Posts Tagged ‘taxes’
“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.)
“Black money is so much a part of our white economy, a tumour in the centre of the brain – try to remove it and you kill the patient.”*…
The informal, or shadow, economy (and here and here)– economic activity, both casual and criminal, that is neither recorded nor taxed– is a feature of life virtually everywhere. Dorothy Neufeld (in Visual Capitalist) unpacks the league table…
The world’s $12.5 trillion informal economy covers nearly every corner of the world, seeing the highest concentration in emerging economies.
Yet in absolute terms, China, the U.S. and India are home to the largest black markets—covering everything from street vendors to illegal activities that evade governmental oversight. Overall, this generates lower tax revenue and poorer working conditions given the absence of worker protections, leaving millions exposed to poor working conditions…
… Since 2004, workers employed in China’s informal economy have nearly doubled, reaching approximately 200 million.
Driving this trend are jobs are found in the labor-intensive services sector, such as drivers, nannies, and roadside repairmen. As a result, China’s income tax revenue accounts for about 6% of GDP—far lower than the 24% OECD average.
Ranking in second is the U.S. shadow economy, valued at $1.4 trillion. Overall, states with lower real GDP and higher regulatory burdens tend to have more active underground economies.
Meanwhile, Brazil leads in Latin America, with a shadow economy valued at $448 billion. In Europe, Germany is home to the largest at $308 billion, equal to 6.8% of GDP…
Ranked: “The World’s Biggest Shadow Economies.”
* Rohinton Mistry, Family Matters
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As we contemplate commerce, we might recall that it was on this date in 1988 that three 50 pound snapping turtles were found in a Bronx, New York sewage treatment plant. They had probably been pets that were flushed down the toilet when very small. One might imagine that this story helped spawn the Teenage Mutant Ninja Turtles, but the Ninja Turtles are actually a bit older than that. Comic book artists Kevin Eastman and Peter Laird published the first Ninja Turtles comic in 1984.
“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 don’t pay taxes. Only the little people pay taxes.”*…
Nine years ago, Republican lawmakers gutted the IRS’s budget, but didn’t relax its requirement to conduct random audits: in response, the IRS has shifted its focus from auditing rich people (who can afford fancy accountants to use dirty tricks to avoid paying taxes) to auditing poor people (who can’t afford professional help and might make minor mistakes filling in the highly technical and complex tax forms), until today, an IRS audit is just as likely to target low-income earner whose meager pay entitles them to a tax credit is as it is to target a filer from the top one percent of US earners.
Propublica pointed this out in an excellent tax-season report last April, and Senator Ron Wyden [D-OR] took up the issue with the IRS. Now, IRS Commissioner Charles Rettig has provided a report to Senator Wyden admitting that his agency targets poor people because they can’t afford to appeal the audits, making them cost-effective notches on the IRS’s bedpost.
Rettig’s report admits that auditing rich people would turn up more fraud and bring in more money for the US government, but says that he can’t afford to do so unless Congress restores the IRS’s funding. There’s bipartisan support for such a measure, but with Sen. Mitch McConnell blocking any Senate action, there may not be any more appropriations bills in 2019…
The sad story in full at “IRS admits it audits poor people because auditing rich people is too expensive.”
Pair with “The Rich Really Do Pay Lower Taxes Than You.”
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As we shake our heads, we might recall that it was on this date in 2011, a Saturday, that Weezer’s ex-bassist Mikey Welsh passed away. Two weeks earlier, on September 26th, he had tweeted “Dreamt I died in Chicago next weekend (heart attack in my sleep). Need to write my will today,” followed by “Correction – the weekend after next”. He died from a heart attack in his sleep. In a hotel room. In Chicago.
“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else”*…
President Trump [recently] announced that economist Arthur Laffer will receive the Presidential Medal of Freedom. Laffer is most famous for his “Laffer curve,” a graph that suggested that lowering tax rates might increase tax revenue. This graph had major political consequences, but made him more notorious than celebrated in the field of economics…
Economists tend to roll their eyes when the Laffer curve is mentioned. A panel of elite academic economists across the political spectrum found in 2012 that none of its respondents agreed that the United States was on the wrong side of the curve. Even George Stigler, a leader of the Chicago School of Economics who disliked taxes at least as much as Laffer, described the Laffer curve as “more or less a tautology.”
Yet the idea has been influential for more than 40 years. The Laffer curve did not begin as a formal economic theory, but as a simple depiction of the relationship between tax rates and government revenue. Legendarily, perhaps apocryphally, it was scribbled onto a napkin after dinner. [A recreation of the legendary napkin, created by Laffer for Donald Rumsfeld, who was at the dinner (with Dick Cheney) where it was supposed first sketched.]
The concept is simple enough. As tax rates increase, people’s incentives to work and make investments decrease because they make less money from them. Above some rate, taxes become so onerous that total revenue goes down because people aren’t as economically active as they would be in a world with lower taxes. The big question is what that rate — the tipping point on the Laffer curve — actually is.
Laffer may have named the curve, but the idea was not original to him. As proponents in the late 1970s liked to point out, the general idea dates to the Arab social theorist Ibn Khaldun, who wrote in the 14th century, “At the beginning of a dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments.”
In less remote history, Andrew Mellon, Republican treasury secretary to three presidents, articulated a similar idea in 1924. And when Democrats advocated for the Revenue Act of 1964, which cut the top marginal rate from 91 to 70 percent, their bill made exactly the same arguments. Even Wilbur Mills, the fiscally conservative Democratic chair of the Ways and Means Committee, found himself claiming that the tax cut would “eventually lead to higher levels of economic activity and thereby increase, rather than decrease, revenue.”
Yet it was Laffer’s variant that caught the ear of Republicans in the late 1970s, just as they were shifting from a position as the party of balanced budgets to the party of tax cuts. Indeed, the Laffer curve was a way to say, “Why not both?” One influential ear Laffer caught was that of Wall Street Journal associate editor Jude Wanniski, who made the curve a centerpiece of his 1978 book, “The Way the World Works.”
Laffer and Wanniski had a champion in Congress as well, in former Buffalo Bills quarterback Jack Kemp. In April 1977, Kemp introduced a bill to cut income tax rates by 30 percent across the board. He started talking about the Laffer curve in October and over the next year mentioned it several more times in Congress.
But it was only with the June 1978 passage of California’s Proposition 13, which slashed property taxes, that the Laffer curve argument exploded into the mainstream. In this new atmosphere of “tax revolt,” the Laffer curve came up 128 times in the Congressional Record in less than four months…
The man who gave (what Will Rogers first called) trickle-down economics its own “curve,” who gave supply-side economics its graphic icon: “Trump is giving Arthur Laffer the Presidential Medal of Freedom. Economists aren’t smiling.”
For more on the “tyranny of curves,” see “Phillips, Laffer and Gatsby: on economists obsessing about curves.” And for more on the out-sized political, economic, and social impact of Laffer’s ideas, see “Starving the Beast- Ronald Reagan and the Tax Cut Revolution.”
* “The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.” -John Maynard Keynes
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As we grapple with graphs, we might spare a thought for a different kind of economist (and one whose impact was much more indisputably positive), Elizabeth Josephine Craig; she died on this date in 1980. A home economist and journalist, she published dozens of books, mostly cookbooks and volumes of home management advice. Craig started to cook when she was 6 and began collecting recipes at 12; she began publishing cookbooks after World War I and continued to publish until her death. Her contribution to English culinary literature comprises a very large collection of traditional British recipes, but also included a considerable number of dishes from other countries, which she gathered during visits abroad (often with her war correspondent husband).
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