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The Best Protective Tariff Rate Is Zero (But Perhaps Not So for Revenue Tariffs)

Over at Law & Liberty Brian Domitrovic offers wise counsel to Oren Cass and other protectionists who use the economic history of 19th-century America to justify high tariffs. But in his essay Mr. Domitrovic makes two claims that I want to question. The first claim, I believe, is incorrect; the second is unintentionally misleading.

The first, incorrect claim is that the hike in personal income-tax rates in the 1930s played a key role in sparking and fueling the Great Depression. These tax hikes (along with the Smoot-Hawley tariff, enacted in June 1930) certainly made the Depression worse, but I don’t believe that the onset, depth, or length of the Great Depression can be explained chiefly, and much less exclusively, by tax or tariff policy. What Milton Friedman and Anna Schwartz identified as the Great Contraction of the U.S. money supply, 1929-1933, remains, I believe, by far the most credible explanation for America’s economic calamity of the early 1930s. As for the Great Depression’s long duration, Robert Higgs’s theory of regime uncertainty works far better than does tax policy. (I encourage readers to study Higgs’s 2006 book, Depression, War, and Cold War and George Selgin’s forthcoming False Dawn.)

The second, unintentionally misleading claim is that economists regard the optimal tariff rate as zero percent. (Of course, there is the “optimum tariff,” but neither Mr. Domitrovic nor I have this theoretical curiosity in mind here.) When Mr. Domitrovic writes that economists are in widespread agreement that tariffs should be set at zero he should have instead written that economist are in widespread agreement that protective tariffs should be set at zero. The hostility to tariffs that Mr. Domitrovic correctly notes is widespread among economists is hostility to the notion that protectionism achieved through tariffs will increase the overall wealth of the nation. This hostility is to protectionism. Because tariffs are the chief tool of protectionists, economists insist that if government wants to set tariffs at rates that will maximize the wealth of the people of the home country, government should set those rates at zero.

But if economists were instead asked “What is the optimal tariff rate for raising revenue?” there would be no widespread consensus to set that rate at zero. Not even close. Even I – as staunch an opponent of protective tariffs as has ever lived – do not rule out the possibility that relying more heavily for government revenues on tariffs, and less heavily on income taxation, might be good policy. While I (like very many economists) am convinced that the optimal protective tariff is zero, I (also, I’m confident, like very many economists) am quite sure that within an ‘ideal’ tax system the optimal revenue tariff is very likely above zero.

Mr. Domitrovic’s essay would have been even stronger had he been more aware of the distinction between protective tariffs and revenue tariffs. The two are categorically different creatures. The former is a destructive beast; the latter has the potential to be a productive workhorse, at least when compared with income taxation.

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