In response to this recent post, a reader e-mailed me:
I read your letter to Mr. E today, and I’m a bit confused (as is often the case).
Wouldn’t a tariff designated as a revenue tariff have essentially the same effects as a protection tariff? It seems to me that a revenue tariff would necessarily also protect some domestic producers, and that a protection tariff would also raise some revenue.
How does one distinguish between them?
The confusion is understandable, especially given my limited powers of explanation. Here’s a slightly modified version of what I wrote back to this reader:
Hi S__,
The confusion is understandable. The difference lies mainly in the intentions that motivate the different kinds of tariffs.
Protective tariffs are motivated by a desire to restrict imports; if they work perfectly they yield no revenue. Any revenues that they do yield are incidental to protective-tariffs’ purpose, which is to reduce the amount of the taxed activity (importing) that takes place. Revenue tariffs are motivated by a desire to raise revenue; if they work perfectly they restrict no imports and government officials want the tariffs to restrict as few imports as possible. But like protective tariffs, revenue tariffs never work perfectly, so they do in fact keep some imports out and, to that extent, have an unfortunate ‘protectionist’ effect.
In practice, a well-designed system of revenue tariffs would be broad-based (that is, cover many imports) and have low and more or less equal rates. The amount of ‘protection’ would thus be practically minimized. In contrast, protective tariffs well-designed to achieve their goals are targeted to particular outputs or industries and the rates are high enough to substantially diminish imports.
Think of income taxes versus taxes on carbon emissions. Both taxes reduce the amount of the taxed activity, but in the case of income taxation the goal is revenue and the resulting reduction in income-earning activity is lamented. In the case of carbon taxes, the goal – quite unlike with income taxes – is precisely to reduce the amount of the taxed activity.
One reason for the relevance of distinguishing between protective tariffs and revenue tariffs is to expose the inconsistency of those (many) people – not the least being Donald Trump – who promise to use tariffs to achieve both significant protection of domestic producers and significant revenues to fund government programs.
Hope this helps.
Don
