Trump's middle class tax hike

Higher tariffs will raise prices and promote lower-paying jobs

Democrats have, for reasons that are politically if not substantively sound, grown skittish about the idea of raising taxes on anyone who isn’t dramatically richer than the average American. And I think we all understand that if Joe Biden were to put out a tweet tomorrow that said “I really admire the Danish social model, and that’s why I’m proposing a big new national consumption tax to finance a more generous safety net,” it would be a huge deal politically. Which makes it remarkable, in my view, that Donald Trump is running on a gigantic regressive tax increase and nobody seems to care.

But let’s be clear: Tariffs, which Trump is proposing to raise across the board, are taxes. They are taxes on imported goods.

If you buy a banana, that banana is going to be more expensive. If you buy a t-shirt, that t-shirt is going to be more expensive. If you buy an iPhone, that iPhone is going to be more expensive. In exchange, the government will get more revenue. That’s how taxes work, and there’s no magic in using the word “tariff” as jargon for “tax on imported stuff.” I am not, personally, an anti-tax ideologue, and I think that broadly raising the price of private consumer goods in order to finance a stronger social safety net is a reasonable idea. But I also acknowledge that this is a very unpopular idea with very few people willing to personally pay higher taxes, so I think it’s totally reasonable that Biden only wants to raise my taxes.

But Trump’s tax increase is worse than a Danish-style Value Added Tax (VAT) for several reasons.

One is that by exclusively taxing imported goods, it generates a lot of economic distortions and odd windfalls. Almost all coffee consumed in the United States is imported, for example, but there is a small amount grown in Hawaii. A 10 percent tax on all coffee would be annoying to coffee drinkers (we’d have to pay ten percent more), but the government would also get a bunch of revenue. If you make it a tax exclusively on imported coffee, the price of coffee still goes up ten percent for everyone, but some of the revenue ends up in the pockets of Hawaiian coffee plantation owners rather than the government, because they get to raise prices to match.

Stephen Miller has taken to making the case that tariffs are an unusually good kind of tax that “built America,” citing, I guess, Alexander Hamilton’s economic program as a model for Donald Trump.

This has prompted some interesting intra-conservative debates about the economic history of the United States, and it links up with some ideas about “industrial policy” that progressive economic thinkers are interested in.

But I do have to insist that there’s something of a trap in getting yourself enmeshed in these debates, because the actual Trump proposal — a broad increases in taxes on all imported goods — isn’t any kind of industrial policy at all, and it has nothing to do with the situation facing the early Republic.

Technology has advanced since 1790

Economic development features a kind of order of operations. The Industrial Revolution started with textile manufacturing, and almost every country that has sustained economic development starts with a textile manufacturing industry. Economic growth success stories tend to move “up the ladder,” making furniture and toys and eventually more complicated goods like heavy machinery and high technology products. This was obviously not a big consideration for the Founders, because at the time of the founding, there was no computer chip industry or airplane manufacturing industry or medical device manufacturing industry. There were farmers, a small and relatively primitive industrial sector, and some people in trades.

Reasonable people can disagree on exactly what mix of policies helps countries move up the value chain of industrialization. Some people believe that protective tariffs are very helpful to this, and others disagree.

The point, though, is moving up the ladder. This is why, at its best, the American industrial policy conversation is focused on things like chips, batteries, defense manufacturing, medical goods, and other things that we perceive to be on the cutting edge or strategically significant.

But Trump is going to put a higher tax on imported bananas. And out-of-season fruit. And coffee. And this is not going to create flourishing domestic banana plantations. And even if it did, picking fruit is not a high wage job. I guess taxing imported food could help American farmers as people switch away from food that isn’t grown here, but the United States is also a net importer of fertilizers, so all agricultural production is going to get more expensive.

And this is not a unique feature of the agricultural value chain. Trump and Miller don’t seem to realize that most stuff is made out of other stuff, so it’s not even clear that taxing imports does systematically advantage domestic producers.

Value chains matter

The United States imports a lot of cars and also exports a lot of cars. We import a lot of car parts, and we also export a lot of car parts. Notably, we both import car parts from China and export cars to China. If we taxed imported Chinese car parts, that may increase the number of Americans who get jobs working in factories that manufacture car parts. But it’s not only going to increase the price that Americans pay for cars, it’s going to make it harder to sell cars to China. American car factories will close, and those workers will need to get new jobs. Chinese car part factories will close, and the workers will need to go get new jobs. The transition would be costly and pointless.

But note that we also sell a lot of cars to places like Saudi Arabia, the UAE, and Nigeria, countries that don’t really have domestic automobile industries. When imported car parts get more expensive in the United States, that’s going to make American car exports less competitive in those Middle Eastern and African markets. Customers there will buy cars made in Germany or Japan or Korea instead, and American manufacturing will be hurt by tariffs that are supposed to help it.

Reality is complicated, and to fully game this out, you’d need to know what happens to exchange rates and a million other things.

What we can know is that the general tendency of a flat tax on all imports is to advantage American producers of primary components, but to hurt American exporters of complicated machines. We’d be making fewer cars, but more fan belts. More steel and aluminum, but fewer airplanes.

Whether or not you believe it’s the case that 19th century tariffs helped the United States move up the value chain, what Trump is proposing would be the reverse — a move down the value chain that reduces productivity and wages for no reason.

The lure of nostalgianomics

Miller acknowledges that his plan would turn back the clock of American industrial development and revert us to a low-income, low-end country full of low-wage workers. Except he drenches it in nostalgia, talking about how tariffs are going to bring apparel jobs back to states like South Carolina.

When I was a kid, the Northeastern United States was full of towns where people were angry that their textile manufacturing jobs had been lost, not to foreign countries, but to places like South Carolina. This was a genuine hardship for those towns, as economic dislocation always is. Looking back, though, the reason apparel manufacturing went from New England to the Southeast is that New England was the richest region of the country and textile manufacturing is the lowest end of the manufacturing value chain.

South Carolina is now making Boeing 787s and Mercedes Benz Sprinter vans. Two new manufacturing facilities related to EV batteries are under construction.

South Carolina is, in other words, an industrial development success story. Now as I noted, the big dilemma for Joe Biden’s version of industrial policy is that industrial policy success stories frequently involve labor repression. South Carolina succeeded in getting those airplane and car manufacturing jobs, in part, by having a ruthlessly anti-union political economy. But from the standpoint of Nikki Haley’s ideology, it all hangs together perfectly well: While an airplane manufacturing job in South Carolina may not be as good as one in Washington, it’s better than the old textile jobs. Millerism would be a move back into the poorer past, when the state was manufacturing simpler goods at lower wages.

I acknowledge that this may be a politically difficult sell. Irrational nostalgia is a powerful force in politics, and a lot of people erroneously believe that the poorer past was richer. David Autor and his co-authors have a new paper out about how Trump’s tariffs helped him win votes in trade-exposed heartland communities, even as they delivered no economic benefits. The first Obama-Trump crossover voters I met in the 2016 cycle lived in Bucksport, Maine, and they told me they thought he would bring the town’s shuttered paper mill back to life by cracking down on imported paper from China. Trump won the town. The paper mill did not reopen, and in 2020, he won the town again.

So perhaps the best way to avert this disaster is to just argue the tax point.

A tax is a tax is a tax

Haley said that Trump wants to tax every American, which is true.

Miller responded by saying “tariffs are taxes on FOREIGN producers not American,” which I guess is also true. But there’s a difference between the legal incidence of a tax and its true economic incidence. Right now, for example, the federal government taxes gasoline. It doesn’t really matter whether you characterize this as a tax on people who buy gasoline or as a tax on gas stations who sell gasoline. The tax is the tax and it has three effects:

1. The price you pay for gasoline is higher than it would be without the tax.

2. Government revenue is higher than it would be without the tax.

3. The total volume of gasoline sold is lower than it would be without the tax.

The relative scale of one, two, and three depends on what economists call the elasticity of gasoline purchases. Gasoline price elasticity is very well-studied, and we know that in the short-term, consumers mostly swallow the higher prices (this is why high gas prices make people so grumpy), but in the long term, they buy more fuel efficient vehicles (compare European and American cars) and the volume of gasoline consumed goes down.

Most studies indicate that the price of Trump’s tariffs have been primarily born by American consumers (American Action Forum, Cato Institute, Tax Foundation), but this is admittedly an empirical issue. It’s certainly conceivable that slapping a 10 percent tax on imported bananas will primarily cause a decrease in banana purchases and a loss of income to Central American banana growers. But I think that if you don’t use the word “tariff,” and just think about the question “should we put a 10 percent tax on bananas?” you’ll see that “don’t worry, Americans will just stop eating bananas” doesn’t really make it sound better. What is the point of this policy? Are we hoping to create a thriving domestic banana industry? Rubber plantations?

Or think about textiles. I’m wearing a t-shirt right now that was made in Vietnam. The average factory wage in Vietnam is about $1.30 per hour. Given that wage differential, you’re probably not going to close a t-shirt factory in Vietnam and open a new one in South Carolina over a tax increase. The price of shirts will go up. And if you did move your factory to South Carolina, the price would go up even more. This has nothing to do with “free trade” or “industrial policy,” it’s just a boring tax policy question in which “tax foreign t-shirts and fruit” is an inefficient and highly regressive means of raising taxes.

So what?

Understanding this correctly is a big deal for partisan politics.

Most people think (and I agree) that Trump flip-flopping the GOP away from its Reagan-Bush-Bush free trade positions helped him pick up votes in the Midwest. So Joe Biden has mostly kept Trump trade policies in place, which has induced Trump to raise his ambitions in an effort to outflank Biden. And what he’s stumbled on is an idea that, if explained properly to the American people, would be politically toxic. This isn’t a huge regressive tax increase that will finance useful public services — it’s a huge regressive tax increase that will partially offset the cost of tax cuts for the rich.

But I worry that because a lot of progressive intellectuals are so invested in the industrial policy debate, they aren’t going to want Democrats to talk about why a 10 percent across the board increase in tariffs is bad.

So it’s really worth saying that whatever you make of industrial policy, what Trump is suggesting is not a remotely strategic approach to national economic development. If anything, Trump’s entire trade agenda — not only these tariffs, but things like his 2020 effort to score a giant sale of soybeans to China — is geared around de-industrializing the United States and turning us into a primary commodity exporter.

The right’s intellectual trajectory on these topics is somewhat alarming. Everyone in DC understands that Trump did not come up with this policy proposal based on any kind of detailed study of the issue. Unless it benefits him personally, Trump just pulls ideas out of his ass because he likes the vibe. Most professional conservatives have realized that the best way to wield influence in a Trump-dominated party is to say nice things about him and try to work behind the scenes. But the MAGA faithful don’t see the machinations behind the scenes. All they see is Miller talking about how amazing it will be for South Carolina to tumble backward to a more primitive state of development.