Sunday, June 2, 2019

A Tariff Laffer Curve?

Douglas Irwin is a very good economist. Let’s highlight his Historical Perspectives on U.S. Trade Policy:
The Civil War marked the beginning of a long period of high U.S. tariffs. These tariffs served the dual purpose of raising revenue for the federal government and keeping out foreign goods, ostensibly for the protection of U.S. labor and business. After the war, tariffs (which generated roughly half of government revenue) remained high to service the enormous debt burden that resulted from the war. Yet by the mid-1880s a curious problem had arisen: though much of the debt had been paid off, federal revenues were outstripping expenditures by as much as 50 percent. Republican and Democratic politicians agreed that the fiscal surplus should be reduced, but they proposed exactly the opposite policies for achieving this objective. Democrats advocated cutting tariff rates in an effort to reduce revenue. Arguing that this would simply encourage imports and raise even more revenue, Republicans proposed higher tariff rates to reduce fiscal revenue. This debate over the tariff "Laffer curve" essentially hinged on whether existing tariffs were above or below the revenue-maximizing rate, which in turn depended on the height of the tariff and the price elasticity of import demand.
Irwin examined this issue in his Higher Tariffs, Lower Revenues? Analyzing the Fiscal Aspects of the "Great Tariff Debate of 1888":
This paper examines this debate and attempts to determine the revenue effects of the proposed tariff changes. The results indicate that the tariff and the price elasticity of U.S. import demand during the 1880s below the maximum revenue rate, and therefore a tariff reduction would have reduced customs revenue.
Irwin also contrasts the other policy agendas of the two parties. Democrats wanted to lower tariffs to “ease the tax burden on consumers and farmers, and to eliminate inequities associated with special interest protection”. Republicans feared import competition as lower tariffs “would expose American industry and workers to foreign competition and thereby jeopardize the economic well-being of the country”. His paper notes that the typical tariff back then was even higher than the tariff rates being considered by the Trump White House. His estimates of the revenue-maximizing tariff rate, however, suggests that lower tariff rates would reduce tariff revenue. Of course, today we have other ways to raising Federal tax revenues as opposed to inefficient tariffs, which is why U.S. fiscal policy had relied on these other taxes and not tariffs before Trump.


Barkley Rosser said...

Well, earlier than the US Civil War, UK Tory politician Edmund Burke argued that overly high taxes on the then American colonies might lead them not to pay them, or at least pay less than would otherwise be the case. Laffer himself has claimed that Ibn Khaldun made arguments like this many centuries ago, although I cannot confirm this.

Anyway, the idea that overly high taxes might bring in less revenues has been around for a long time. The problem is always the practical one of what that revenue maximizing rate is for any given locale at any given time. Laffer has made a complete fool of himself by without any deviation since he was wrong with his forecasts about the 1981 Reagan tax cuts to continue making the same wrong prediction to W. Bush, Kansas, and Trump that cutting taxes will increase revenues. The problem is anybody giving him an award for all this false propagandizing nonsense.

Peter T said...

Aside from the common dependence on tariffs for revenue, an explicit aim of tariff policy in Australia and NZ (and I think other countries) was to induce a particular economic structure - one of industrial workers/local employers and small farmers, rather than one of importers and plantations. They went with hostility to low-wage (ie Asian and, in Australia, Pacific Islander) immigration and encouragement of European immigration.

In short, Republicans wanted to use tariffs to build an economy where their political base predominated, and Democrats one that favoured theirs.