Inspired by Don Boudreaux, Tim asks: “If tariffs reduce trade, why does income tax not reduce incomes?”
As one of the many targets of the question - someone who supports free trade and income tax, a perfectly common position - I’d suggest three reasons:
1. There are often more and closer substitutes for imports than there are for earning a wage.
One of the curiosities of international trade is that there’s a very incomplete division of labour, as rich countries often import and produce very similar goods. This generates an ability to substitute away from imports if a tariff is imposed - either to a very close substitute (domestic vs. imported steel) or a near substitute (home-grown apples vs. imported bananas).
By contrast, the substitutes for wage-earning aren’t so close. Yes, some can slip into the black economy, and others can work overseas. But leisure is - as we all know - a very distant substitute for work.
The upshot is that we can’t substitute away from work as easily as we can away from imports.
For this reason, I’m not sure if Tim’s example of NBA stars moving to low-tax states has huge relevance to the UK. Playing basketball in Texas is a close substitute for playing it in California, so we’d expect taxes in the latter to encourage players to move to Texas. But insofar as working in London is a less close substitute for working in Paris, we’d expect a smaller effect of UK taxes on labour supply.
2. Income tax has an income effect as well as a substitution effect. In reducing our post-tax incomes, income tax might encourage us to work harder or longer. It’s difficult to establish this empirically, because one way in which this happens is that we postpone retirement with the result that taxes in one year might raise labour supply decades later.
It’s not obvious that tariffs have an analogous effect in boosting imports.
3. Tariffs often are not just a tax on consumer goods, but upon inputs. And insofar as point 1 doesn’t hold, this introduces another channel in which tariffs reduce imports. In making some activity unprofitable at the margin, firms might shut down.
Again, there’s no analogy with income tax. Companies might kill themselves in response to higher tariffs on imports, but people don‘t kill themselves in response to higher income taxes.
Now, I stress that these are hypotheses that apply generally and with exceptions. It’s entirely possible - nearly certain - that there are some cases where income taxes reduce incomes and where tariffs have relatively benign effects. The question is an empirical one: how common, exactly, are such cases? And the answer is: it’s hard to tell.
Instead, I’m just trying to motivate the Bayesian prior held by many liberalish lefties like me, which is to instinctively oppose tariffs but support income taxes, unless there‘s good empirical evidence to the contrary. And for the tax rates that are relevant, this evidence is, so far at any rate, unconvincing.