Income Taxes, Consumption Taxes and Tariffs

Currently (April 2018) there is considerable debate raging as to the wisdom of the Trump proposed tariffs. As one more opinion on the subject, I would like to frame the argument in terms of who pays for maintaining the U. S. marketplace rather than in terms of punitive actions and retaliatory reactions in the form of tariffs.

Since the government's income in the U. S. is primarily derived from taxes, and in particular from income taxes, the government's costs of providing the infrastructure - currency, roads, courts, etc. - is paid in this country by the individuals and companies (which again boils down to the individuals) that pay the income taxes. Thus the participation in the U. S. markets by foreigners is a free ride since they do not pay U. S. income taxes. This is why U. S. made goods do not compete in both domestic and foreign markets.

The use of tariffs to level the playing field does provide a mechanism to make foreign sellers contribute to the costs of maintaining the marketplace they are enjoying, but it requires much legislation and regulation to target which goods and who's selling them. This in turn engenders hostility in those targeted and invites the 'trade wars' that are the current concern of the chattering classes. A flat tariff might be preferred in that it would be less 'in your face' to the trading partners otherwise targeted, but it still reeks of hostility to 'free trade'. It also does nothing to make U. S. goods more competitive in foreign markets.

To this author, a better solution is to replace the income tax with a National Sales Tax on all new goods. With respect to incoming foreign goods this serves the same purpose as a tariff - it makes the foreign producer pay his fair share of the support of the U. S. market. It relieves the exported goods from the income tax burden that makes U. S. goods non-competitive internationally. It allows U. S. workers to compete with foreigners as well as non-taxpaying illegals. It invites less hostility since it applies to domestic as well as all foreign goods equally. It requires no additional infrastructure to assess and collect tariffs. And as a huge added incentive, getting rid of the income tax would do more to restore health to the U. S. economy than any other single action.

Replace the income tax AND potential tariffs with a National Sales Tax. A win-win-win solution.