Donald Trump on Monday floated the idea that he might seek to replace the federal income tax with federal taxes on imports—also known as tariffs.
This is potentially a good idea, but not for economic reasons. There is no economic reason why tariffs are any better or any worse than the income tax. A tariff, which is just a tax, is no less compulsory than the income tax. A tariff is no less destructive to private wealth and capital than the income tax. Contrary to various protectionist myths, Americans pay tariffs like they pay any other tax imposed by the US government.
[Read More: “How to Look at Tariffs“ by Murray Rothbard]
On the other hand, a tariff isn’t necessarily worse than an income tax. Yes, tariffs act to diminish trade, and that’s a bad thing. But income taxes do the same. When people pay taxes of any kind—whether they are income taxes or tariffs, people have less money to spend on—or invest in—everything, regardless of where it is made or located.
The only reason why it might be a good thing to “replace” income taxes with tariffs—note that we’re not being offered any significant cuts in taxes overall—is that income taxes have always been a way for the federal government to engage in wholesale violations of individual privacy. Since the legalization of the income tax in 1913, the federal government has claimed the power to monitor every wage earner’s income. Theoretically, replacing income-tax revenue with tariff revenue would reduce the number of Americans who must report all their financial affairs to the federal government every year. That’s not an economic argument, it’s a political one, and maybe that’s reason enough to bother abolishing the income tax, even if something else replaces it. In economic terms, though, let’s not pretend replacing one tax with another makes anyone more free or better off.
The Problem with Tax Reform
All this talk about “replacing” one tax with another means we’re talking about tax “reform,” not tax abolition. Every now and then, we encounter various types of tax “reform” such as replacing the progressive income tax with a flat tax, or replacing income taxes with a VAT tax or national sales tax. There is rarely any reason to get very excited about tax reform, because it usually just rearranges the tax burden without endangering the regime’s ability to collect huge amounts of revenue.
As with most tax reform plans, the Trump proposal to replace one tax with another is based on the premise that overall tax revenue should be “revenue neutral.” That is, the amount of tax revenue extracted from Americans will be more or less the same, and the American state will continue to have many trillions of dollars to spend each year. That’s not exactly a great blow to state power, nor does it offer any sort of boon to economic activity or the standard of living for ordinary Americans.
Read More: “The Myth of Tax Reform“ by Murray Rothbard
Moreover, when it comes to Trump’s proposal, the details of what we mean by “income tax” matter a lot. When Trump says he wants to abolish “the income tax,” its unclear if he just means the graduated income tax, or all taxes on income. After all, all wage earning Americans pay enormous amounts of taxes in the form of payroll taxes. Payroll taxes are income taxes, and in order to collect them, the government demands access to the details of everyone’s earnings.
So, any benefits in terms of added privacy and freedom will only be achieved if all taxes on income are abolished. That means no graduated income tax, no payroll taxes at all, and the abolition of all the machinery of the IRS.
If Trump only abolishes the graduated income tax and replaces it with high tariffs, then our position is hardly improved. The federal government still monitors all our earnings, and we get to pay a lot more for basic goods. That’s the sort of tax reform that is not worth caring about.
For argument’s sake, though, let’s say Trump abolishes all income taxes and replaces them with tariffs—which would exactly “replace” the revenues formerly obtained through income taxes. In terms of financial privacy, this would be a good thing for our everyday lives. Regular people who are not directly involved in international trade would generally not have to worry about the endless paperwork that comes with income taxes. That’s all to the good. Economically speaking, though, the “reform” makes no difference. Tariffs would still be sucking trillions of dollars out of the private economy in a way similar to income taxes.
Moreover, with tariffs rising to much higher levels, efforts to avoid tariffs will become much more widespread, and smuggling will become an occasion for much federal handwringing. As federal bureaucrats do now with income taxes, there will be demands for more taxpayer money to staff agents to enforce tariffs mandates.
Again, this isn’t necessarily any better or worse than the situation with income taxes, but these facts are reminders that all taxes require enforcement, and tariffs are hardly some kind of kindler, gentler tax.
What Real Tax Reform Would Look Like
No revenue-neutral will ever make any real difference to the size and scope of the state, however.
The only change that would make a real difference is a program of sizable cuts to both taxes and spending. Tax cuts alone will never make us better off because tax cuts without spending cuts only means bigger deficits. Bigger deficits mean more inflationary monetary policy and more price inflation. Tax cuts without spending cuts mean the tax burden is merely shifted from nominal taxes to the de facto tax of price inflation.
If a politician claims to be a “tax cutter,” he is not to be taken seriously unless he’s also for cutting spending. When Trump rearranges tax programs or cuts taxes while also signing off on more deficit spending, he is really raising everyone’s inflation tax. No tax “reform” changes this.
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