This Is The Key Thing Missing In The Debate About Trump Tariffs—& It Affects All Of Us: Steve Forbes

Forbes Breaking News

Steve Forbes discusses the missing part of the debate about President Trump's tariffs—the tax wedge—which affects business and consumers in every transaction.

Transcript

00:00The debate on tariffs ignores a very big issue, the tax wedge.

00:10Hello, I'm Steve Forbes and this is What's Ahead, where you get the insights you need to better navigate these turbulent times.

00:17A tariff is a tax, and a tax is a wedge, an obstacle between buyer and seller.

00:24How harmful the tax wedge is, of course, depends on its size and its breadth.

00:29Let's make the idea simple.

00:31Suppose there's no income tax, and a person makes $40 an hour and wishes to buy an item that costs $200.

00:39That individual would have to work five hours to make that purchase.

00:44Five hours times $40 equals $200.

00:48Now, suppose the income tax is 50%.

00:51The would-be buyer keeps only $20 an hour after that 50% tax.

00:57So that individual would have to work 10 hours instead of five hours to make that purchase, thanks to that tax wedge.

01:05Right now, the tariff discussions are focused on inflation.

01:09That is, what impact will tariffs have on prices?

01:12Overlooked is that whatever impact tariffs might have on consumer prices, they will impose a wedge, a barrier to doing business.

01:22Taxes add friction to conducting business.

01:25The magnitude depends on the actual rates and how extensive they will be on particular products and services,

01:31and the effect on supply chains and existing trade patterns.

01:34That's why the focus on inflation misses the bigger issue.

01:39Tariffs don't necessarily raise overall prices.

01:42The cost of that $200 item may not change, but the effort required to buy it will.

01:49That means less prosperity.

01:51Federal Reserve boss Jerome Powell misses the point with his fussing about the possible impact of tariffs on prices.

02:00Instead, he should concentrate on the friction they would impose on commerce.

02:04The most devastating result historically came from the sweeping Smoot-Hawley tariff bill

02:10that began to wend its way through Congress in 1929, triggering the infamous stock market crash.

02:17It was signed into law in June 1930.

02:21The bill imposed tariffs on thousands of items.

02:25The legislation triggered massive retaliations from other countries and effectively blew up the global trading system.

02:32Trade shriveled.

02:34It began what came to be called the Great Depression, as it was followed by other big economic mistakes,

02:41particularly tax increases in the U.S., Britain, Germany, and other nations.

02:45Countries resorted to competitive devaluations, with historians labeled beggar-thy-neighbor policies.

02:54This disastrous state of affairs is why nations after World War II, led by the U.S.,

03:00began a series of agreements, reducing tariffs and other trade barriers.

03:05The resulting explosion in trade was critical for the big growth the world experienced after 1945.

03:11The most immediate point today is that the Smoot-Hawley tariffs didn't raise prices.

03:19The slump in commerce led to price cuts.

03:22Prices don't go up in going out of business sales.

03:25Thankfully, the tariffs being enacted or proposed today aren't on the scale yet of Smoot-Hawley.

03:31Moreover, unlike 1929-1930, they're still fluid, still subject to change.

03:39Nonetheless, the helter-skelter way the issue is being treated leads to real concerns.

03:45Hopefully, these are hard-fisted negotiating tactics that will yield sensible agreements and end up reducing trade barriers.

03:53But in the meantime, remember the impact the tax wedge can have on economic growth.

03:59I'm Steve Forbes. Thanks for listening.

04:02Do send in your comments and suggestions.

04:04I look forward to being with you soon again.

Category

Transcript

Recommended