The purpose of domestic taxation is two-fold. 1) It raises revenue for the government, without which it couldn’t do what we want it to do for us. And, 2) if but only if consumption of the product is discretionary, it discourages that consumption. Think of alcohol and tobacco.

These two desiderata are in direct conflict, because the more successful taxation is at discouraging consumption, the fewer taxes it will collect. Well yes, but that loss is at least partially covered – or so policy makers hope – by what government saves in health care, at least in countries with socialised medicine. Poor people pay more in sin taxes because they drink and smoke more. But taxes on rent discourages investment in housing. Graduated income tax discourages overtime. But limiting overtime distributes employment. And so on.

So yes, taxes giveth and they taketh away. But good tax policy is about finding a workable and stable equilibrium. Workable because if it’s not, the transaction costs – i.e. the cost of collection – can render its collection revenue-neutral or worse. And stable because human behaviour is almost entirely a function of anticipated payoff. If one can’t anticipate with a reasonable degree of confidence, it’s not that she won’t behave as the policy intends. It’s that she might not ‘behave’ at all!

A tariff is a tax the country places on the importer at the point of entry. That that tax is then passed on to the consumer is not an autonomous effect. It’s the sine qua non of it. The purpose of a tariff is two-fold. 1) It raises revenue for the government, and 2) it tilts the playing field in favour of the domestic producer of the same product.

The consumer wants free trade for the same reason the producer doesn’t. It keeps prices down. If the tariffs do their job, they’ll knock out the offshore competitors, so the domestic price can and will go up. That places producers and consumers in direct conflict. And so once again, good tariff policy is about finding a workable and stable equilibrium between these competing constituencies. Workable and stable for the reasons already cited.

But now comes the side complication. When governments control prices, either directly or through taxes, they’re balancing domestic interests. But tariffs penalise producers on the other side of the border. So those producers will lobby their government to impose retaliatory tariffs. Good for the producer, bad for the consumer. And of course producers are also consumers, including of the constituents of what they produce.

So as above, it’s giveth and taketh away. But as with any redistribution of wealth, it’s a fool’s errand to try to figure out whether I’m a winner or a loser. We’re all inclined to think the counterfactuals make us the victim. But that’s because we’re cherry picking the counterfactuals.

One justification for tariffs on some products is that reliance on offshore production renders us vulnerable in the case of a rupture in that supply train. So a country that can produce the lion’s share of its own oil should. Likewise pharmaceuticals. And now computer chips. We can’t compete with countries in the Western Pacific on the production of these commodities, and so we have to protect our onshore production of them.

But figuring out which commodities, how vulnerable, and so on, can’t be dismissed as a fool’s errand. We fools need gas, drugs, and now smart phones. So we’ve delegated these calculations to our slightly betters. I say our slightly betters, because they too can and do get it wrong. In short, a little humility can go a long way. Just as long as that long way isn’t all the way.

Categories: Everything You Wanted to Know About What's Going On in the World But Were Afraid to Ask, Social and Political Philosophy

Tags: competition, consumers, domestic, foreign, free trade, producers, tariffs, taxes, vulernability