


All taxes are bad, but some are worse than others. The government needs revenue, so smart tax policy focuses on the less-bad taxes rather than the more-bad ones.
On the tax badness spectrum, tariffs are among the worst. Economist Brian Albrecht gives six reasons why in a new article for his newsletter, Economic Forces.
- Tariffs distort consumption. For a consumption tax to be less harmful, it should have as broad a base as possible. Tariffs have some of the narrowest bases possible: Specific goods from specific countries. That means they end up being taxes that also function as regulations or subsidies by discouraging or encouraging purchases that people would not have made otherwise.
- Tariffs also distort work. Part of the reward to working is the stuff that your income can buy. Albrecht gives a simple example of a worker in a country that produces coconuts. Workers in that country buy bananas from another country. If the government puts a tariff on bananas, it has effectively reduced the reward for producing coconuts.
- Tariffs reduce productivity. They apply to inputs to production along with final goods. That’s why they aren’t really a consumption tax. Any well-designed consumption tax only taxes final products. Tariffs on steel, aluminum, copper, and other inputs raise costs of production and take away money that could have gone to paying workers or buying better machines.
- Tariffs are bad at redistribution. “If you want to redistribute from rich to poor, it’s better to do it directly through progressive income taxes than indirectly by trying to guess which goods rich people buy more of,” Albrecht writes. On top of that, tariffs apply to goods, not services, and poorer people tend to spend more of their incomes on goods than richer people do.
- Tariffs are a tax on growth. Capital accumulates over time, to the benefit of people who can use it to be more productive. Tariffs don’t just reduce productivity in the present. They hinder further accumulation of capital into the future, reducing the growth potential of the economy in the long run. That then reduces incomes below what they would have otherwise been, which makes capital less affordable, compounding the problem.
- Tariffs invite wasteful rent-seeking. Inefficient producers benefit more from tariffs than efficient ones, so they now have strong incentives to lobby for them. The efficient producers, who don’t need the tariffs to compete effectively, now hire their own lobbyists to counter. Now, on the sidelines of actual economic activity, there’s a zero-sum battle between lobbyists that wouldn’t exist if the tariffs didn’t exist.
The striking thing about tariffs to an economist, Albrecht notes, is that as economic models become less abstract and more realistic, tariffs look worse, not better. The rent-seeking point doesn’t exist in a simple supply-demand graph, but it happens all the time in the real world. One could sketch out a model where a tariff could raise revenue with minimal distortions, but the incentives that politicians face mean they are never going to actually implement a tariff in that way. Tariffs: Bad in theory, worse in practice.