Trump is proposing tariffs and a national sales tax because he hates the poors. Back in the Lincoln era, the main platform of the Republican Party (formed from the ashes of the Whigs) was "God, Country, and the Tariff!* The Republican Party back then was pro-business and tariffs on imported goods were thought to help foster domestic industry. As a relatively "new" country, America was importing a lot of manufactured goods and even things like cloth early on. Cotton would be grown in the South, shipped to England, and then returned as soft goods to the colonies. One act of rebellion back during 1776 was to wear "homespun" cloth in place of imported goods. Oddly enough, Gandhi had a similar tactic, spinning his own cotton thread on a spinning wheel, which the Brits had outlawed. Today, that wheel is on the Indian national flag.
So, domestic industry has always been a thing. However, starting in the 1960s and accelerating in the 1970s, more and more "dirty" industries packed up and shipped overseas. I recounted before how the enormous forging machines at New Departure were being packed up on flat bed rail cars, sticking out several feet on each side, and taken down to the coast to be shipped to India. It was a messy, labor intensive industry, and with UAW wages, we could not compete with other domestic industries, much less foreign ones. You don't see "NDH" on railroad bearing hubs anymore, other than in railroad museums. You still see Timkins, though.
I remember, as a kid, our family driving through Pittsburgh, and the entire city was engulfed with smoke. Most cities were, to some extent back then, but Pittsburgh, with its steel industry, was particularly polluted. Today, the sun shines on Pittsburgh and the steel industry has been reduced to the name of a football team. Newer "clean" industries have sprung up in place of the old, with higher salary jobs requiring a higher level of education. Most residents I have met do not pine for the "good old days" of intensive manual labor.
Donald Trump sees this as a problem and wants to bring back domestic industry with tariffs. Problem is, they don't work the way they are intended and the net result is higher prices - more inflation - from the guy who criticizes inflation and blames it on the President at the time. Interesting note, however, inflation has receded to pre-2021 levels. Does Biden get credit for that, or if Trump wins, will he claim the glory? I don't need to guess on that one.
The problem with tariffs are many:
1. It just raises prices: You may recall during the Obama era, they slapped an anti-dumping tariff on Chinese tires for a year or so. The net result was that imported tires skyrocketed in price. Domestic manufacturers followed suit by raising their own prices to reap windfall profits. Consumers, used to paying under $100 a tire for an ordinary car, were chagrined to see prices nearly double. The net result was the consumer got screwed, the domestic tire manufacturers (what few were left) reaped huge profits for four quarters and then.... nothing changed.
If tariffs are imposed on imported goods, expect to see prices skyrocket. Since the "domestic" industry in many cases no longer exists, there is no alternative but to pay the tariff and thus fuel inflation. Even if domestic industry arises (at great capital cost) its overhead will be much higher and thus prices will remain high. Even if a domestic producer can get their costs down, there is no incentive to lower prices, but rather to match competition overseas and pocket the difference.
UPDATE: Trump claims that China will pay the tariffs and that prices will not rise. But it is importers who pay the tariffs and the costs are passed on to consumers. Manufacturers often operate at profit margins of 5% or so and cannot swallow the cost of 50% or even 20% tariffs. They cannot cut their prices to compensate. So the cost is passed on to the consumer - in every case. In some cases, importers simply leave the market if the tariffs are too high (as VW did with its cargo vans in the 1960s as we shall see below).
2. There are work-arounds: Some tariffs just won't go away. Back in the 1960s, Germany imposed a tariff on imported chicken from the USA. In retaliation, America slapped a whopping 20% tariff on imported trucks. That's why, after 1965 or so, you never saw VW vans imported to the States, except for the passenger versions. Every foreign manufacturer set up an assembly plant in the USA to avoid the possibility of tariffs. In fact, there are probably more "Foreign" assembly plants in the States than domestic.
Most of these assembly plants are non-union, too. So instead of creating high-paying UAW jobs in Detroit, we have low-wage part-time jobs in places like Mississippi and Tennessee. The good news is, we now export some American-made cars overseas (for the first time in decades) but most of these are foreign brands. Sure, we send a few American SUVs to Arab countries, where rich young Saudis can drive them around at 30 cents a gallon. But few European or Asian countries are pining for oversized American SUVs and pickups.
So what did these tariffs accomplish? Nothing. Since the "chicken tax" was enacted, GM's market share shrank from 60% to below 20%, on par with Ford these days. The "Big-3" survive only because foreign manufacturers don't make big pickup trucks. But they are slowly moving into that market as well. The tariff on light duty trucks was little more than a temper tantrum - over chickens!
3. Tariff Engineering: Ford has its "Transit" vans made in Turkey where labor costs are low. They are fitted with cheap cardboard seats and flimsy thin glass windows. When they reach the port in New Jersey, there is no "chicken tax" tariff as they are ostensibly passenger vehicles. Once they are certified for sale, the seats are removed, the windows replaced with metal panels and the leftover parts are shredded and disposed of.
Wasteful? Yes. But so are tariffs. For Ford, it is cheaper to destroy these parts and install new ones than to pay a 20% tax. Of course, the government is aware of this and is trying to put an end to "tariff engineering" - but how? A passenger vehicle is tax-exempt, no matter how cheap the seats are. It just illustrates how arbitrary and stupid the "chicken tax" was - and is.
But that is just one example. When Harley-Davidson hit the skids in the 1980s - selling crappy, over-priced bikes during the 1970s AMF era - they petitioned the government for an anti-dumping tariff on motorcycles over 750cc in displacement. The net result was that the Japanese started pushing smaller bikes, which still had a following. Displacement and power are not necessarily related - as evidenced by the new era of car engines making 500 HP from as little as three liters. It gave Harley some breathing room, and that, combined with aggressive licensing of their brand and logos, gave them the cash-flow they needed to rebuild.
But the work-around for importers was to simply make smaller bikes and expand that market with the younger buyers, who often are brand-loyal for life. Harley is paying the price today for abandoning that segment of the market.
But of course, others saw opportunity. The old Indian brand was resurrected and Polaris entered the big-bike fray - building big bikes in America and avoiding the tariff. This cut into Harley's sales. Eventually Indian and Polaris merged (from what I understand) but the big issue is the next generation doesn't seem interested in big "hog" motorcycles, which they identify as boomer-bikes. Harley's venture into smaller bikes and e-bikes seems to have flopped as well.
So the tariff was only a short-term band-aid fix for a long-term problem. The ultimate work-around for importers is to simply open up a factory in the USA, which many have done.
My 1988 Toyota 4x4 pickup was made in Japan - most of it, anyway. To avoid the chicken tax, the cargo bed and bumpers were domestically produced and added to the chassis at the point of entry. I guess they argued it was not a completed vehicle and had "domestic content" and thus avoided the tariff at least in part. Today, Toyota simply builds cars and trucks here, avoiding import duties.
Yes, a tariff can help some industries, but the effects are only short-term.
4. Retaliation: As the "Chicken Tax" debacle illustrates, if you enact a tariff, you might have to deal with blowback from your trading partners who enact retaliatory tariffs on produces you export. As a result you end up hurting your own economy further and commerce grinds to a halt. In 1828, Congress passed, almost by accident, an onerous tariff that ground commerce to a halt. A century later, a Republican Congress passed the Smoot-Hawley tariff act which had the same effect and made the depression even worse. Time and time again, tariffs have been shown to be a bad idea that benefits perhaps only a few at the expense of the many.
When America puts large tariffs on imported goods, our trading partners hit us where it hurts - slapping tariffs on America's biggest export - agriculture. As a result, farmers suffer as crop prices plummet to a point where the cost of harvesting exceeds the market value of the crop.
Tariffs are a two-way street!
But what about a national sales tax?
Again, another ill-conceived idea that will raise prices and ding the poor the most. There are a plethora of problems with this idea as well:
1. It will make inflation accelerate by another 22%: We know this exact amount as that is the number Trump is throwing around - a 22% sales tax, or as they call it overseas, a "Value Added Tax" or VAT. Except here, it would attach to everything you buy. People were freaking out at 8% inflation in 2022. Imagine nearly tripling that rate. Goods would literally be unaffordable for a lot of lower income people.
2. It would drive wage demands up: If your wages are dinged 22% in buying power, you would be more likely to strike for higher wages. We saw this in the last few years as workers decried high inflation and stagnant wages. Those who could hold out for more money, did. Those who could strike, struck. Expect to see more labor unrest if such a bill is passed.
3. It is a huge tax increase for the middle and lower classes: As a retiree, I pay very little in taxes as my income is low. Even the middle class hardly rises above the marginal rate of 25% and even then, there are deductions and exemptions and a huge chunk of their income is taxed in the lower brackets. For even the middle class, a 22% sales tax would mean a big tax increase.
The lower and middle class spend almost all of their money on items to survive - food, clothing, shelter, education, automobile costs, etc. As a result, they would be paying a flat 22% on almost their entire income. Maybe some middle-class folks who can afford to invest would not have to pay taxes on their entire income. Then again, a 22% tax on "everything" should include stocks, right?
Of course not. And that's why the very rich love this idea. If you are a billionaire, you spend a small portion of your income on purchases and a huge portion on investments. This is why the idea is so popular with the rich, as it would allow them to accumulate even more wealth at an exponential rate.
Sure, it would give the middle-class more incentive to invest, provided of course, they are smart enough to figure this out. The number of Trump signs I see in middle-class neighborhoods seems to negate that idea. Your average middle-class person wants a new monster truck, not a stock portfolio, and is ready to go into debt to get it.
But assuming it encourages more investment, what does that mean for sales? Yup, they would drop. When a new car costs 22% more to buy, you might be tempted to hang on to your old one for a lot longer.
I had a friend in Florida who bought old cabin cruisers and converted them to diesel power, using military surplus engines. He worked for an SAS pilot who brokered these deals. Once refurbished, they were shipped to Europe and sold as used boats - avoiding a lot of the steep VAT tax they have there. But of course, this meant a dent in their domestic sales. Good for my friend in Florida, not so good for Sven's New Boat Sales in Stockholm.
So if this is passed, you can expect prices to skyrocket and sales to go down, and people coveting older and used items because they are that much poorer.
4. The rich will simply use work-arounds: The Swedish boat gambit illustrates how people find ways around taxes if they have to. And the rich can afford to do this when millions are on the line.
For example, in California, they passed a populist "yacht tax" to stick it to those rich bastards - right? But rich bastards didn't become rich by paying taxes or being stupid. In Southern California, the very wealthy simply registered their yachts across the border in Mexico, and avoided the tax. Docking fees were less and they could hire crew and maintenance people for far less money. So long as the boat was docked in Baja for six months and one day of the year, they avoided the yacht tax.
And Baja is a short drive or even shorter helicopter or private jet ride from LA or San Diego, right? Fishing is better there, anyway.
So, who paid the tax? Middle-class people who couldn't afford to go through the rigmarole of registering a boat in Mexico - or Panama, or Liberia, or whatever. If you were middle-class, you could afford a 30-foot cabin cruiser, which is hardly a "yacht" but was taxed as such. It really put a damper on boat sales.
Now, imagine this 22% sales tax kicking in. The rich would simply buy their yachts overseas in low-tax countries and avoid the tax. The middle-class, buying their retirement dream boat would get socked - and likely not buy.
Sales taxes are taxes on the poor!
5. It would make us all criminals: Of course, even the poor would try to work-around the taxes. When you buy and sell a used car today, you have to pay sales tax. And an old gag was to put down a ridiculously low sales price on the title to avoid paying the paltry 6% sales tax. The tax authorities got wind of this and started charging sales tax based on book value - putting the onus on the purchaser to show the value was less than that.
Now imagine a 22% tax. People would be tempted to do under-the-table transactions to avoid the tax, or under-report sales prices. Policing this would be a nightmare - and involve sales tax agents knocking on people's doors and asking pointed questions.
In Virginia (and a lot of other Southern States) they used to have a "property tax" on everything you own, not just your house and car (the latter also being problematic). Every year, you had to pay tax on your couch, your television, and even the clothes on your back. Everything. Most people opted to pay a flat tax based on a percentage of the value of your home. But, if you were willing to add up the value of all your possessions, you could, in theory, itemize. Be sure to count the glasses in the cupboard!
It was a nightmare from an enforcement standard, as the "value" of used household possessions is, in real life, trivial (I have cleaned out enough houses of deceased relatives to know this). Now imagine this with a national sales tax. The cost of enforcement would skyrocket.
Already today, there are people who will sell "untaxed" cigarettes illegally. Do you think people will just roll over and pay 22% sales tax on everything? No, there will be lots of "I know a guy" kind of deals out there. Organized crime will have a field day, at least for smaller, untraceable items.
6. It would not simplify your taxes: These sort of flat-tax or national sales tax arguments are popular with the ignorati of our country. They have an irrational fear of the IRS, probably because they subscribed to one of those "tax avoidance" scams and got audited as a result. The 1040EZ is so hard to figure out! Make it a simple flat tax or sales tax and make it simple - for simple people!
But just as a flat-tax of 16% on income is a huge tax increase for the poor and middle class, a 22% national sales tax is similarly a tax increase. And if this tax does not replace your Social Security and Medicare taxes (so-called payroll taxes) then you still may have to file a Federal return. And since States will not be part of this (unless they want to raise State sales taxes to 10% or more), you will still have to file a State return. It will not be easier - but harder.
* * *
So why do these ideas sound good to the very people they will hurt the most? Well, as I noted in the last section, they appeal to the less-smart segment of the public. These are people for whom the words "marginal rate" are a mystery. These are the folks who don't know the difference between a tax deduction and a tax credit - and are not interested in learning (it is really simple, too!). These are the kind of people who blather about their company "taking a write-off" on a money-losing project, as if somehow the company made money by losing money.
A national sales tax sounds appealing as they don't need to do math - or so they think. Tariffs sound appealing as it will "force" consumers to buy the over-priced and shoddy products their company makes. They think they will be on easy street making big bucks at the unionized factory.
That is, until they try to spend it - and find their higher wages aren't keeping up with 22% inflation.
I know this as I lived through an era like that. From the 1960s to the 1990s, we saw inflation get out of control as unions went overboard with ridiculous wages and restrictive work rules. Granted, today, the pendulum has swung far, far, in the other direction. But back then, a slug on the assembly line could rake in as much as a doctor or lawyer. A lucky few made out like bandits - and spent it all, too.
Nixon tried to control inflation with "wage and price controls" which today would be considered Communism. Gerald Ford thought that if everyone wore a "WIN" button (Whip Inflation Now) then prices would come down. Jimmy Carter tried to deregulate industries, such as the airline industry, to reduce prices (and create low-cost, non-union carriers). Reagan went for union-busting as a means of controlling inflation. And of course, lower interest rates helped fuel the economy - something lost on economists who still believe today that increasing the cost of borrowing money will actually bring prices down - a theory even a child can poke holes in.
The 1970s were an era where higher prices lead to demands for higher wages, which in turn lead to higher prices. Wash. Rinse. Repeat. It was a cycle that went out of control and took decades to dampen down. A 22% national sales tax, particularly combined with tariffs, would send inflation skyrocketing into territories that only some South American countries have ever seen.
It's just a really shitty idea from every angle. And no surprise that Trump is supporting it and his idiotic cult followers think it is swell, too.
So, what's the alternative? Well, if you want to keep wages low (which keeps prices low) then you need to expand or at least maintain the buying power of the workers. We've already done this through means like food stamps (SNAP), which as I noted before is a subsidy to Walmart and other low-wage employers, not so much as to the recipients. Guess what program Republicans also want to cut?
If we lower taxes on the working class, their buying power increases and their demands for increased wages subside, leading to lower costs for employers, which in turn allows them to lower prices in a competitive market.
While low-cost imports may have meant the death of some factory jobs, it also means the low-wage worker can afford to buy more with their dollar. I noted before that my Dad - a upper-middle-class executive, couldn't "afford" a $99 Coleman Steel-Belted cooler or a $99 Weber kettle. That was a lot of money in the early 70s, when a new car could be had for under two grand. Today, until recently, those items were available at the same dollar amount as in 1970 because they are made more cheaply overseas.
My Dad finally broke down and bought his first color television in 1976 - a decade after most Americans had one. It was an RCA 25" Colortrak and cost a whopping $500. I recently bought a larger 28"flat-screen television for our camper, for $89 at Walmart (it was the smallest one they had and is no longer available in that size!). Deflation has affected a lot of our consumer goods, thanks to low-cost overseas production.
Maybe we make less money today, accounting for inflation, than years ago, but then again, our buying power is so much greater. Would you rather make $50,000 and pay $1 for a loaf or bread, or make $100,000 and pay $5 for a loaf of bread. If you said the latter, I suspect you flunked math.
There are other factors to consider, of course. As the "supply chain" issues of the pandemic era illustrated, putting all your eggs in one (Chinese) basket is not a good idea, just from the perspective of national security. Today, they are building chip factories and other electronics firms in the USA, simply to preserve supply chain security. And with the lower turnaround time and lower shipping costs, well, the production costs are comparable.
And yea, Trump promised to do this with the Foxconn deal - but it ended up just as a warehouse. Thanks, Donny! Keep up the good work!
Automation comes into play as well. I noted before how car factories had armies of employees doing everything by hand. Today, they use less than 1/4 the number of people. The paint booth once held a dozen wheezing men inhaling paint fumes. Today there is one guy in a glass booth breathing fresh air, pressing a button labeled "select color" - robots do the rest. So even if we enact tariffs, don't expect a flood of manufacturing jobs to materialize. The old armstrong method of building things is gone. The humans they do hire, are hired to maintain the robots. Get a good education!
Sadly, we have to import educated (and non-educated) workers as well. Republicans want to throttle this, too, which has lead to higher production costs and higher prices.
Of course, this all falls on deaf ears to the vast majority of people. Those on the right are dumb enough to vote against their own self-interest. Those on the left, well, so long as you say the majick words of "tax the rich!" you will get elected. Problem is, of course, the rich have millions to spend on attack ads, and the poor are dumb enough to believe them.
Oh, well. Democracy was nice, while it lasted!
* It should be noted that the GOP largely abandoned tariff politics by the 1980s as they realized it was bad for business and cheap imports helped their union-busting efforts. Besides, there was more money to be made in "busting out" failed rust-belt companies and bankrupting their pension-plans. Ask Mitt Romney about that!
