U.S. President Donald Trump and House Speaker Paul Ryan (R, Wis.) are proposing a 20 percent border tax. Their goal is to level the playing field between American manufactured goods and foreign goods. And the promise is that a border tax will return manufacturing jobs to America.
But here is what you must also know. A border tax is a consumer tax. Buying back-to-school clothes will be a more painful experience. Avocados, shrimp and bananas will cost a lot more. Get ready for sticker shock at Starbuck's and your auto dealership.
Beyond higher prices, some wonder whether the border tax plan will be leveraged to lower corporate America's taxes or whether it will actually create manufacturing jobs.
American manufacturing has learned how to compete within the global supply chain. Our factories are producing twice as much as they produced in 1984. America’s smart factories win competitive advantage because sweat shops cannot compete against their ability to ship price-competitive, mass-customized products into a just-in-time global inventory system. That is partially why we are now seeing on-shoring of manufacturing back into the U.S.
But here is what corporate America has actually been doing with their after-tax cash flows:
With this in mind, it's easy to imagine a scenario in which a border tax actually reduced sales and employment:
This problem will only be made worse if a border tax takes money out of the pockets of the 90 percent. And worse still if corporate America uses the tax cuts generated by a border tax to buy back stock and raise dividends -- money that, again, goes mostly into the pockets of the 10 percent.
Now, ask yourself: When was the last time the government got this right? Remember President Ronald Reagan’s supply-side economics? Taxes were massively cut on the assumption that they would generate sustained job growth. It did create a short-term economic boom. It also started us down the path of massive annual government deficits. Then the tax-generated economic boom went bust, and stock prices collapsed in 1987.
The Republican Congress and president ignored the economists (sound familiar?). This tax turned a recession into the Great Depression. National incomes dropped 36 percent. The Great Depression then drove global extremism, culminating in Adolf Hitler's rise to power and the second world war.
But tax reform should not be confused with creating the foundation for sustainable economic growth. Economic growth is won through productivity and innovation. Protectionism in any form, including a border tax, undercuts the ability of our free market system to reward those who are more productive and innovative.
A border tax sounds great because there is real human pain tied to lost manufacturing jobs. But protectionism does not grow jobs, and it will not reduce this pain. Protectionism is proven to create economic recession and depression, job loss, and even war.
America must go lightly into this night.
Image credit: Flickr/Gage Skidmore
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