Donald Trump really likes tariffs. When he muses about tariffs, it sounds like he wishes that he could place tariffs on absolutely anything brought into the US from anywhere. And he might try to do so (or not).
But why is he so enthusiastic about them? In his public discourses he justifies his stance by alleging that they will bring more jobs and investment into the US. But most economists don’t think that will be the result of such action, but rather that a modest number of new jobs would be created, while a fair number of others would be lost, and inflation would be expected to increase to a non-trivial extent, which in turn might well lead to higher borrowing costs.
Within the rich boys’ club, who are his key backers, and especially amongst the tech billionaires, you would think that their logical preference would favour fairly free trade, which would optimize their costs of operation and increase their income and wealth.
But for the hard right in the United States, there is a less obvious reason why substantial tariffs might be viewed as desirable. It relates to the hard right’s opposition to the graduated (or “progressive”) income tax. Income tax was first introduced in the United States in 1913, and, right from the start, it had higher marginal rates for higher incomes. Over generations there has been a right-wing movement in the United States advocating a flat tax on income rather than a graduated one. Various fringe candidates have actually run on “flat tax” platforms, and there have been many legislative attempts to reduce the number of tax brackets, including in 1986 by Ronald Reagan. But the flat taxers know that they could never get a true flat-rate income tax plan through Congress. It would be too obviously an economic attack on the poor and the middle class and a financial benefit for the wealthy.
The difficulty in achieving a flat rate income tax led some on the right to start thinking about sales taxes, which are also flat rate taxes. But again, at this juncture, it would be well nigh impossible to get a national sales tax bill through Congress. It is true that all but five states have state sales taxes, and many counties and cities have add-on sales taxes. But a national sales tax to raise revenue for the federal government, so that it could lower income taxes would almost certainly be what is often termed “a third rail political issue”, meaning a fatal political mistake.
But there is a less obvious back door to the same objective. Since the US is a sort of nexus of world trade, and imports rather a lot of goods, the act of placing tariffs on most goods that come from most other nations would, surreptitiously, have the same effect as a national sales tax. And that effect would be to raise money using a consumption tax, which is as a form of flat tax on income spent. If this could be escalated to the point where it would provide substantial resources to the federal government, it would allow the flattening (and diminishing) of the income tax structure. Furthermore, it would not be quite as obviously an attack upon the poor and middle class as a flat income tax scheme would be.
It is already clear that Trump’s tariff notions are really not simply aimed at making various US industries more competitive vis-a-vis outside suppliers than they are at present, with a view to “importing jobs”. If this were the objective, he would not be attempting to apply tariffs to goods for which no realistic internal US increase in supply is possible. Two examples relevant to Canada would be the aluminum and potash we supply to the US. The US has no choice but to continue to source them from us, but Trump nonetheless wants to increase the cost that US firms will need to pay for these things, which, in turn, will increase the price they must charge for the products into which these are incorporated. The blanket nature of the tariff manoeuvre is what reveals the falseness of the publicly stated rationale.
Given that all these early moves by Trump may be found in due course to be extra-judicial, as they have been carried out under an ersatz national security emergency rubric, the experiment to achieve the flat-taxer goal via the back door may never fully come to fruition. But it seems very likely that it is a non-trivial portion of the motive for the current silliness.
