I could hardly be happier with the actions of the Trump Administration, though I’m not a tariff guy. Donald Trump is perhaps the most atypical politician since George Washington, largely because he’s not a politician—he’s a CEO. He’s focused on results, not on hoodwinking the public with faux policies that merely create the illusion of progress, as is so often the case in Washington.
Understanding this about him, I feel he has a broader endgame with his tariff policy. So, let’s discuss trade, tariffs, and where his approach might lead.
So-called “trade deficits” are meaningless. I go to Starbucks every morning for coffee. Starbucks has never used my legal or financial services. If we were two nations, under the current mercantile philosophy of the pro-tariff crowd, we’d have a 100% trade imbalance. Yet, there is no real imbalance because I get coffee, and they get my money—it evens out perfectly. Plus, it’s voluntary; no one forces either of us to do business with the other. Commerce between citizens of different nations works the same way. Countries don’t trade—people do.
The silliness of getting one’s panties in a wad over trade imbalances knows no bounds. Take Starbucks, for example. We don’t have a 1-to-1 relationship. Starbucks trades with numerous vendors to make me a cup of coffee—cups, napkins, sugar, coffee beans, cream, and more—sourced from all over the world. The cup manufacturer alone might buy from 20 other vendors to produce a single cup. Something as simple as a cup of coffee could involve hundreds of global transactions. Some foreign products imported into the United States even contain components originally manufactured in the U.S., assembled with other global parts abroad, and then sold back to the U.S. The complexity of trade is beyond the grasp of government bureaucrats—and there’s no reason to measure it.
Is it true that some countries manipulate their economies with tariffs and other means to promote exports, causing certain sectors of American manufacturing to lose jobs to overseas entities? Yes. Is an imbalance in tariff rates “fair?” I loathe the emotionally loaded term “fair,” but for the sake of argument, let’s say no. Do these countries hurt themselves more than they hurt the United States through protectionist policies? Absolutely! Their citizens are poorer because they lack access to goods and services at lower prices. Less wealth is produced, and without wealth, there is no capital—without capital, there is no innovation or economic growth. Canada, for instance, has significantly higher tariff rates than the U.S. on the same products, and its per capita family income is lower than that of Mississippi, our poorest state.
We still win when other countries don’t “play fair.” Is it better to have zero tariffs between nations? Yes, and one reason is that the more wealth other countries generate through free trade, the greater the chance they’ll create new, innovative products that benefit us. When an American factory closes because its products can be made cheaper in Mexico, it creates a visible impression of decline. But what isn’t seen is the “flip side”—Adam Smith’s “invisible hand” at work in the marketplace. While 100 factory workers might lose their jobs, perhaps 100,000 consumers can now buy those goods at much lower prices. Creative destruction is the essence of capitalism. We may lose an industry, but markets react, we innovate, and we end up better off. The real measure of free trade’s benefits isn’t the old tool-and-die factory, sputtering along on the edge of town—it’s the standard of living of the average American. By any historical standard, it’s the highest it has ever been. Could it be better? Yes—much better.
Now, let’s consider the potential benefits of tariffs. They are not necessarily as punitive as they seem, because markets adapt to circumvent them. One could argue that foreign capital flowing into America to build manufacturing plants is a good thing. No question—but let’s not forget that cheaper products coming into the U.S. due to low tariffs also represent an asset class that is “capital.”
So, what is Trump thinking? I believe he wants to replace the income tax with a tariff system. Taxing productivity is akin to slavery. Moreover, taxing productivity directly reduces productivity. It’s a terrible way to collect revenue. Our Founders would have taken up arms against the proponents of the 16th Amendment. The IRS Code spans 2,600 pages, with 80,000 pages of regulations. Employers have essentially been “press-ganged” into government service to collect revenue for the Leviathan state. Taxpayers effectively employ over 4 million accountants, lawyers, bookkeepers, tax preparers, and others to comply with IRS regulations. These 4 million could instead be part of the productive economy, creating goods and services that others voluntarily purchase. The cost of the income tax is embedded in every product and service. In other words, virtually everything would cost less without the income tax. There is significant merit in replacing the income tax with a revenue system that eliminates billions of man-hours, trillions of dollars in costs, and frees 4 million highly educated people to contribute to the productive sector instead of the compliance sector. While tariffs might raise the costs of goods and services, eliminating the income tax could create far greater benefits than the increased costs associated with tariffs.
The Department of Government Excess (DOGE) has exposed incredible waste and corruption. Just before COVID-19, federal spending was $4.4 trillion per year. That was only five years ago. It’s now $6.7 trillion—a 54% increase. Five years ago, the federal government was already a wasteland of fraud and inefficiency. Rolling back federal spending, which crowds out private investment, to 2000 levels would be an economic bonanza of epic proportions.
I think Donald Trump is considering this approach: drastically reduce government spending and replace the income tax with a tariff system. If I had Merlin’s magic wand, this is precisely the system I would create—except I’d prefer a universal consumption tax over a tariff system. The greatest calamity in American history was caused by manipulating the tariff system to favor one part of the country over another. A universal consumption tax would be much harder to manipulate and far more equitable.
That’s my opinion, and I’m sticking to it. I’ll even bet an announcement along these lines is coming soon.
I would also privatize Social Security—the biggest financial scam in history—and reform the medical industry to reduce Medicare costs, but that’s an article for another day.
