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 Richmans' Trade and Taxes Blog

The Irresponsible Tax Compromise
Howard Richman, 12/21/2010

The current leaders of both political parties have been totally irresponsible. They are following the same foolish strategy that some of my beginning economic students try in one of the simulation games that we play. They continually run large government deficits to keep their economy stimulated. At first the government deficit spending helps. But eventually debt payments become such a huge part of government spending that the government loses its ability to ever balance its budgets. From then on, the growing government spending causes hyper inflation which makes the economy totally unmanageable.

Peter Morici had a great Seeking Alpha commentary on December 20 (Downgrade U.S. Treasuries to Junk). He pointed out that the irresponsible tax compromise between the Obama administration and the Republican congressional leadership will result in huge budget deficits into the distant future:

In 2012, when the Congress must revisit the personal and corporate tax codes, permanent reductions in Social Security taxes will be politically necessary to win extensions for the Bush tax cuts benefiting even middle income families and the truly essential benefits businesses need to create jobs, not to mention all the additional goodies the Congress has just bestowed.

This renders the Social Security system absolutely insolvent, and makes permanent budget deficits upwards of $1.5 trillion and about ten percent of GDP permanent.

Then he pointed out that this will cause term-term U.S interest rates to climb and climb, as has already begun:

Just the fear of inflation causes investors to demand higher interest rates on virtually all dollar-denominated bonds issued by government agencies, banks and corporations. In anticipation of the new tax cuts, interest rates jumped, despite massive new bond purchases by the Federal Reserve.

As Washington spends and borrows, the Treasury will have to offer higher rates on new 20 and 30 year bonds, making comparable securities issued in 2010 and earlier worth less in the resale market.

The solution is simple. Balance budgets while balancing trade with the scaled tariff. If the scaled tariff were to just move the U.S. trade deficit back down from the $552 billion rate of the the third quarter 2010 to the $386 billion of 2009, it would provide $170 billion dollars of additional federal government revenue while at the same time providing the American people with $166 billion of additional income, due to the improved ability of American manufacturers to compete with imports and to the opening of the currency-manipulating countries' markets to American exports.

Some think that a tariff would violate WTO rules, but not the scaled tariff. WTO rules let countries with trade imbalances impose duties to balance trade. The scaled tariff's rate with a currency-manipulating country would go up when our trade deficit with that country grows, down when our trade deficit with that country goes down, and go to zero when our trade deficit with that country disappears. It would force the currency-manipulating governments to take down their many tariff, non-tariff, and currency-manipulation barriers to American products.

Tea Party leader, prolific author and talk show host Glenn Beck is fond of pointing out that the United States Constitution has within it the secrets for how to put our country back in order. Our founding fathers provided tariffs (duties and imposts) as a primary method for our government to pay its debts. In fact, Article 1, Section 8 of the United States Constitution begins:

The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;