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This Is The Key Thing Missing In The Debate About Trump Tariffs—& It Affects All Of Us: Steve Forbes
Forbes Breaking News
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Steve Forbes discusses the missing part of the debate about President Trump's tariffs—the tax wedge—which affects business and consumers in every transaction.
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00:00
The debate on tariffs ignores a very big issue, the tax wedge.
00:10
Hello, I'm Steve Forbes and this is What's Ahead, where you get the insights you need to better navigate these turbulent times.
00:17
A tariff is a tax, and a tax is a wedge, an obstacle between buyer and seller.
00:24
How harmful the tax wedge is, of course, depends on its size and its breadth.
00:29
Let's make the idea simple.
00:31
Suppose there's no income tax, and a person makes $40 an hour and wishes to buy an item that costs $200.
00:39
That individual would have to work five hours to make that purchase.
00:44
Five hours times $40 equals $200.
00:48
Now, suppose the income tax is 50%.
00:51
The would-be buyer keeps only $20 an hour after that 50% tax.
00:57
So that individual would have to work 10 hours instead of five hours to make that purchase, thanks to that tax wedge.
01:05
Right now, the tariff discussions are focused on inflation.
01:09
That is, what impact will tariffs have on prices?
01:12
Overlooked is that whatever impact tariffs might have on consumer prices, they will impose a wedge, a barrier to doing business.
01:22
Taxes add friction to conducting business.
01:25
The magnitude depends on the actual rates and how extensive they will be on particular products and services,
01:31
and the effect on supply chains and existing trade patterns.
01:34
That's why the focus on inflation misses the bigger issue.
01:39
Tariffs don't necessarily raise overall prices.
01:42
The cost of that $200 item may not change, but the effort required to buy it will.
01:49
That means less prosperity.
01:51
Federal Reserve boss Jerome Powell misses the point with his fussing about the possible impact of tariffs on prices.
02:00
Instead, he should concentrate on the friction they would impose on commerce.
02:04
The most devastating result historically came from the sweeping Smoot-Hawley tariff bill
02:10
that began to wend its way through Congress in 1929, triggering the infamous stock market crash.
02:17
It was signed into law in June 1930.
02:21
The bill imposed tariffs on thousands of items.
02:25
The legislation triggered massive retaliations from other countries and effectively blew up the global trading system.
02:32
Trade shriveled.
02:34
It began what came to be called the Great Depression, as it was followed by other big economic mistakes,
02:41
particularly tax increases in the U.S., Britain, Germany, and other nations.
02:45
Countries resorted to competitive devaluations, with historians labeled beggar-thy-neighbor policies.
02:54
This disastrous state of affairs is why nations after World War II, led by the U.S.,
03:00
began a series of agreements, reducing tariffs and other trade barriers.
03:05
The resulting explosion in trade was critical for the big growth the world experienced after 1945.
03:11
The most immediate point today is that the Smoot-Hawley tariffs didn't raise prices.
03:19
The slump in commerce led to price cuts.
03:22
Prices don't go up in going out of business sales.
03:25
Thankfully, the tariffs being enacted or proposed today aren't on the scale yet of Smoot-Hawley.
03:31
Moreover, unlike 1929-1930, they're still fluid, still subject to change.
03:39
Nonetheless, the helter-skelter way the issue is being treated leads to real concerns.
03:45
Hopefully, these are hard-fisted negotiating tactics that will yield sensible agreements and end up reducing trade barriers.
03:53
But in the meantime, remember the impact the tax wedge can have on economic growth.
03:59
I'm Steve Forbes. Thanks for listening.
04:02
Do send in your comments and suggestions.
04:04
I look forward to being with you soon again.
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