Steel tariffs will allow American steelworkers to keep their jobs, help the American domestic economy, reduce United States’ dependency on China as a trading partner and foster the growth of the middle class.

This was the logic that motivated Donald Trump to impose a 25 percent tariff on steel and 10 percent tariff on aluminum on all countries except Mexico and Canada on March 23, 2018. This decision, while politically popular among his supporters who advocate for the steel industry, is incorrect in its assumptions and harmful to America as a whole. History and economic theory demonstrates that these tariffs will be bad for the economy in the short and long term.

Historically, tariffs have adversely affected the United States economy. The Smoot-Hawley Tariff, enacted in 1930, was arguably the largest in American history. This piece of legislation levied taxes on over 20,000 goods. According to Robert Whaples of the Economic History Association, there is a consensus among economists that the Smoot-Hawley Tariff exacerbated the effects of the Great Depression.

Other tariffs have had similar effects on the economy. More recently, President George W. Bush implemented steel tariffs on March 5th, 2002. These ranged from 8 percent to 30 percent and were implemented in response to the collapse of many steel-producing companies. The United States’ International Trade Commission estimates that these tariffs created a loss of around 41 million dollars to the U.S. economy. In addition, thousands of steelworkers lost their jobs. The tariffs reduced the amount of steel into the United States economy, inevitably creating a 9.2 percent steel price increase. As a result, around 200,000 jobs in all steel-consuming industries were lost in 2002 according to a Lancaster University study by Robert Read. Since steel-producing industries only account for 190,000 jobs, the net result on employment of this policy was incredibly negative. Because of the negative effects of this action, the Bush administration decided to revoke these tariffs on December 4th, 2003. Simply reducing the imports does not improve domestic conditions. Successful domestic firms are not competing against international firms; therefore, they will not be efficient enough to export their goods to other countries. Furthermore, American citizens will be less likely to purchase these goods for higher prices. This creates market conditions that aren’t conducive for success in the long term. Even if tariffs are imposed on just one product like steel, the negative effects will extend to a variety of industries.

Still, roughly 70 percent of Republicans and 25 percent of Democrats support President Trump’s decision to implement steel tariffs. These numbers are a result of the belief that tariffs can help expand the ever-decreasing American middle class. However, the fact that technology is advancing at such a rapid pace and automation is becoming more popular leads to a lower demand for labor in manufacturing jobs. As capital becomes more efficient, fewer workers will be necessary. In 1950, the number of steelworkers in the United States was around 650,000. Today, this number has fallen to 140,000. This number will continue to decrease as technology improves. Tariffs will not stop the inevitable jobs loss in the steel and aluminum industries. Instead, they will decrease jobs in other industries. A strong, concentrated political interest in favor of the steel tariffs currently outweighs the weak, diffuse interest in opposition to the steel tariffs. Because steelworkers benefit greatly from these tariffs, they will have a large incentive to passionately support President Trump’s policy. On the other hand, the greater number of people who would be harmed by the implementation of steel tariffs do not believe their jobs are in jeopardy. Therefore, there will be significant passion and political support behind the steel tariffs, even though they harm America as a whole.

The recent steel tariffs had immediate negative effects on the U.S. economy. The day the steel tariffs were put in place, the S&P 500 dropped from around 2,750 points to around 2,590 points. While there is limited data on the effect on employment and GDP, we can use history and economic theory to predict the full effect of these tariffs.

Steel and aluminum are present in everything from cables to cars. Accordingly, steel tariffs raise prices on items that hard-working Americans need in their daily lives. Joseph Amaturo from the Buckingham Research Group estimates that these tariffs will raise the price of cars by 300 dollars per vehicle. The actual effect of this is to lower the income of the rest of America at the expense of just steelworkers. This will reduce the amount of money that people have to spend and invest to grow other segments of the economy.

Additionally, raising tariffs could cause harmful economic effects if other countries choose to retaliate. In fact, the United States has already suspended the tariff on the European Union, Australia, South Korea, Brazil, and Argentina, some of the biggest exporters of steel into the American economy. The result of putting this tariff into effect only in certain countries will only benefit the countries which have been exempted from this tariff.

Furthermore, the fact that some of the biggest exporters of steel are exempted shows that this tariff does not even serve its intended purpose. The exempt countries will still export enough steel into the American economy to drive American steelworkers out of their jobs at a similar rate. This tariff only strains relations with countries who aren’t exempted, while effectively maintaining the quantity of steel imported.

Just like President Bush did in 2003, President Trump should recognize that his decision to put in place steel and aluminum tariffs is damaging to the United States as a whole. However, that does not seem to be the case right now. While some steelworkers may lose their jobs consistent with global demand and technology changes, more Americans will be able to keep jobs in related industries and the average American will be more able to afford everyday goods without the tariff. Because people are able to save more money, they will choose to invest more of that money. This will have the effect of creating jobs in other industries that are competitive in the global economy, like technology, rather than attempting to sustain unsustainable jobs. The American economy would be more prosperous, vibrant, and efficient without these tariffs.

 

On March 1st, 2018 President Donald Trump signed two proclamations imposing a 25 percent tariff on steel and a 10 percent tariff on aluminum that have become subject to much public debate. “I’m defending America’s national security by placing tariffs on foreign imports of steel and aluminum,” he said, finally fulfilling one of his campaign promises to aid the American steel industry.

            This is not the first time that the domestic steel industry has received protection through tariffs and trade regulations. In 2002, President George W. Bush imposed similar tariffs on imported steel, a controversial decision met by public outcry from those who advocated for free trade. The economic impact of these trade policies does not bode well for the future of the Trump economy. Despite their intentions, studies show that Bush’s trade policies were largely detrimental to the national economy, suggesting a similar path for Trump’s tariffs.

            Despite the administration’s support for free trade, the Bush administration justified the steel tariffs in 2002 as a necessary measure to protect against dumping practices. After the International Trade Commission, a U.S. agency, concluded that the European Union (EU) had been flooding and endangering the American steel industry, Bush swiftly authorized plans to impose tariffs on EU and East Asian steel. Bush hiked the tariff on foreign steel up to 30 percent, which had previously ranged from zero to one percent.

Politics also influenced Bush’s decision to impose tariffs. According to a study on the consequences of the 2002 tariffs, one of Bush’s primary campaign promises was to protect the steel industry, gaining him much support from steel-producing swing states like Pennsylvania, Ohio, and West Virginia. Fulfilling these promises became paramount for the Bush administration who sought reelection in just a few years. The culmination of economic and political factors resulted in tariffs that were swiftly announced and imposed in March.

            The economic retaliation by the EU was detrimental to the American manufacturing industry and economy as a whole. Within months of the tariff, the World Trade Organization had deemed Bush’s tariffs to be illegal, permitting the EU to set $1 to $4 billion worth of its own tariffs and sanctions in response. This sparked an international trade war leading to major steel shortages within America, which according to Trade Partnership Worldwide, increased steel prices up to 38 percent within eight months. These volatile price hikes had collateral effects on the manufacturing industry: automobile and appliance companies now faced rising production costs along with shortages on steel. Companies across most American industries now needed to cut down on costs and did so largely at the expense of their workers. By March of 2002, every state within America had experienced job loss from higher steel prices, leading to a roughly $4 billion decrease in wages. “We found there were 10 times as many people in steel-using industries as there were in steel-producing industries,” said Tennessee Senator Lamar Alexander. “They lost more jobs than exist in the steel industry.”

            The culmination of economic and political pressures eventually pushed Bush to reverse the sanctions just over a year after they were imposed. Having targeted various American exports, the EU began targeting specific industries that would directly hurt Bush’s hopes for his 2004 reelection. For example, the EU threatened to place high tariffs on oranges from Florida and cars produced in Michigan, an attempt to inflict significant damage on Bush’s campaign for reelection. By late 2003, Bush finally lifted the tariffs.

            The motivations behind the economic sanctions that Trump has signed are eerily similar to those of Bush. Both presidents have justified their tariffs by declaring a clear opposition, the EU for Bush and China for Trump. Similar political key words such as “safeguard” or “protection” have been used to support these tariffs. A significant portion of Trump’s supporters come from these steel-heavy states like Pennsylvania, one of the major swing states that Trump won. Very similar political and economic factors appear to have pushed both presidents to support tariffs on the steel industry.

            There are also several parallels between the economic details and circumstances of Trump and Bush’s overall plans. Trump has signed off on imposing a 25 percent tariff on all steel imports, a number just shy of the 30 percent tariff that Bush had implemented. The steel industry has remained a declining sector in the American economy since 2002. A recent study by the Organization for Economic Co-operation and Development, or OECD, described the global steel industry as “weaker than it has been in years” and that most governmental policies have failed to promote short to medium-term sustainability. Though China has now emerged as the key player for steel exports rather than the EU, the overall macroeconomic conditions of the industry itself have not changed significantly.

            Advocates of Trump’s sanctions have argued that several differences between the two plans make the Trump’s tariffs more likely to succeed. Both sides of the political spectrum have noted the vagueness of Trump’s executive order, particularly to which countries the tariffs will apply. The current executive order exempts “friendly nations” from the sanctions without much clarification which countries would fall under such category. Supporters of these sanctions view this vagueness as a way of insuring greater flexibility and leniency. By having these loopholes and potential exemptions, Trump can pick and choose which countries fall under the “friendly” category. It should also be noted that Bush’s tariffs, though stringent in the beginning, ultimately succumbed to pressures for exemptions once the EU retaliated. Today, China has openly stated that they still expect these sanctions to apply to their steel industries. China has also been vocal about potential retaliation.

            The Bush administration’s steel tariffs have been largely condemned by both Democrats and Republicans since their end in 2003. The economic retaliation and subsequent effects on the manufacturing industry have all pointed towards the necessity and benefits of free trade. Trump’s tariff plan appears to have many economic and political similarities to the Bush tariffs, suggesting a similar fate will befall the American economy within the coming years.

The Tax Cuts and Jobs Act, passed along party lines by Congress and signed into law by President Donald Trump in December 2017, marks the most expansive overhaul to the tax code since the Reagan era. Economic conservatives could not have asked for a better Christmas gift, as they celebrated the tax bill’s inclusion of slashes to the corporate tax rate, widespread lower income taxes and a variety of deregulatory and financial perks for small and large businesses across most industries. However, people yearning for the delivery of a central promise of the bill are left wanting; while elements of the byzantine tax code were simplified by the new bill’s passage, the system remains essentially as complex as ever.

The reality is Americans in 2018 will not be able to do their taxes “on a postcard,” a colloquialism used by Senate Majority Leader Mitch McConnell and Trump, which referred to the optimistic idea that tax-payers would no longer need to fill out – or pay someone to fill out – hundreds of sheets and documents for the IRS each year before Tax Day. The failure to streamline the tax system begs the question of whether Americans will ever see simpler procedures, or if they should accept that today’s economy is too complex and the influence of special interest groups too strong for itemized deductions to ever fully disappear.

The history of the federal tax system is one of sustained growth, both in regards to the number of citizens targeted and the size of the bureaucratic skeleton. Throughout the 20th century, tax rates and the number of deductions ballooned. Before World War II, only a small percentage of the wealthiest Americans paid taxes; that number, about seven percent, expanded to include nearly 70 percent of the population while the war was being funded, according to economic website Marketplace. Due to the introduction of the Earned-Income Tax Credit (EITC), a refundable tax credit for low income people (especially those with children), this number has declined to 53 percent of the population that pay taxes today. As a result, changes to the federal tax code mostly affect non-retired earners who do not qualify for credit breaks.

The new bill also doubles the standard deduction for these non-retired earners, which admittedly promotes more simplicity as an increased amount of people will be incentivized to deduct a flat rate rather than itemizing deductions line by line. Most people who have the opportunity would evidently rather pay a clear flat rate than suffer through an endless sea of forms and painstakingly account for their receipts. Internal Revenue Service (IRS) data from 2013 (the most recent year with available data published) shows that 68.5 percent of households took the standard deduction in lieu of line by line deductions, leaving only 30.1 percent of households that choose to itemize. This latter number will shrink as a result of the tax bill, but for those that continue to itemize, the system will likely continue to be as convoluted as it was last year.

One of the tax system’s central controversies has repeatedly been individuals exploiting technicalities in tax breaks for certain behaviors, in an effort to avoid paying taxes. One example of this involves businesses shifting their official classifications from an industry such as “Consulting” to a less-taxed industry, in order to keep more of their revenue. Since certain new rules implemented by the Tax Cuts and Jobs Act are intended to simplify parts of the code, there will inevitably be situations where people will attempt to cheat the IRS by taking advantage of loopholes that reward certain types of behavior.

For example, an important provision in the new bill increases the deduction for pass-through entities, which are business vehicles exempt from corporate income tax such as landlords’ real-estate, legal partnerships and S-corporations. According to the Brookings Institute, however, 95 percent of all U.S. businesses can be defined as pass-throughs. While this particular change will be a boon for many small businesses and may spur economic growth, the reality remains that the majority of this pass-through income flows to the top one percent of earners, who might try and position themselves as businesses rather than as individual taxpayers in order to pay a lower rate. For example, a hedge fund might absorb hundreds of millions of dollars a year and still classify as a pass-through based on the status of its ownership, which may seem unfair to earners making less but proportionally paying more. In turn, more rules would have to be put in place to prevent this disingenuous behavior from occurring, leading to more provisions, more paperwork and more bureaucracy.

Similarly, while the bill lowers most individual rates, it also keeps the previous seven income brackets in place. As was the case in the previous tax code, the amount of income paid scales up gradually. For example, a family with an income requiring a 28 percent income tax rate will not pay a full 28 percent of its income to the IRS. Instead, for its income that falls within the first income bracket, the family would be taxed at the 10 percent rate stipulated by the new bill. This taxing procedure would continue for its income falling within the subsequent income brackets (rates of 15 percent, then 25 percent), and finally the remainder of its untaxed income will be taxed at 28 percent. This is just one more cause of confusion and frustration that the bill did little to eliminate.

Several solutions to tackle the complexity of the current taxing system have long been brought up by experts. One solution is that of investor Steven Forbes, who has always advocated for a flat tax system with no deductions or loopholes. This radical solution would eliminate the interest group question entirely and make tax filing truly doable on a postcard, although inevitably resulting in a loss of benefits for the poor and elderly. However, the idea never gained much real traction during the process of amending the bill. Instead, the debates over what changes to make to the existing code centered around haggling over individual bracket rates, debates over which deductions to add or eliminate and a variety of other minutia that was decided by different Congressmen and committees. A different path towards simplification, and the one that was most used in practice, is the elimination of as many itemizations as possible. However, most discussions of removing specific line items faced pushback from one interest group or another.

Approaching the tax system by attacking line-by-line details parallels the myth of Hercules and the Hydra: cutting off one head of the beast leads to two more popping up in its place. For a meaningful simplification of the tax code to take place, politicians will likely have to start working on a bill from the top down with the philosophy that all itemizations must go and that flat taxes will be the new standard for each income group. If they can accomplish this while maintaining a safety net for low-income and elderly people, all families and earners will benefit. Until then, per the Taxpayer Advocate Service, Americans will continue spending a combined six billion hours a year filing taxes while paying compliance costs roughly totaling 195 billion dollars. There’s a reason tax magnate H & R Block’s stock actually increased after the bill passed, despite early fears the company would be forced to close its doors. The Tax Cuts and Jobs Act made some meaningful strides by doubling the standard deduction, but the code still has a long way to go before filing taxes on a postcard becomes possible.