Tuesday, September 15, 2009

Obama’s Protectionist Folly

The Obama administration announced on Friday that it is imposing a 35% tariff on tires imported from China. This sent chills throughout the international community. America and much of the world are already mired in the worst economic crisis in decades. The administration’s ill-conceived protectionist action could spark a full-blown trade war that would deepen and lengthen the current downturn.

First, let me state unequivocally that I am not one who believes that running massive current account deficits year after year is inconsequential. Since 2001, when George Bush took office, the United States has run up a $3.8 trillion trade deficit in manufactured goods. That’s more than twice the $1.68 trillion trade deficit America incurred for imported oil and gas. The consequences of continuing this are very real, broad, and deep.

However, punishing Americans by raising the prices of imported goods is not the answer. The real solution is to fix America’s convoluted tax system, which makes products produced here increasingly uncompetative in world markets.

The U.S. has the second highest corporate tax rate in the developed world, which drives up the cost of goods that are produced in America. In addition, most other countries provide their domestic companies with tax rebates on goods that they produce for export, lowering their prices in world markets.

The government also taxes money that U.S. corporations earn overseas when the money is brought back home. This penalizes U.S. companies that want to use their foreign earnings to invest in America. As a result, a large portion of overseas earnings is never brought back home and put to productive uses. The U.S. is one of the very few countries in the world that do this. The Obama administration is proposing to make the situation worse by taxing foreign earnings whether or not the money is repatriated, which will surely drive corporate headquarters out of America.

The U.S. tax code also punishes savings. Not only does the government tax income that is saved, it also taxes the interest on that savings. Consequentially, Americans don’t save enough to finance all of the available domestic investment opportunities. Instead, we borrow money from countries like China and Saudi Arabia.

The U.S. also imposes payroll taxes on employers to fund Social Security and Medicare, which increases the cost employing people, thereby reducing the potential for job creation.

Lastly, it will cost Americans an estimated $350 billion next year just to comply with our overly complex tax code. That is money that can’t be used for more productive purposes.

The real answer to America’s trade deficit is to replace our convoluted and counter-productive system of taxing savings, production, and employment, with a simple system of taxing consumption. Doing so would have the following effects: America’s savings rate would increase. American would become a huge magnet for productive, job creating foreign business investment. American exports would be far more price competitive in world markets. In the domestic market, products produced in America would be more competitive with imports. In addition, money that is spent today complying with the complex tax code would be put to better uses.

There would be many other benefits as well, including increased privacy because the government would no longer be required to collect massive amounts of information about what we earn and how we spend it.

One such proposal for fixing our broken tax system is the Fair Tax, which proposes to replace all current federal taxes with a simple retail sales tax on goods and services.

Unfortunately, it’s not likely that the Obama Administration or the Democratic Congress will even consider anything like this. They are too busy bashing corporations and placating union bosses. Instead, in addition to their ill-conceived protectionist measures, they are likely to make the tax system even more convoluted and punitive, much to America’s determent.

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