Coauthored with Patrick Hedger of FreedomWorks. This op-ed was originally published at The Hill on March 4, 2018.
Populists and socialists have one thing in common: a complete lack of understanding of who pays taxes. Put simply, businesses don’t pay taxes; only individuals pay taxes. Businesses simply pass along the tax to the consumer, resulting in higher prices at the point of sale.
During his testimony in the House Ways and Means Committee on the Tax Cuts and Jobs Act, Joint Committee on Taxation Chief of Staff Thomas Barthold reiterated how taxes work, calling it “consistent with a substantial amount of empirical economic literature.” He said, “Ultimately, businesses don’t pay taxes. Those taxes are borne somewhere else.”
Indeed, this is true of corporate and pass-through income taxes, but it’s also true of tariffs, which are just another form of taxation. The Trump administration’s plans to impose tariffs on steel and aluminum will come at a cost to consumers and businesses alike. Consumers will pay higher prices and, as other countries undoubtedly retaliate by imposing tariffs of their own on imports from the United States, businesses will have to increase prices on their products, leading to adverse economic impacts.
The growing sentiment in the United States in support of protectionist policies is a failure of those of us who support free trade. We have fundamentally failed to educate the American public on the benefits of free trade and how it leads to lower prices and increased standards of living for Americans and foreigners alike. Trade is not and has never been a zero-sum game.
Yes, policy wonks know this, but politicians seeking an easy path to elected office often prey on what the 19th Century French economist Frédéric Bastiat referred to as “that which is seen, and that which is not seen.” Protectionist politicians easily point to the thousand jobs “saved” at an uncompetitive business in their district, while the million jobs sacrificed in the process are either spread across the country or are jobs never created in the first place — likely both.
Tariffs or the lack thereof are not the cause or the solution to the slide in manufacturing jobs. We haven’t properly explained how automation and rising productivity in the workforce, not trade, is responsible for the vast majority manufacturing job losses in the United States. We haven’t communicated how the number of manufacturing jobs has been declining for decades, long before the passage of the North American Free Trade Agreement (NAFTA) and other free trade pacts. But we also haven’t explained that U.S. manufacturing output is growing, and at near record levels, according to the Federal Reserve Bank of St. Louis, the Pew Research Center, and the American Enterprise Institute.
We haven’t explained that economies naturally evolve and that American workers are now largely better suited for knowledge-based jobs over manufacturing jobs, just as they once were better suited for those manufacturing jobs over back-breaking farming jobs.
If we wouldn’t impose policies to take workers out of factories and put them back onto farms, why would we do so to take workers out of offices to put them into factories? American workers can command higher pay with their minds than with their hands. Our greatest export is increasingly our ideas. Look at the back of your iPhone for example: “Assembled in China. Designed in California.”
Protectionism is a sure path to economic pain. In 1930, as the country was teetering on the brink of an economic depression, Congress passed the Tariff Act, championed by Sen. Reed Smoot (R-Utah) and Rep. Willis Hawley (R-Ore.). The law raised tariffs on more than 20,000 imported goods. Although more than 1,000 economists urged President Herbert Hoover to veto the Tariff Act, he signed it into law.
“The higher duties proposed in our pending legislation…plainly invite other nations to compete with us in raising further barriers to trade,” the economists wrote. “A tariff war does not furnish good soil for the growth of world peace.”
These economists couldn’t have been more right. What happened next was a trade war. Other countries retaliated by increasing tariffs on American-made goods, leading to a decline in the total dollar value of products and materials produced domestically.
“The tariff dramatically lowered U.S. exports, from $7 billion in 1929 to $2.4 billion in 1932,” Theodore Phalan, Deema Yazigi, and Thomas Rustici explained. Similarly, the unemployment rate increased from 6.3 percent in June 1930 to 8.7 percent at the end of the year. Although Smoot-Hawley wasn’t the singular cause, the United States eventually entered a depression, in which the unemployment rate exceeded 24 percent.
Although the Trump administration’s planned tariffs on steel and aluminum aren’t as devastating at Smoot-Hawley, history tells us that other countries will retaliate. As Time recently noted, when the Bush administration proposed tariffs on steel imports in 2002, “the European Union responded with tariffs of its own and a number of countries disputed the tariffs at the World Trade Organization.” The Bush administration eventually reversed the steel tariffs in response to the backlash and the economic consequences, which included 200,000 lost jobs.
Not only do these tariffs and others lack any economic sense, they undermine the benefits of the Tax Cuts and Jobs Act. The administration has been quick to point out the bonuses, wage increases, and other boosts in compensation that came as a result of the passage of the Tax Cuts and Jobs Act. It’s unlikely that the administration will talk about the negative economic consequences of its tariffs on steel and aluminum.
The administration can’t tax America’s way into prosperity through protective tariffs. We must learn from history, not ignore it, and focus on liberalizing our trade laws and eliminating trade barriers that both hurt consumers and businesses.
Jason Pye is the vice president of legislative affairs for FreedomWorks. Patrick Hedger is the director of policy for FreedomWorks.