There is another aspect to the economic effects of taxation not covered adequately in the 'Economics of Taxation 101' post: the impact on international trade. With President Trump reviving tariffs as a tool of international policy, the ramifications of that and other taxes are worth examining.
Everyone has heard from time to time that a given country – ours or others' – is blessed with an abundance of natural resources. This is obviously a good thing, but if the inhabitants of the country merely sell off the non-renewable resources, a wealthy country can quickly be reduced to ruin and destitution. A few natural resources are not expendable, such as climate, access, etc., which can be lumped into the Realtor's favorite line – location, location, location. Virtually everything else can be exhausted or decimated for short term profit. Taxation can play a major role in either facilitating or discouraging the demise of a country's natural resources.
Development of mineral resources can contribute positively to the wealth of a country, but not in the long term if they are liquidated in international trade. On the other hand, consumable resources such as fossil fuels can be depleted internally or externally if not given the proper respect as finite non-renewable assets. In either case, the fairly obvious policy a country should pursue with all non-renewable resources is to try to conserve them for posterity.
So what should be the proper approach to international trade? Ideally one should export renewable assets, primarily labor, and strive for at least net zero export of non-renewables. In fact, a net positive import of non-renewables is desirable, with export profits being based on value added to imported raw materials by labor and manufacturing. This strategy, in fact, been responsible in a large part for the ascent of China in recent decades.
The role of taxation for encouraging the principles described above is to discourage or restrict export of non-renewable raw materials; to NOT tax the contribution of labor to exported products; to discourage imports to the extent that they are primarily labor intensive; and to encourage to the extent possible the import of non-renewable raw materials. Tariffs can be useful for achieving the proper balance of types of imports, but should not interfere with obtaining raw materials.
As usual, the Income Tax is perhaps the worst offender in achieving the desired trade objectives. It taxes the labor and value added of Americans at the source and throughout the supply chain, and therefore works diametrically opposite to the strategy outlined above. It does not tax exported non-renewable raw materials, but instead taxes any American labor involved in producing and shipping them. As this blog has repeatedly emphasized, THE INCOME TAX MUST GO!
Sales Taxes, on the other hand, tax some or all goods and services consumed by the residents of a country. In this country State sales taxes are a levy on American goods and services, but also a levy on all imported goods. Unfortunately, they usually do not tax foreign services rendered by mail, telephone or internet. A National Sales Tax would treat domestic and foreign entities equally, and would also be more or less equivalent to an across-the-board tariff of the same rate. This would then make any additional targeted tariffs more advantageous to American producers and a more flexible tool for trade negotiations.
It is worth noting that a tariff is essentially a sales tax levied on specific imported goods or on imports from specific countries. It is levied on imports at the time and/or place of import and not at the point of sale. This differs from what Americans are accustomed to, as sales taxes in this country are levied by each State at the time of sale as an add-on. Thus the tariff sales tax is buried in the price of the affected goods and as such goes more or less undetected by the consumer. A National Sales Tax could be implemented in a similar manner.
