The American Income Tax
Written by Darrell Anderson.
If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage. The general industry of the country, being always in proportion to the capital which employs it, will not thereby be diminished, no more than that of the above-mentioned artificers; but only left to find out the way in which it can be employed with the greatest advantage.
Adam Smith, Wealth of Nations, 1776
One of the original claims for supporting an income tax was the protective tariff. The desire for a protective tariff is to protect fledging businesses from competition. The effect is to raise the price of affected imported commodities. Managers and owners of the protected businesses then may raise the prices of their products in a like manner with impunity because they have a captured market. The result is windfall profits. The end consumer pays the increased prices regardless of whether buying the domestic or the imported product.
Imposts and duties, commonly called tariffs, are difficult to levy while conforming to the rules of equality/uniformity and consent. The American War Among the States was fought in part over the decades-long dispute over tariffs. The tariffs imposed by a northern states-controlled Congress created inequitable and unfair trade balances between the northern and southern states, and southern states and foreign markets. The southern states were stuck with the consequences of the tariffs and the northern states reaped the profits. In fact, the Confederate Constitution prohibited protective tariffs, essentially creating a free trade zone that frightened northern manufacturers and merchants.
Because of the way tariffs are levied, such taxes can hardly be considered uniform, fair or equitable. Although arguably used to raise revenues, tariffs are more often used to provide trade protections. Trade restrictions are a way of creating artificial scarcity. Creating artificial scarcity is a way to increase or ensure profits. Even when tariffs are imposed altruistically to raise revenues, tariffs nonetheless create trade protections. One way to avoid the protection argument is to levy a tariff on a product that is not produced locally. However, even then the consumer suffers from higher prices. When one class of people is protected, another class of people suffer. Such thinking violates free trade and liberty. Such thinking is outside the bounds of protecting rights and property.
Within the context of a true voluntary political society, imposts and duties might be justified but only when those taxes are strictly used to raise revenues and not to protect specific agendas. To be uniform and equitable, however, tariffs must be levied on all parties, not just a chosen few; but levying an import tax will not avoid the protectionism argument if foreign markets offer competing products.
Unfortunately, tariffs are levied before goods and services reach the retail market of the consumer, therefore such a tax is easily passed to consumers and embedded in the final retail price.
Furthermore, any tax that specifically targets one industry or trade or a class of people over other people must be viewed with suspicion. Hamilton wrote:
Before we proceed to examine any other objections to an indefinite power of taxation in the Union, I shall make one general remark; which is, that if the jurisdiction of the national government, in the article of revenue, should be restricted to particular objects, it would naturally occasion an undue proportion of the public burdens to fall upon those objects. Two evils would spring from this source: the oppression of particular branches of industry; and an unequal distribution of the taxes, as well among the several States as among the citizens of the same State.
One of the common arguments in favor of tariffs is protecting new industries. That is, new industries need to be protected to help them get started, otherwise established external markets will swamp the fledgling business into oblivion. Establishing a protective tariff raises the price of products sold by foreigners, which relative to those increases “lowers” the price of the domestic products; thus encouraging consumers to buy the domestic product.
Another argument is that tariffs protect established industries, and therefore, protect domestic jobs.
The trouble with such arguments is that they look only at one element of the system. Wages certainly contribute to final product prices, but wages are only part of those calculations. There are other elements, but wages often are an emotional element.
There are several questions people can ask when observing a business selling at a lower price than competitors. Does that business use a more efficient production process, thereby reducing overall costs? Does the business have fewer expenses to pay when obtaining raw resources? Are raw materials more easily accessible for the foreign business than the domestic business? Despite possible lower wages, are the workers at such businesses content with those wages? If so, is the reason because of lower cost-of-living standards in that general area? Are wages lower because the tools and equipment (capitalization) used make the entire process more efficient? Does high capitalization (more tools and equipment) mean more production? Does improved technology mean a higher demand for improved skills and training? Are higher wages a function of a scarcity of labor? Why are domestic competitors selling at a higher price? Are those businesses less efficient? Wages play only one part in determining final prices.
People produce because they want to consume. Any interference with consumption means a violation of rights and property titles. If a foreign business can provide a product at a lower price, then the consumer wins.
When a consumer buys a foreign product at a lower price than a domestic product, the consumer then has some remaining disposable revenues. The consumer can choose where to move those revenues. Consumers can save for future spending, or use those revenues in other areas of consumption — within foreign or domestic markets. In other words, quality of life improves for consumers — and everybody is a consumer.
Some people argue that such a philosophy would mean fewer jobs domestically. Possibly, but such displacements at worst are temporary and merely the result of changing markets. Markets are continually changing. Displaced workers find employment in other areas. Nature abhors a vacuum.
Consider the invention of the automobile. That device replaced the horse and buggy. Such a transition displaced workers in the horse and buggy industry, but the transition was caused by a continually changing — and improving — market. Furthermore, the reason why consumers eventually opted for the automobile instead of the horse and buggy was because the new device improved their own lives. The automobile helped people become more mobile, more productive, provided more freedom of movement, and introduced more efficiency and economy into their own lives, thereby reducing their own labor to provide needs and wants.
There is another element that many people often do not like to recognize. How much of a role does political intervention play? The entire concept of free trade fundamentally rests upon an amazing cornerstone. That is, that with such a market all players abide by the same known rules. Yet, when politicians intercede, the rules change — and sometimes often.
Assume all people of the world engage in true free association and voluntary exchange. Suddenly, without warning or cause, the politicians of one nation levy a tariff on all imports. What happens?
To those people importing goods to that nation, they will pass the cost of the tariff to consumers and if that nation has domestic competitors for those goods, the importers likely will see a drop in sales — just as the politicians intended. Domestic competitors also will raise their prices to just below that of the cost of the imported goods.
To consumers outside that nation, nothing much happens. People exporting those goods to the affected nation will see a reduction in sales. If the effects of the tariff are significant, then those people will try to adjust for the loss of revenues by raising prices in other areas of the world.
But inside that affected nation is where the direct impact is noticed. All people inside that nation are consumers and they must now pay the additional cost of the tariff or avoid consuming that particular product.
If the politicians of other nations believe that the businesses in their own nation are suffering because of the loss of revenues resulting from the tariff, they might decide to impose a tariff on goods sold from that first nation. Thus begin the trade wars — caused by politicians.
Notice in this process that the consumers were merely minding their own business. The politicians were the true cause of the economic problems. Or, just as likely, special agendas prompted the politicians to initiate the tariff.
Suppose that nobody “retaliates,” leaving only that first nation imposing a tariff on imports. Some businesses might suffer a drop in revenues, but all consumers in the effected nation suffer. That is as far the problem will propagate.
Perhaps one of the great examples of this flawed thinking of providing protectionism is seen whenever politicians impose trade restrictions on the necessity of food. The most well known example was the great potato blight in the mid 1800s. As many people recall, people of Ireland depended heavily upon the potato for basic sustenance. The blight eliminated the potato from their diets. People assume that people died as a result. Yet, such thinking only looks at one element of the story. The reason why so many people in Ireland died was not the lack of potatoes, but the lack of any alternate food source. The reason? The British Corn Laws imposed high tariffs on imported food. In fact, that potato blight and the resulting thousands of deaths is what finally motivated the British Parliament to repeal the laws.
Some people argue that existing tariffs must continue because sellers are already paying (and passing) the cost of any tariff, yet consumers continue to buy despite the added embedded cost. Thus, sellers know what price the market will bear. Therefore, eliminating a tariff will not necessarily reduce prices as many free-marketers claim. Instead, sellers will maintain prices at the old tariff level and instead of passing the marginal cost to the state, will keep the difference as profits. Therefore, maintain the tariff to produce revenues for the politicians and encourage domestic production.
Such an argument has merit with respect to how sellers might respond to the lack of a tariff. However, one flaw with the argument is that free trade was originally impeded when the state imposed the protective tariff. That was the first “wrong.” The second wrong is attempting to justify the first wrong. As the old adage goes, “two wrongs don’t make a right.” Another flaw is that although some people might be tempted to keep prices high, many would not. Instead they would lower prices and hope to realize a higher return of sales through a higher volume of trade. A third flaw is that without political interference, free trade is restored and new competitors would enter the market, eagerly selling at lower prices in the hopes of gaining market share; thereby forcing existing sellers to lower prices. All consumers win.
One of the oversights with the entire tariff issue is that tariffs are meant to protect the “balance of trade.” What many people do not realize is that such a statement is merely a statistical observation about the total amount of trading in the market. In reality, there is no such thing as a “trade deficit.” Only individuals trade. One human sells and another buys. When examined at the fundamental level that all such transactions take place, one realizes that there is no imbalance or deficit — only individuals trading.
Consider the some principles regarding human actions, property, and rights:
With those principles in mind, realize that tariffs exist because some humans naturally want to avoid competition, desiring to obtain more for less. Tariffs are an attempt by a select few people to create artificial scarcity and eliminate competition. Tariffs are mercantilist in nature in that producers are given preference over consumers. Tariffs are easily passed to consumers. Tariffs rarely observe the principle of equality/uniformity. Tariffs are levied using subjective ad valorem calculation methods. Consent is not honored. Protective tariffs fail to qualify as a reasonable tax and negate the concepts of self-ownership, rights, property, contracts, and consent.
Next: Chapter 21 — Excises
 Adams, When in the Course of Human Events, in toto.
 Article I, § 8, cl. 1: The Congress shall have power — 1. To lay and collect taxes, duties, imposts, and excises, for revenue necessary to pay the debts, provide for the common defence, and carry on the Government of the Confederate States; but no bounties shall be granted from the Treasury; nor shall any duties or taxes on importations from foreign nations be laid to promote or foster any branch of industry; and all duties, imposts, and excises shall be uniform throughout the Confederate States [emphasis added].
 Curtiss, The Tariff Idea, p. 20.
 Curtiss, The Tariff Idea, p. 34.
 Curtiss, The Tariff Idea, p. 34.
 The Federalist Papers, No. 35.
 Curtiss, The Tariff Idea, p. 27.
 Hoppe, Democracy, p. 154, footnote 3, citing Murray N. Rothbard, The Dangerous Nonsense of Protectionism.
 Hazlitt, Economics in One Lesson, “Who’s Protected by Tariffs?” pp. 74–84.
 Spangler, Clichés of Politics, pp. 246–248.