David Henderson, a co-blogger who writes for Hoover Institution’s Defining Ideas Publication (April 24, 2025, “Cleaning the Air in the Deficits”), mentions two plausible debates on non-zero tariffs. One of them is within the best tax system.
Another intellectually respectable argument for tariffs is that they are part of the optimal tax structure. Federal government taxes a lot: individual and corporate innome, capital gains, gasoline and other communities. How can you confirm that positive tax rates on imports are not part of the optimal tax system? you can’t. We know that the loss of weight, the overall loss from taxes minus profits to the government, is proportional to the square of the tax rate. For example, double the tax rate. So, reducing the top marginal tax rate for INOME from 35 paying current paying from 37 paying, potentially reducing overall deadweight losses when replaced with a 5% tax on imports.
I would like to expand David’s diskate and discuss what I think is a unique aspect that will become more than just a sub-sub-tax. But first, it is worth taking advantage of this opportunity to dispel common myths about free markets and free trade. Free markets do not mean zero taxes (including customs duties). Rather, free market means non-distance tax. In other words, taxes should seek to generate revenue in the neutral way possible. Certainly, taxes reduce the effects of distortions, but the goal is to minimize them as much as possible. Put it in Adam Smith’s words (add emphasis):
Therefore, all systems are either of preferences or inhibitions, and therefore completely deprived of obvious and countless delusions, and for proper performance in which human wisdom and knowledge is not sufficient. The obligation to oversee civilian industries and seduce them towards employment that is most appropriate for the interests of society (Wealth, Book IV, Chapter IX, Paragraph 51, pg 687).
Smith went on to lay out his tax sayings in Book V (Chapter 2).
Taxes must be proportional, taxes must be certain, not arbitrary, taxes should be collected at the time to amend to the payer to pay it, and taxes must be violated to undertake something positive.
(To this last point, he adds protective tariffs as a clear violation of this maxim).
So, we quickly conclude this derailment: the free market does not mean taxes. Governments can coexist with the free market. Similarly, it can coexist with a free trade trough. It is when there is no distortion and is not neutral that makes taxes and tariffs worse. That is, when they try to direct people’s economic activities.
Now, back to the main topic: tariffs are unique among taxes.
Most of the taxes are purely domestic. However, tax and tax import. Therefore, they are international. In domestic taxes, how they are parsed by other governments is irrelevant (unless there is a leader who doesn’t understand the tax when they believe VAT is an export subsidy). However, even if it wasn’t intended, it could still be Pensen. Therefore, governments from other countries could retaliate, or render a tax that would otherwise be less than optimal.
In fact, this threat of retaliation has long been debated as the fundamental issue of optimal tariff. In his 1987 article, “The Classical and Neoclassical Roots of the Theory of Optimal Tariffe,” Thomas Humphrey states that even early theorists of optimal tariffs (such as J.S. Mill) stated that the major failures were in other countries (see p. 27).
Therefore, the theoretical optimal tariffs may be practical if they are interpreted by my other governments. The same threat does not exist in domestic taxes.
In a slightly different context, Edwin van de Gaal writes about the country’s security dilemma (add emphasis):
In a world without the highest authority, every state faces a security dilemma (Booth and Wheeler 2008). This means that even if such an order is best for the well-being of a general human being, one cannot expect a stable and peaceful order. Taking advantage of the absence of a world government, there is always a threat to a nation or a group of states. Therefore, there is a security dilemma. If they want to survive, take care of their safety, the First Fourth Army nation. Leaders and elites cannot be sure about the trends of leaders in other states. Similarly, weapons procured purely for self-defense can be considered by others as offensive. Perception is extremely important in a world of uncertainty (Humanity and World Affairs: An Introduction to Classical Liberalism and International Relations Theory, pg 78).
Consenkori, a country that builds military for self-defense, could place itself in sourness to the greater threat of invasion if accumulation was misunderstood by other governments.
You can see the same dilemma at customs duties. This is called the tariff dilemma. Tariffs may be part of the optimal tariff scheme, but if they are being mepered as a litigation that is expanded by foreign governments, such optimal Timal fees can lead to retaliation and cause optimal top suboptimal tariffs. As if such police were off, we will see you lobbying for rent as domestic businesses will then try to get subsidies and protections before retaliation. [1]
Considering all political distortions, the optimal tariff may be 0%. Based on David’s example above, in the absence of retaliation, a 5% tariff at a marginal upper tax rate of 35% may be a less optimal tariff retaliation. However, in the event of retaliation, 37% without tariffs may be optimal.
At the end of the post, David wonders why the Trump administration has not tried to justify tariffs as part of the optimal tax system.
Surprisingly, I have never seen a Trump economist make this claim. Perhaps that’s because TAIF allows it to be taxed and impose taxes on it. Can you just imagine Trump wants his supporters to be as ignorant about the cost of tariffs as magician dairy farmers in upstate New York?
Since David wrote those words, the administration and its allies have begun to accept that Takuto imposes costs despite the inconsistent message. And I don’t disagree with Aisher of his ratings. There is always an incentive to obfuscate the costs of political projects.
But let me suggest another reason why the “optimal tariff” debate doesn’t occur. The Trump administration is openly shy. Repeated attacks on the trade deficit show that the Trump administration’s tariff scheme focuses on distortion political targets rather than optimal taxation.
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[1] Relatedly, Dom Pino wrote that lobbying has risen by 277% last year due to tariffs. The man who thought “want to drain the swamp” made it a Depper
