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There is a reason the U.S. abandoned revenue tariffs

There is a reason the U.S. abandoned revenue tariffs

Mark Twain claimed that “history doesn’t repeat itself, but it does rhyme”; at some point though the repetition and rhyming become indistinguishable. Tony Mellon, grandson of Gilded Age robber baron and 1920s Treasury Secretary Andrew Mellon, gave a pro-Trump PAC $50 million the day after the former president was convicted of dozens of felony charges related to his fraudulent business records. A few days later, Trump posted on his Truth Social account about the many delights of tariffs, a favorite tool of Mellon’s grandfather and of William McKinley, whose unabashedly pro-business policies helped create the Mellon family fortune in the late 1800s:

The sudden upswing in support for tariffs, after decades of expanding free trade, has many roots. A general distrust of all things “neoliberal” is one of them, and perhaps the most understandable: increased trade has brought increased prosperity, just as economics from David Ricardo to Paul Krugman (and very much including Henry George) predicted. However, the wealth was not broadly distributed, and increasing inequality in wealthy countries has led to a protectionist backlash in many. Another trend is even more troubling: nationalism and saber rattling aimed at China, which both parties partake in to some degree. When Americans think imports, they often think China (ignoring our neighbors Canada and Mexico, both of whom are major exporters to the US as well), and imagine that higher tariffs will hurt our ostensible geopolitical rivals across the Pacific.  

Whatever the security or strategic arguments for tariffs, however, it’s important to point out that Trump’s economic ‘theories,’––to the extent that they merit the name, were abandoned by mainstream economics long ago. It’s true that McKinley and other Gilded Age U.S. presidents made great use of tariffs in the absence of a constitutional amendment allowing for an income tax. But the economy over which they governed was hardly idyllic, wracked as it was by extreme instability, with frequent crises and volatile employment markets, exacerbated by extreme monopoly power wielded by influential trusts. Tariffs impoverish consumers and lead to decreased efficiency; and, unlike income taxes, they cannot easily be made progressive. Georgists today often decry income taxes as having the effect of discouraging work, and so they do. But Georgists of the late 19th and early 20th century rightly saw income taxes as an improvement to that tariff system, and it’s worth examining why.  

First, tariffs, in reducing trade, fundamentally make us all poorer. As George notes so eloquently: “What protection teaches us is to do to ourselves in time of peace what enemies seek to do to us in time of war.” The last few years of ratcheting sanctions by the U.S. and allies against Russia, and now of many states and organizations against Israel––to say nothing of the forcible blockades of places like Gaza or Yemen, reveal that all these parties fundamentally understand that restricting a state’s trade is a way to impoverish it in the long run. Tariffs of the scale necessary to appreciably mitigate income taxes would effectively make trade with the US near impossible for all but a few goods. Could the US recover? Perhaps. One can look at Russia’s effort to shift manufacturing to domestic sources to make up for its exclusion from European trade. But the cost to Russia has been high inflation despite double digit interest rates, and this is despite mostly unrestricted trade with China, the Middle East, and several other regions. A massive universal tariff would likely hit the U.S. even harder.  

Second, tariffs are doomed to regressivity in a country like the U.S. where imports are frequently inexpensive. Income taxes in the United States are progressive; that is to say, those with higher incomes pay a larger percentage of those incomes than those who earn less. Indeed, a large percentage of Americans don’t pay any income taxes at all. (Our payroll taxes, funding things like social security, are quite a different story, and end up being regressive overall.) Trying to raise the same money with tariffs would hit low and middle-income Americans much harder.  Every pair of jeans from Bangladesh, every banana from Costa Rica, every 2×4 milled in Canada, and every computer chip forged in Taiwan would have to be more expensive. Tariffs would increase costs no less surely than sales taxes, which are broadly understood to be regressive. Perhaps even worse, inputs like steel, aluminum, rare minerals, and rubber would also get more expensive, meaning that American manufacturers, far from reaping the benefits of a ‘protectionist’ policy, would be at a competitive disadvantage relative to the free trading world.  

And this leads to the final problem with deriving most of our revenue from tariffs: to survive, companies would need to lobby and compete for tariff exclusions on their inports and special tariffs on their products. Not for nothing did free traders of yore declare that “tariff is the mother of trusts.” By structuring tariffs to their advantage, well connected corporations can reap record profits while keeping foreign competitors out and lording their trade advantages over domestic competition as well. A multibillion dollar corporation will generally find a way to slip tariff exceptions for its most important inputs into a tariff schedule likely to extend to thousands of pages, while smaller firms will be crushed by capricious import taxes and the inevitable retaliatory tariffs. We already saw this with the relatively small scale trade war Trump declared on China in his first term. Tariffs on steel and aluminum harmed many manufacturers, while some farmers were given rebates and credits to make up for the damage to their businesses caused by Chinese retaliatory tariffs. 

Of course, for both these enormous businesses and a potential chief executive, these are features, not bugs. Corporations with access to legislators and cabinet officials can insulate themselves from competition, while the president and his appointees have new tools with which to punish or reward firms. But it’s hardly a past any of the rest of us, who aren’t Trumps or Mellons, want to return to.  

What’s the solution, then? Well, first and foremost of course it is to work against tariffs and the politicians who would expand them. Trump (with acolytes like JD Vance) has promised to push tariffs the furthest, but both parties find them politically convenient, and lobbying Democrats for free trade will also be important. Beyond this, however, George identified a great weakness of free traders in his own day, and in ours: 

“The opponents of protection have, for the most part, not only professed no special interest in the well-being of the working classes and no desire to raise wages, but have denied the justice of attempting to use the powers of government for this purpose. . .While protesting against restrictions upon the production of wealth they have ignored the monstrous injustice of its distribution.”

If we are to defend a system of free trade (probably with strategic, environmental, and human rights exceptions), we need to take George’s words to heart. Trade produces a great deal of wealth, but this is not sufficient. If we want to create a durable system of free trade, we need not only to defend that trade itself but also make its benefits felt up and down the socioeconomic spectrum.  

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