s actually real. It is happening now,” Mohamed Kande, the U.S. and global advisory leader at the accounting firm PwC, told me.
…
How to respond to these problems? The U.S. government has one tool to slow down the great chase of inflation: Leash up its dollars. By raising the rate at which the federal government lends money to banks, the Federal Reserve makes it more expensive for businesses or consumers to take out loans themselves. This brings demand in the economy more in line with supply. It is like the king in our thought experiment deciding to buy back some of his gold coins.
But wait—is it always appropriate to focus on dollars? What if the problem was caused by too few goods? Worse, what if the economy lost the ability to produce goods over time, throwing off the dollars-to-goods ratio? Then what was once an adequate number of dollars will, through no fault of its own, become too many...
… if the climate scars on supply continue to grow, does the Federal Reserve have the right tools to manage? Stinson Dean, the lumber trader, is doubtful. “Raising interest rates will blunt demand for housing—no doubt. But if you blunt demand enough to bring lumber prices down, you’re destroying the economy,” Dean told me. “For us to have lower lumber prices, we can only build a million homes a year. Do you really want to do that?
“Raising rates,” he said, “doesn’t grow more trees.” Nor does it grow more coffee, end a drought, or bring certainty to the energy transition. And if our new era of climate-driven inflation takes hold, America will need more than higher interest rates to bring balance to supply and demand.
A provocative look at the tangled roots of our inflation, suggesting that “The World Isn’t Ready for Climate-Change-Driven Inflation,” from @yayitsrob in @TheAtlantic. Eminently worth reading in full. Via @sentiers.
* Native American proverb
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As we dig deeper, we might send carefully calculated birthday greetings to Frank Plumpton Ramsey; he was born on this date in 1903. A philosopher, mathematician, and economist, he made major contributions to all three fields before his death (at the age of 26) on this date in 1930.
While he is probably best remembered as a mathematician and logician and as Wittgenstein’s friend and translator, he wrote three paper in economics: on subjective probability and utility (a response to Keynes, 1926), on optimal taxation (1927, described by Joseph E. Stiglitz as “a landmark in the economics of public finance”), and optimal economic growth (1928; hailed by Keynes as “”one of the most remarkable contributions to mathematical economics ever made”). The economist Paul Samuelson described them in 1970 as “three great legacies – legacies that were for the most part mere by-products of his major interest in the foundations of mathematics and knowledge.”
For more on Ramsey and his thought, see “One of the Great Intellects of His Time,” “The Man Who Thought Too Fast,” and Ramsey’s entry in the Stanford Encyclopedia of Philosophy.
“An imbalance between rich and poor is the oldest and most fatal ailment of all republics”*…
In a stark sign of the economic inequality that has marked the pandemic recession and recovery, Americans as a whole are now earning the same amount in wages and salaries that they did before the virus struck — even with nearly 9 million fewer people working.
The turnaround in total wages underscores how disproportionately America’s job losses have afflicted workers in lower-income occupations rather than in higher-paying industries, where employees have actually gained jobs as well as income since early last year.
In February 2020, Americans earned $9.66 trillion in wages and salaries, at a seasonally adjusted annual rate, according to the Commerce Department data. By April, after the virus had flattened the U.S. economy, that figure had shrunk by 10%. It then gradually recovered before reaching $9.67 trillion in December, the latest period for which data is available.
Those dollar figures include only wages and salaries that people earned from jobs. They don’t include money that tens of millions of Americans have received from unemployment benefits or the Social Security and other aid that goes to many other households. The figures also don’t include investment income…
The figures document that the vanished earnings from 8.9 million Americans who have lost jobs to the pandemic remain less than the combined salaries of new hires and the pay raises that the 150 million Americans who have kept their jobs have received.
The job cuts resulting from the pandemic recession have fallen heavily on lower-income workers across the service sector— from restaurants and hotels to retail stores and entertainment venues. By contrast, tens of millions of higher-income Americans, especially those able to work from home, have managed to keep or acquire jobs and continue to receive pay increases.
“We’ve never seen anything like that before,” said Richard Deitz, a senior economist at the Federal Reserve Bank of New York, referring to the concentration of job losses. “It’s a totally different kind of downturn than we’ve experienced in modern times.”
The figures also underscore the unusually accelerated nature of this recession. As a whole, both the job losses that struck early last spring and the initial rebound in hiring that followed have happened much faster than they did in previous recessions and recoveries. After the Great Recession, for example, it took nearly 2 1/2 years for wages and salaries to regain their pre-recession levels…
One reason why the job losses have had relatively little impact on the nation’s total pay is that so many of the affected employees worked part time. The average work week in the industry that includes hotels, restaurants and bars is just below 26 hours. That’s the shortest such figure among 13 major industries tracked by the government. The next shortest is retail, at about 31 hours. The average for all industries is nearly 35 hours.
The recovery in wages and salaries helps explain why some states haven’t suffered as sharp a drop in tax revenue as many had feared. That is especially true for states that rely on progressive taxes that fall more heavily on the rich. California, for example, said last month that it has a $15 billion budget surplus. Yet many cities are still struggling, and local transit agencies, such as New York City’s subway, have been hammered by the pandemic.
The wage and salary data also helps explain the steady gains in the stock market, which have been led by high-tech companies whose products are being heavily purchased and used by higher-income Americans, such as Apple iPads, Peloton bikes, or Amazon’s online shopping.
This week, the New York Fed released research that underscored how focused the job losses have been. For people making less than $30,000 a year, employment has fallen 14% as of December. For those earning more than $85,000, it has actually risen slightly. For those in-between, employment has fallen 4%…
Some companies have cut wages in this recession, but on the whole the many millions of Americans fortunate enough to keep their jobs have generally received pay raises at largely pre-recession rates. Some of those income gains likely reflect cost-of-living raises; the Commerce Department’s wage and salary data isn’t adjusted for inflation…
Truman Bewley, a retired Yale University economist who wrote a book about the concept of sticky wages, said that most companies have a key core of workers they rely on through hard times and are reluctant to cut pay for them.
And there’s another reason, Bewley said, why many companies cut jobs instead of pay. While researching his book, he said a factory manager told him why his company did so: “It gets the misery out the door.”
More at: “Sign of inequality: US salaries recover even as jobs haven’t.”
See also “More Than 33 Million Americans Have Filed for Unemployment During Coronavirus Pandemic.” source of the image above.
And to compare the U.S. to other countries, try this nifty interactive visualization.
* Plutarch
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As we examine equity, we might send foundational birthday greetings to Pierre le Pesant, sieur de Boisguilbert; he was born on this date in 1646. A French lawmaker and a Jansenist, he is best remembered as one of the inventors of the notion of an economic market– he championed free trade in opposition to Colbert‘s mercantilist views (which generated government revenues through duties and tariffs).
But he is also noteworthy as the champion of a single tax on each citizen (in lieu of all tariffs, customs, and other trade-related fees) that in some ways presaged Henry George‘s proposals.
“I like to pay taxes. With them, I buy civilization.”*…
The United States and Britain had a treaty under which they agreed not to tax each other’s companies’ profits. Such double-taxation treaties are foundational to the globalised economy because they ensure that a company that operates in more than one country isn’t taxed twice on the same money… this treaty extended to Britain’s overseas colonies, which exposed a flaw at the heart of this system: if one country undercuts the other on tax rates, companies that base themselves there can dramatically reduce the amount of tax they pay in the other.
Most big countries won’t play this game, because it would destroy their tax bases. The BVI, being small and having a weak economy, had no such considerations because it didn’t have much tax revenue to lose: the new business the islands attracted from relocating companies gained them more in fees than they lost in taxes. Such countries are now understood and referred to as tax havens, but back in the 1970s they were a new phenomenon and businesses were exploring them with relish.
In the 1970s, corporations in the BVI paid 15 per cent tax on their profits, while in the United States they paid 50 per cent. If an American incorporated her business in the Caribbean she could export her dividends and cut her effective tax rate by more than half. All she needed was a local lawyer. And, dating from 1976, when US clients first found him, that lawyer was Michael Riegels…
The extraordinary story of the British ex-pat in the British Virgin Islands who founded the now-global off-shore tax haven “industry,” currently estimated to hold $7-10 trillion in assets (up to 10% of global assets) anonymously and outside the reach of home country authorities: “The Second Career of Michael Riegels.”
*
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As we salt it away, we might recall that it was on this date, the Ides of March, in 44 BCE that Julius Caesar, who was reputedly “born of the knife” (via cesarean section), died by the knife– stabbed to death by Brutus, Casca, and 58 others in the Roman Senate.
In fact, the early history of cesarean section remains shrouded in myth and is of dubious accuracy. Even the origin of “cesarean” has apparently been distorted over time. It is commonly believed to be derived from the surgical birth of Julius Caesar, however this seems unlikely since his mother Aurelia is reputed to have lived to hear of her son’s invasion of Britain. At that time the procedure was performed only when the mother was dead or dying, as an attempt to save the child for a state wishing to increase its population. Roman law under Caesar decreed that all women who were so fated by childbirth must be cut open; hence, cesarean. Other possible Latin origins include the verb “caedare,” meaning to cut, and the term “caesones” that was applied to infants born by postmortem operations. [source]
The Death of Caesar, Jean-Léon Gérôme, 1867
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