What tax reform means for corporations and the middle class
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Just when many policy types thought that Donald Trump was about to wind down his trade war with China and work out a deal, he announced that he was in no rush to reach an agreement. He said that he might wait until after the election next year, boasting about the "massive" amount of money he was pulling in from his tariffs.
In addition to his China attack, Trump also imposed tariffs on steel and aluminum from Argentina and Brazil, complaining that they were manipulating their currencies. Moreover, his administration announced plans to put a tariff as high as 100 percent on wine and cheese imported from France in retaliation for France's plans to tax internet services. This tax will largely hit U.S. tech giants like Google and Facebook.
Each of these moves by themselves would seem a bit peculiar; taken together they are truly bizarre. This is similar to a general ordering randomly fired artillery shots. Some hit the opposing army, some hit civilian targets and some shoot backward at his own troops. There is very little sense in what Trump is doing here.
Starting with the China trade war, which is certainly the most economically important, the cycle of retaliatory tariffs is the largest cause of uncertainty in the economy today. Economists often overplay the risks posed by uncertainty, but in this case, they are very real.
It is difficult for a company to plan an investment strategy if it has no idea if tariffs against China will be near zero next year, 25 percent (as they are now for many products), or whether imports from China will be banned altogether, as Trump once threatened. Investment has actually turned negative this year, and the uncertainties created by the trade war are almost certainly the major reason. This has been a major drag on the economy's growth in 2019, which now looks to continue into 2020.
Trump's boast about the "massive" amount of revenue he is getting from his tariffs is bizarre. Apparently, he does not understand that tariffs are taxes, and they are being paid almost entirely by consumers and retailers in the United States.
We know this because the Bureau of Labor Statistics reports every month on the price of goods imported from China. Over the last year, they have fallen by just 1.6 percent. This means, as a first approximation, that if we have a tariff of 25 percent, U.S. retailers or consumers are paying 23.4 percent more for the items they buy from China.
Usually, presidents don't want to be boasting about raising taxes on the middle class in an election year, but apparently Trump feels differently. As I have argued elsewhere, there is a reasonable case for pressing China to raise the value of its currency to make U.S. goods and services relatively more competitive in the world economy.
However, Trump's trade agenda with China has put currency on the back burner and focused on protecting the intellectual property of U.S. corporations. That makes sense if your goal is to redistribute even more income to Bill Gates and other rich people, but it is 100 percent antithetical to a progressive trade policy.
Instead of locking down Boeing and Microsoft's patents and copyrights, we should be focused on pooling innovation, especially in areas like clean energy and health, so that the whole world can benefit from new technology as quickly as possible. But don't look for forward thinking on trade from Trump, or really anyone else in elite policy circles.
Trump's other shots in his trade war are also difficult to understand. While the currencies of both Brazil and Argentina have fallen sharply in the last year against the dollar, this certainly has not been a policy choice. Both countries have actually made considerable efforts to stabilize the value of their currency.
Trump's steel tariffs have a sort of kick-them-when-they-are-down quality. There may be a political motivation in the case of Argentina, where a left-of-center government is taking power this month, but Brazil is being run by a far-right president who is often compared to Trump. To paraphrase the old proverb, there is no honor among fools.
Then we get to the Brie tax. France and other European Union countries are planning to tax internet companies like Google and Amazon based on where their business is rather than where they claim their profits. As it stands now, these companies claim most of their profits in low-tax countries like Ireland.
Taxing corporate profits based on sales is a policy that has been widely supported by economists, including many in the United States. A Democratic president would likely include this in a reform package if they take office in 2021.
Anyhow, to protect Google and the rest, Trump wants to make his campaign contributors pay more for their cheese and wine. This doesn't seem like good policy, but on the plus side, most of us won't have to worry about it too much.