Finance, April 8, 2025; WM, April 9, 2025
Trump has broken the back of neoliberalism - as his voters wanted. He mimics their social biases (which he does not believe privately - except the racism) and has essentially thrown the wealthy and upper middle class under the bus (unless they contribute). As I commented during the first Trump Administration, he practices brinkmanship. Sadly, he does this without a destination, save the desire to get as much ground as he can - even if that is too much.
As I stated in February, he has also created industrial policy using tariffs which, with correct support, can be used to provide what his voters want while making prices rise for everyone else. He has also created conditions for value added taxes. The question is whether he or a successor will adopt this solution and the extent to which exemptions and exclusions from the VAT are allowed and, if so, who controls them. The Congress cannot really do the fine work on doing this fairly that the executive branch can - like tariff policy.
The question that must be asked in response to these policies is whether or how to give more money to the bottom third of income holders - which is about 77% of the population - either through a higher minimum wage & higher child tax credits - distributed through wages rather than either the IRS directly or indirectly through individual tax filing.
As the markets decline, the financial assets that hold pensions are not doing poorly because they provide dividends rather than relying on capital gains. The speculative side is losing money. His voters don't care. I don't either.
My research on debt holdings and adjusted gross income show that the bottom 77% of households have tax free income (and if they are invested in speculative assets, they are getting what they deserve) or are temporarily poor because they have had business losses - including those carried over. Switching to a VAT economy eliminates these advantages - especially if an ASSET VALUE ADDED TAX allows for employer based taxation of high wages, dividends and interest and ignores individual capital gains and losses. This feature is the only way to abolish direct income taxation - which is a long-term libertarian goal that I also share.
A tariff policy favors workers (and by implication overseas workers) over capital. Because it (or VAT) can be manipulated by the executive branch, using them (or VAT exemptions) creates industrial policy that the Soviets and Chinese would envy.
While Trump voters do not understand this, the Russian and Chinese systems where the connected have the power are the same as the old Soviet system. Oligarchs and senior party members have the same crony relationships with the supreme leader (and his secret policy) in either case. For some reason, American conservatives don't get the joke. The irony is thick.
The question then arises on what tariff rates should be. If we wish to go country by country, the tariff should at least be equal to the exporter's value added tax rate that was zero rated at the border. Canada has a Goods and Services VAT at the Dominion and Provincial levels. The tariff for each trading partner needs to be at least that much. Most Canadian provinces have a 5% rate, while Ontario’s rate is 13%. The highest proposed Chinese rate is 13% as well. European rates average over 21%, although Germany comes in at 19%. Mexico’s rate is 16%. My proposed rate is between 13% and 19%, which would fund domestic military and civilian discretionary spending - with the higher rate including what is now collected by employers for Old Age and Survivors Insurance.
If we want a general tariff, simply count up the benefit all countries extend when exporting to us by zero rating and divide it by total imports. Canada, China and Mexico would have the biggest weighted impact - although this does not justify the large rates the Administration has imposed.
Good trade policy will exempt those products which we simply cannot make here at any time during the year. If we don't make something but could do so, then the tariff needs to be set high enough to make cost a wash - with the tariff funding subsidies to develop the industry - say growing cherry trees in California and Florida on a year round basis rather than importing them from Chile in the winter.
If we wish to expand tariffs against us, we can raise rates high enough to pay for health care subsidies that go beyond what employers could be incentivized to provide - say coverage of their retirees or long term care. Obamacare is crap - premiums and deductibles are too high for the working poor. Medicaid, Medicare and a cost-free public option to cover care for pre-existing conditions should all be VAT or tariff funded.
The portion of Social Security Old Age, Survivors and Disability premiums now paid by employers could also be funded by tariffs or a value added tax and be credited to each eligible worker on an equal dollar basis (which removes an objection to personal retirement accounts).
Both healthcare and retirement funding inclusions - which may result in higher tariffs - will lower the costs paid by employers while allowing poorer workers better coverage. A win-win.
And that is how to set tariff rates and what to spend them on.
