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Warren sounds great.
I did see the Katherine Graham documentary, it was very good, I highly recommend it.

Warren does comment on tariffs:
"Tariffs are actually...we've had a lot of experience with them...they're an act of war to some degree."

Q:How will tariffs impact inflation?
"Over time, they're a tax on goods. I mean...you know, the tooth fairy doesn't pay 'em. I mean...you always have to just ask and then what?
You always have to ask that question in economics. Always say, And then what?"

https://www.cbs.com/shows/video/dfu2P_9gBjdFhqJdPy...

Q:How will tariffs impact inflation?
"Over time, they're a tax on goods. I mean...you know, the tooth fairy doesn't pay 'em. I mean...you always have to just ask and then what?
You always have to ask that question in economics. Always say, And then what?"

Brings up a good point. Lots of economists think we'd better off taxing consumption, which is the enemy of productive investment, rather than taxing income, which is the friend of working hard to be productive. Is there any particular reason to think Tariffs are a worse way to do that than is a VAT or a national sales tax? The way I figure it, at least the current administration is doing SOMETHING to increase "taxes" before someone comes along and freezes our credit cards.

r

Does Warren remember this idea of his from 20+ years ago? Then what?

https://faculty.washington.edu/ss1110/IF/Buffett%2...(6).pdf

https://www.berkshirehathaway.com/letters/growing....

Lots of economists think we'd better off taxing consumption, which is the enemy of productive investment, rather than taxing income, which is the friend of working hard to be productive. Is there any particular reason to think Tariffs are a worse way to do that than is a VAT or a national sales tax?

The ideas are similar.

First, a bit of background:

I believe the US is the only OECD country without a national sales tax or value added tax. I think the next biggest economy in that situation is Hong Kong.

Governments do need tax, and the best tax is the one that hurts and distorts the economy the least and is not too expensive to collect and enforce. (Jean-Baptiste Colbert's maxim: the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing) The last few centuries have shown that a value added tax (one of the variants) is the best for that. The US has a modern economy and a nineteenth century tax system, which is really the main reason for the generally huge deficits: the current tax system just isn't structured in a way to balance the books without breaking a lot of stuff (too much hissing in some quarters, so it can't be balanced). A national sales tax is badly needed, but good luck getting re-elected after introducing one.

As to the question you raise:

So, is a broad set of tariffs the same thing? It's similar. To a first approximation a broad set of tariffs is a sales tax, but applied only to foreign goods, so it discriminates against those in favour of locally produced goods. So, at the first level it sounds like a good idea. The problems show up in the second and third order effects, which are in this case dominant. Other countries will tend to do the same, for a variety of good and bad reasons. Global trade as a fraction of GGP will fall a lot, a little if the other countries don't join in, a lot if they do. Aggregate global wealth will fall a lot, since division of labour is the cause of virtually all wealth above subsistence: it's not something you want to reduce. At the extreme, imagine personally making everything you and your household consumes. So, the pie will be smaller, and countries will be left fighting over the shrinking pieces. Pretty much everyone is worse off. Smoot-Hawley didn't cause the great depression, but the massive global rounds of tariffs and the concomitant 65% collapse of world trade sure made it broader and deeper and longer lasting.

The key observation is that there are lots of things that make no sense to produce in the US; the law of comparative advantage is the one best example of a conclusion from economics that is simultaneously true, non-obvious, and very important. To summarize, for those not familiar with the idea: imagine two countries, A and B. The only two products are wine and cheese. Both countries produce both items, and the products of both countries are considered equivalent. Everybody likes to have some of both. Country A is 20% more productive at making wine than country B, AND is 50% more productive at making cheese than country B. The non-intuitive but demonstrably true result is that if country A focuses mainly on making cheese and country B focuses on making wine, and they trade with one another, BOTH countries are better off. Even though country A is better at everything.

Like anything, you don't want to go to the extreme: efficiency is the enemy of resilience. A resident of country A would not want to be importing 100% of the much-desired wine, as something could happen to the supply chain and you'd get thirsty. But a *focus* on importing wine from countries with a comparative advantage in winemaking (but not necessarily an absolute advantage) will make everybody better off. The resilience argument: If you imagine a country of whose exports crude oil makes up over 80%, you can see that some modest carefully selected tariffs are probably not such a bad idea to promote the relative importance of whatever their second largest export is. It could be an aid to diversification and resilience, if not efficiency. Perhaps an export subsidy on the second and third largest categories of export would be a better idea, but export subsidies are frowned upon even more by places that compete in that same marketplace. If the end user's price goes below the producer's cost of production, that's the (original, meaningful) definition of dumping.

Jim

I believe the US is the only OECD country without a national sales tax or value added tax.

VAT tax rates are 22%-25%

US states sales tax generally ranges between 4% - 7.5%. Many cities & counties also have a smaller local sales tax.

I don't know what is the effective sales tax rate of a 25% VAT.

It is unlikely to be a US Federal sales tax, because of the nature of the US. United STATES of America. I don't think there is any other country that has such a structure.

But never say never when it comes to a government's greed for money.

Seems to me that the beauty (for the government) of a VAT is that it is invisible to the people, so the government can jack it up without people knowing.

---------------------------
We were on a long cruise and got to be friends with an Australian couple. They toured the US for a couple of weeks before boarding the cruise. They said they were floored when they bought something and the sticker price was less than the rung-up price. They, of course, were used to the tax (VAT) being buried in the price and not used to a separate sales tax.

It is unlikely to be a US Federal sales tax, because of the nature of the US. United STATES of America. I don't think there is any other country that has such a structure.

Actually there are several.
Canada is one. (unless the second attempt at American conquest is more successful than the last time around) Individual provinces are *wholly* sovereign in a long list of specific areas, which includes health, transport, direct taxation, education, interprovincial trade and so forth. Considerably more independent and sovereign than US states in some ways. As in the US, national level laws have been promulgated effectively in those areas of solely local responsibility by offering conditional funding: if the smaller places voluntarily choose to follow certain rules, they get a boatload of money.

A national sales tax could certainly be done in the US, as there is always a workaround. As mentioned above, tariffs are in effect (if not in name) sales taxes. And the national government can always apply the funding pressure. Dear state: may we humbly request that you collect and remit the national value added tax...or we won't pay for your [insert federal funding program] any more.

We were on a long cruise and got to be friends with an Australian couple. They toured the US for a couple of weeks before boarding the cruise. They said they were floored when they bought something and the sticker price was less than the rung-up price. They, of course, were used to the tax (VAT) being buried in the price and not used to a separate sales tax.

Interestingly, in Canada when the GST was introduced, whether to include it in the sticker price was optional for each retailer. Each store was asked which sticker they wanted by the till. Some consumer associations heavily encouraged the "don't include it" approach, on the reasoning that it prevents the government from getting away with raising taxes, so that is the norm. Quite skipping the fact that sometimes raising taxes is the right thing to do. That's the way it went. Alas, having the tax not included causes a whole lot of minor human misery millions of times per day. Life is better when the transactions are simple and obvious and you know what you're paying.

But the Canadian example shows that no, the beauty of VAT (or GST and similar) isn't that it's invisible, the beauty is that it's extremely diffuse: it doesn't distort the economy, and rich people automatically pay more. It's astounding how much (or little) money can be raised without killing industries, or industriousness. Hungary is at 27%, which seems a bit startling even to an enthusiast like me, but the economy still continues. VAT is the main source of funding for the Monaco government, and it works well as an alternative to income tax.

Jim

Mungofitch writes a nice comprehensive comparison of Tariffs, a sales tax on imported goods, vs VAT. More or less.

Mungofitch, I think you made a bit light of the importance of producing strategically important goods domestically. Yes, if its wine you purely import you might get thirsty. If it is the chips that give your military a strategic advantage, then you are going to be a lot worse than thirsty.

But there is another effect that I don't believe is contemplated by the comparative advantage theory.

When we have an import from an economy who's "comparative advantage" consists of paying their laborers much less than we pay ours, that's just fine as long as we can move our workers to some other tasks. And classic capitalism says it is the displaced worker's problem to learn something that allows them to participate in whatever higher value added pursuits our society engages in that supports our higher wages. But what seems to have happened in fact is that we have simply thrown our lower skilled worker's to the wolves, that is, they have to compete against super low payed competition in other countries and other continents.

And the thing that may make the comparative advantage theory an incomplete analysis of the problem is, in our modern country and economy, we spend money on displaced or underemployed workers when they are underemployed.

So really, by NOT having a tariff, by not having a tax on the low-cost foreign producers, we are subsidizing their low cost of production by paying the costs we have associated with underemployed low-skilled domestic worker so that they can sell their stuff at high-profit/low-price to us.

So really? We are supposed to subsidize low-cost the owners of foreign businesses using low-cost labor so we can avoid the "mistake" of putting a tariff on them?

If those underemployed workers are going to cost our society money by being underemployed, it seems quite sensible to put at least enough of a tariff on the foreign companies so that we are not net-subsidizing their businesses by socializing the cost of the undermployed workers. It would seem the money we spend on undermployed workers is an externality to having zero-tariffs on low-cost foreign producers.

If we offset carbon with a fee or tax, why not offset really low wages with a tariff?

Anyway, that's what I've been wondering about.

R:

And the thing that may make the comparative advantage theory an incomplete analysis of the problem is, in our modern country and economy, we spend money on displaced or underemployed workers when they are underemployed.

If tariffs were being spent to assist said displaced / under / un-employed workers that would be a reasonable policy angle to debate. But the actual tariffs are going to be spent to partially offset tax cuts for the top quintile while almost everyone else gets charged MORE taxes, and support for said workers is being undercut by a multitude of staffing, program, and upcoming budget cuts. This does not make for a convincing case IMO.

I think you made a bit light of the importance of producing strategically important goods domestically.

As Germany found out when the Nordstream pipeline was terminated.

A bunch of pet owners learned a lesson on foreign imports when their pets died from bad dogfood.

If we offset carbon with a fee or tax, why not offset really low wages with a tariff?

We know from the last round of tariffs that no jobs were onshored, everybody just paid higher prices. Perhaps if the tariffs were in force for a longer period of time we would have seem some onshoring, but that seems long a long, hard row to hoe.

I've seen two proposals to counter some of the problems you outlined in your post. One is that we only make free trade agreements with countries with industries that pay a living wage in that country. The other is wage insurance. I'm not aware that either of these have been applied in any large scale. But they seem like rational approaches.

That said, the current US unemployment rate is about 4%, which most economists believe is close to the theoretical minimum. I'm very skeptical that even with tariffs there will be any onshoring unless and until unemployment rises to the point where wages are bid down to developing nation status. Which I don't think would be a victory.

However, we know from statements from US government leaders the tariffs seem to be about mercantilism more than jobs. For example, the US has a trade deficit with Canada, and US officials have indicated they believe this means the US is subsiding Canada. Similarly, official claims that the EU was created to rip off the US, etc.

But economists dating back to David Hume have argued that the key isn't how much you export, it is how much money you make. So, if we can import Canadian aluminum cheaper than we can make it ourselves, then we should import every ingot we can.*


*In a strict financial sense. There might be other considerations like jobs or strategic supplies. But the current administration is mostly framing trade in strict win-loss terms.

oddhack wrote: "If tariffs were being spent to assist said displaced / under / un-employed workers that would be a reasonable policy angle to debate. But the actual tariffs are going to be spent to partially offset tax cuts for the top quintile while almost everyone else gets charged MORE taxes, and support for said workers is being undercut by a multitude of staffing, program, and upcoming budget cuts."

During the first Trump presidency the US imposed tariffs, and foreign countries retaliated with tariffs on stuff including our agricultural exports. US farmers took it on the nose, and then the Trump administration funneled massive amounts of relief funds to them to relieve the pain. From what I read, that financial assistance to farmers who were injured by the trade war that our tariffs provoked consumed most if not all of the income from the tariffs.

Thoughtful, targeted tariffs can make sense. That's not what's going on, and there will be economic destruction with little to no net payoff to the US from what the Trump is doing.

Is it rational for companies like Ford to abandon their investments in Mexican factories and build new in the US, or is it smarter for them to wait out the Trump administration and figure the economic chaos will lead to the return of more rational policies after Trump and MAGA lose the presidency in 3 years?

It's a question with no great answer, I suppose. Ford takes a big hit no matter what they do.

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