Turning a blind eye inward

There is no such thing as free trade.

As long as there is a government to be funded, it will impose some kind of tax. It might assess it on trade crossing its borders. It might assess it on trade at the point of sale, as in a sales tax. It might collect an income tax, a sales tax on services to an employer.

Free trade is one of those ideals advocated on high principle, but oddly selectively. In particular, any tax or barrier on trade that happens to cross an international border seems to galvanize instant resistance in Washington and on Wall Street. Let a similar tax or barrier happen to fall on trade within our own borders, however, and the same voices are stone silent. It’s hard to avoid the impression it has less to do with a belief in economic freedom than with a belief in globalism.

It’s fine to tax trade between two parties … until you draw a line on a map between them?

We not only have the income tax, but FICA, HITS, OSHA, EPA, workman’s comp, employer based medical costs, etceteras, that either workers or employers both pay. Combined federal and state income taxes alone can take more than half the value of the services traded. Much of their costs are passed along to consumers in the form of higher prices. But who is reminding us of that daily?

International trade tax, bad.
Intranational trade tax, good.
Why? Does comparative advantage work only between nations, and not between individuals and businesses? The free trade lobby wraps itself in righteous indignation about freedom when you trade with someone half way around the world, but when you trade with the guy across the street, it’s open season on taxation and regulation.

As a casual cruise through the United States Constitution reveals, America’s founders envisioned that the federal government would be financed primarily by duties and tariffs. During the first century or so of United States history, when this was the actual practice, the US went from a ragtag group of colonies to global economic power. Yet this model has been abandoned in favor of one that selectively obsesses over freedom across borders while what happens inside the borders is ever more heavily taxed and regulated. If even a fraction of the animus against taxes and regulations on international trade were directed at the same on domestic trade, it would be like lifting a heavy, wet blanket from the economy.

Different nations have different domestic economic systems, political systems, financial systems, and monetary systems. Over time, the only way to have unfettered trade between them without developing disruptive imbalances is for those systems to converge towards a common, global regime. As a result, the US finds itself in the awkward position of perpetually hectoring its trading partners in a futile effort to get them to Americanize their internal policies in order to try and rectify the imbalances. Much of the rest of the world resents what it sees as American economic bullying. But the US has no choice – it must either change other nations’ way of doing business, or change its own. That is, unless it is willing to engage in serious reexamination of its own misguided policies and adopt a system of trade taxation that functions as a kind of economic impedance-matching device between itself and nations that have different systems. Rates on both imports and exports could be adjusted on a periodic dynamic basis between itself and each of its trade partners to provide glide path towards greater balance.  Another option would be to switch to a consumption based tax, which applies to all goods regardless of origin.

All taxes are economically burdensome. They do not become so simply by virtue of falling at a political boundrary.