Now that the election is over, we can discuss and analyze things again without every piece of analysis needing to be pro or contra or seen in some political light.
Thanks, as always. Good question. Funny too, I had a section on this and deleted it because it was getting too long. Maybe I'll write a separate column just on this. Trump and Team commented more than once that they would gladly investigate if you could replace income taxes with tariffs. My quick take: At one level you are 100% right and in practice it doesn't work. (Technically, "income" can come from any source foreign or domestic, but let's ignore that for now.) And, it's a valid economic inquiry as to whether we finance government via income taxes, consumption taxes or tariffs, or some combo. To see one reason, however, it's not quite the same, imagine pure tariff financing. People could, in principle import zero goods. Then government revenue would be zero. People can't, in practice, generate zero income for themselves. They have to live. So the two can't just be switched out. ... But your basic intuition isn't too wrong. Whatever we tax we get less of and people have long argued we should tax consumption (demand side) not income which is generated from the supply side of the economy. Again, we can't consume zero. We'd die. So, it's feasible. ... Thanks again. Keep asking your questions and sharing thoughts. They're always appreciated and this time, I think, will inspire me to write a short follow up on this topic since it might come back up anyway.
The thing I always wonder in these discussions is: Are tariffs worse than income taxes? Income taxes seem like basically a tariff on domestic production, which I would think would have similar distortionary effects as tariffs on imports, and we can see governments trying to offset some of those distortions by offering deductions (and subsidies), which in turn lead to further distortions, much like we expect to happen for tariffs and exceptions to tariffs. Governments need to make money somehow, so, on the margin, how do we know if it it's worse to raise tariffs by $X or to raise income taxes by $X?
Thanks, as always. Good question. Funny too, I had a section on this and deleted it because it was getting too long. Maybe I'll write a separate column just on this. Trump and Team commented more than once that they would gladly investigate if you could replace income taxes with tariffs. My quick take: At one level you are 100% right and in practice it doesn't work. (Technically, "income" can come from any source foreign or domestic, but let's ignore that for now.) And, it's a valid economic inquiry as to whether we finance government via income taxes, consumption taxes or tariffs, or some combo. To see one reason, however, it's not quite the same, imagine pure tariff financing. People could, in principle import zero goods. Then government revenue would be zero. People can't, in practice, generate zero income for themselves. They have to live. So the two can't just be switched out. ... But your basic intuition isn't too wrong. Whatever we tax we get less of and people have long argued we should tax consumption (demand side) not income which is generated from the supply side of the economy. Again, we can't consume zero. We'd die. So, it's feasible. ... Thanks again. Keep asking your questions and sharing thoughts. They're always appreciated and this time, I think, will inspire me to write a short follow up on this topic since it might come back up anyway.
The thing I always wonder in these discussions is: Are tariffs worse than income taxes? Income taxes seem like basically a tariff on domestic production, which I would think would have similar distortionary effects as tariffs on imports, and we can see governments trying to offset some of those distortions by offering deductions (and subsidies), which in turn lead to further distortions, much like we expect to happen for tariffs and exceptions to tariffs. Governments need to make money somehow, so, on the margin, how do we know if it it's worse to raise tariffs by $X or to raise income taxes by $X?