Some thoughts and questions on tariffs

There seems to be an asymmetry in the way the media and economists treat the U.S. threatening/imposing tariffs and the way they treat other countries having and threatening tariffs.

For example, when Trump threatens a tariff, the media reports it as if a the sky is falling. Sometimes they briefly mention the other country has a tariff on U.S. products, sometimes not, but usually don’t give much details — like how much the other country’s tariff is or how long it has been in place, nor do they mention why it’s okay for that country to have a tariff, but not the U.S.

Same for economists. Rarely do I see a rebuke of the other country’s tariffs, just on the U.S.

Also, since economists feel so strongly about tariffs, I wonder what they think about other forms of taxes, in general?

Doesn’t sales taxes impact trade in similar ways? How about income and payroll taxes? Why are tariffs especially bad, but other forms of taxes don’t receive much wrath from economists?

I can personally say that I have the same distaste for all forms of tax, but I also understand they are a necessary evil to fund some of the good things that government contributes to society. But, I remember they are all evil, not just one particular form or another. They also have really poor feedback mechanisms to ration diminishing returns of government services. More is always better…it seems.

 

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Because ‘basic corporate finance’

On the Today show, this morning, I saw Savannah interviewing Rep. Paul Ryan about the tax bill.

She pushed hard on the cut in corporate tax rate in the plan.

His response was valid.

We have the highest corporate tax rate in the industrialized world. It will be good for the economy to be more competitive, so companies stay here and invest more here.

She pushed again…but Michael Bloomberg, CEO of a large company, says he won’t invest more here. He’ll buy back more stock.

Ryan’s response was valid. That’s one anecdote against studies that show otherwise.

But I think he missed a golden opportunity.

Here’s what my response would have been:

It’s great that Bloomberg supports our position.

I envision Guthrie getting confused look at this point and responding with, But he said he would not invest more. How does that support your position?

He said he’d buy back stock. Basic corporate finance tells us that stock buybacks is one way to return money to owners. Paying dividends is the other. Ask any first year B-school student.

What do investors do with money they receive from their investments?

Often, they invest it elsewhere. 

While Bloomberg’s company might not have good projects to invest in (which may be a problem for Bloomberg), other companies might.

With more money in their pockets, the folks who sold shares to Bloomberg will be able to invest more in companies that have better investment prospects, like Google or Facebook or start-ups building better solar panels, curing cancer or the company that might disrupt Bloomberg’s own business model.

So, the economy still gets the benefit of the reduced corporate tax rate, even if companies, like Bloomberg’s, don’t directly invest their extra cash. Others will be more than happy to.

An Unproductive Discussion

I saw this video of David Letterman’s interview of Rand Paul from 2011 posted on Carpe Diem:

I suggest skipping past Paul’s corny attempts at humor near the beginning and watch the last five to six minutes of the discussion. It’s a great example of how someone’s ignorance, Letterman’s in this case, can be mistaken for legitimate arguments by stating platitudes and refusing to accept facts.

In one example, Letterman characterizes Republicans as the party that just wants to give tax breaks to the rich and big business.

Paul points out that there’s the idea that the rich don’t pay their fair share isn’t accurate. They, in fact, pay most of the taxes. He says the top 1% income earners pay a third of income taxes collected and the top 50% pay 96%. Letterman gets some claps for replying:

…I think there’s something wrong with those numbers. I don’t know what it is exactly, but I’m pretty sure there’s something wrong with them…

I’ll give Letterman credit. After the applause, he then says:

Thank you, you’re applauding my stupidity, God bless you.

I’d like to know if Letterman followed up to learn more about these facts to see if he could build a more valid counterpoint than “I’m pretty sure there’s something wrong.” If he did, what did he find? Did it change his mind?

What do you do when you encounter facts that go against what you previously believed? I don’t know about you, but I find that intriguing and I usually dig in deeper.

Earlier in the conversation (4 minute mark), Letterman demonstrates his ignorance by confusing the national deficit with the debt.  “The American debt is what, $3 trillion?”

Paul explains that the deficit is running about $2 trillion each year, but total debt has accumulated up to $14 trillion.

Letterman blows by this fact. He just learned that something he thought was $3 is nearly 5 times as big and he has no reaction. A reasonable person should respond, “Holy cow! $14 trillion? How did that happen? I had no idea that it was that much. What was I thinking?”

I will give Letterman some credit here. He asks how continuing to borrow will affect him. Paul tries to explain, but I don’t think it made much sense to Letterman.

I would have said the Soviet Union, Greece, Cyprus and Detroit are good examples of what can happen. It’s tough to tell how far down the road that is, but that’s the direction borrowing leads.

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Ask, how much? Part 2

In the same EconTalk podcast with Morris Fiorina that I wrote about in this post, Fiorini describes another ‘how much’ scenario:

…I saw a paper presented yesterday on taxes. And it was very interesting that the population according to these surveys does think we should have more taxes on the rich. But then when you ask them, what are the rich actually paying, they underestimate, of course, what the rich are currently paying. And, what’s interesting is they think the rich should be paying less than they actually are. But you ask them, what is the fair tax to pay for various income brackets? They come in at figures that are actually below what the rich, what people in those brackets are actually paying. So here’s a case of people being uninformed and mal-informed at the same time.

Just curious about the Supreme Court’s Windsor v. U.S. decision

I’m glad the Edith Windsor won her case. I think she deserves it.

The Supreme Court found that not allowing a survivor of a same-sex marriage (as recognized by Canada) to claim the U.S. Federal estate tax deduction that is available for survivors of heterosexual marriages violated the equal protection clause of the Constitution (Amendment 14).

For those who agree with me on the outcome of this case, but also wish to continue to apply different tax rules to high and low-income earners through a progressive tax code, I’m curious to hear why you think holding these two positions is consistent and why the latter position doesn’t violate the equal protection clause of the Constitution.

By the way, I don’t believe the problem is what the state defines as marriage. I think the problem is that we have a state so entwined in our lives that what it defines as marriage matters.

In this case, if there was no estate tax, there would have been no court case for the Supreme Court to rule on.

I have just one follow-up question for the Ms. Windsor. I’m curious if when her spouse was alive if she filed suit to be able to file a joint Federal income tax return to enjoy the same marriage tax penalty as heterosexual marriages.

The mountain of disincentives

I recommend reading John Cochrane’s post about the job market and his thoughts regarding what a few other prominent economists believe are problems and solutions.

Here he addresses Alan Blinder’s prescription to give tax breaks to companies that expand payrolls (emphasis mine):

Is this really the right way to run a country? When “policy makers” want more employment, they slap on a complex, tax break on top of a mountain of disncentives. Presumably they then will remove this tax break, and pages 536,721 to 621,843 of the tax code describing it, despite the lobbying by large corporations who have figured out how to exploit it for billions of dollars, once the Brookings Institution decides that there is “enough” employment (!), and “policy-makers” no longer need to encourage it?
How are the existing hundreds of bits of social engineering in the tax code working out? Do we really need more of this?  Isn’t it time to return to a tax code that raises money for the government at minimal distortion?

Exactly.

And, great question, how are the existing hundreds of bits of social engineering in the tax code working out? 

Consider one of the most popular bits of social engineering: the mortgage interest deduction. How has that influenced home ownership rates? Does anybody know?

I read a lot of economics and I haven’t heard much about that.

Conventional wisdom is that it encourages home ownership by lowering its cost. But, this assumes home prices didn’t change because of the deduction or that renters don’t realize a similar benefit since their landlords deduct interest on their rental property loans.

Are we to believe that the stock market discounts future cash flows into stock prices, but the housing market doesn’t do the same for home prices?

Let me try are more concrete example. You want to purchase a certain new car and your choice is between two versions of the same model. They are exactly the same, except one thing: gas mileage. Version 1 gets 20 mpg and version 2 gets 30 mpg.

Would you be willing to pay more for version 2? Maybe. How much more? If you drive 10 thousand miles a year, version 2 will save you $500 a year. If you own the car for 5 years, that’s $2,500. You may not be willing to part with the full $2,500 of savings — after all, there’s some risk to that. Gas prices will fluctuate and your driving habits might change, but you would likely pay more.

That’s very similar thinking to how some, not all, home buyers factor in expected tax savings when buying a home.