Tariffs instead of taxes

Let's summarize Trump's idea.

In the past, the U.S. government was funded primarily through tariffs rather than taxes. This created a favorable economic climate on the one hand and gave the government enough money on the other. Trump argues that this system created the greatness of the United States. Why, Trump says, should we not return to this system and abolish, say, the income tax? Notably, this idea is difficult to classify as pure protectionism.

Protectionism in its pure form implies the “protection” of certain industries or markets under the influence of lobbying groups that seek to profit from such “protection” at the expense of their fellow citizens.

The fiscal-tariff idea, however, does not depend on the presence of lobbyists, does not involve any form of “protection,” and, in general, should not be influenced by domestic political alignments or the internal economic interests of particular groups.

We all understand that tariffs are the same as taxes, because any tariffs are ultimately paid for by consumers in the form of higher prices. In addition, like taxes, tariffs create artificial distortions in the allocation of resources. Tariffs also distort the effects of the international division of labor, and when used for protectionist purposes, they end up “killing” the industries they are supposed to “protect.”

However, tariffs still differ in their effects from taxes, and perhaps for the better if we consider some ideal case. More precisely, it would be correct to say that a country that finances its government through tariffs alone, ceteris paribus, would be in a better position than a country that finances its government through taxation.

Why, in purely theoretical terms, could such a scheme for financing a minimal government be better than a purely tax-based or tax-and-tariff-based system? The point is where the focus of Leviathan's attention is directed. When the government funds itself through taxes on citizens—or even worse, taxes on businesses—its primary energy is directed at maximizing control over their behavior and designing a tax system that ensures a continuous flow of money. We can see the results of these incentives in most countries around the world. If the state receives a share of a transaction, it automatically gets the right to control the entire transaction and decide whether it has received enough. If the state receives a portion of your income, it automatically gets the right to be interested in your entire income, to control your income and expenses. The elimination of bank secrecy, payment limits, cumbersome tax systems where you can't make a move without a whole staff of lawyers, legislation that fatally regulates businesses of all sizes and scales - all of this has its roots in tax finance.

Moreover, the inherently repressive nature of tax-based government financing creates political incentives—using tax extortion to suppress the opposition (as was done by B. Obama and J. Biden in the U.S., and as is done by virtually every big polititian in Ukraine) and to regulate the incomes of certain financial and industrial groups, artificially enriching some while impoverishing others.

In an ideal tariff-based model, the government is indifferent to its citizens and their businesses. This only fact makes such a model (again, purely conceptually) more economically advantageous. Furthermore, in this model, the government is actually interested in ensuring that citizens and businesses prosper. Additionally, a tariff-funded government is less aggressive on the international stage because it relies on foreign trade for revenue and is therefore incentivized to maximize the volume and diversity of imports.

For such a model to function effectively, the following conditions must be met:

In the case of the real US, there are two more problems. Tariffs and taxes are, of course, serious costs, but they are not all business expenses. In order to lure business to the United States, other costs must be minimized as much as possible. These include various government regulations, and above all, labor market regulations. Without eliminating or severely weakening trade unions, eliminating the minimum wage and other labor restrictions, serious business migration is unlikely to be achieved. This will be especially difficult for Trump, as many labor unions supported him in the election.

The second problem is that it is impossible to reconcile a hypothetical transition to financing the government with tariffs with Trump's policy of using tariffs as a weapon in foreign policy. As mentioned above, in order for tariffs to feed the government and discourage it from paying attention to the domestic market and domestic businesses, complete political calm and balance is needed in the tariff area.