Trump's 35 percent tariff wouldn't keep jobs in the U.S. Here's why.

A container area at the Yangshan Deep Water Port, part of the Shanghai Free Trade Zone in China. (Reuters/Aly Song)

In a series of tweets on Dec. 4 (see below), Donald Trump proposed punishing American companies that move production overseas with an import tariff of as much as 35 percent on the sale of goods back into the United States. The justification for these measures was to keep U.S. companies from moving overseas.

But is this argument justified? Would such a tariff — even if Trump could overcome expected Republican resistance — keep companies from leaving the United States? What other effects might it have?

With these questions in mind, I reached out to my colleague at the NYU School of Law, Professor Mitchell Kane, an expert in international tax law. What follows is a lightly edited version of our conversation.

Joshua Tucker (JT): Trump’s proposal seems like it would be an effective deterrent to moving production offshore. So why are people concerned with it?

Mitchell Kane (MK): Imprisoning CEOs who moved jobs offshore would also be an effective deterrent. Absent evidence of some corruption (as might be reached by the Foreign Corrupt Practice Act), we would reject such a proposal out of hand. So the question is not whether we can imagine laws that would have the effect of keeping production in the United States. The question is whether we are willing to accept the trade-offs.

JT: What are the trade-offs in this case? Isn’t an import tariff just a fair leveling of the playing field since countries like Mexico impose a VAT (value-added tax) rebate at the border?

MK: The problem is that there are two outcomes we like: more rather than fewer U.S. manufacturing jobs and lower rather than higher prices on manufactured goods that we consume here. We need to accept that so long as labor costs are higher in the United States than in other countries, these two objectives will have to be traded off one another.

If we write rules to channel companies into higher cost structures, this will ultimately show up in consumer prices. That’s true regardless of whether Mexico rebates its VAT upon export of goods. When companies move production offshore it lowers their cost structure. Those cost savings will be passed along to consumers back in the United States eventually.

Not immediately, of course, or there’d be no incentive to offshore. But eventually American consumers are the beneficiaries of reduced costs. One way of viewing an import tariff is as an instrument that takes cost savings away from consumers and transfers them to the government.

JT: That would explain why many Republicans are hostile to the proposal. But how would this actually transfer funds to the government? It seems like the whole point is to get companies not to move. So if they don’t move the government wouldn’t actually be collecting any revenue from the tariff, right?

MK: There are two possibilities.

Suppose the tariff is set at an amount that is lower than the labor cost savings from moving offshore. For example, say the tariff captures half of the cost savings. In that case it could still be profitable to move offshore. The cost savings that are collected through the tariff are in a sense taken off the table. They cannot be passed along to the consumer because from the company’s standpoint they are no longer savings. They are costs paid to the government.

The second possibility is that the tariff is set so high that it fully absorbs any potential savings from reduced labor costs. Then there’d be no reason to move. But it would also become increasingly difficult for U.S. companies to compete with foreign companies that could use lower cost inputs and sell into the United States.

To complicate matters, we may not know which possibility we are facing. The problem is a dynamic one. The amount of tariff a company can absorb and still see profit will decrease over time as cost savings are passed forward to consumers.

Also, Trump has talked about an import tariff at a single rate. This will affect different sectors differently based on labor intensity in the sector. 

JT: Isn’t the answer to the foreign competitors problem to impose a tariff on those companies as well?

MK: That did not seem to be the original Trump proposal captured in the tweet sequence above, but it has been suggested by a number of Republicans, including Newt Gingrich. Once the tariff is extended to apply to foreign firms, however, this would almost certainly lead to countervailing measures such as trade penalties imposed on U.S. exporters.

JT: It sounds like a preferable option might be to reform the corporate tax system as suggested by House Majority Leader Kevin McCarthy in his response to the Trump tariff proposal when he said he did not believe in starting a trade war. Would that prevent companies from leaving the U.S.?

MK: McCarthy clearly favors the “Better Way” tax reform blueprint put forward by House Republicans over the Trump tariff idea. Among other things, the House Republicans want to lower the U.S. corporate tax rate from 35 percent to 20 percent and adopt a “destination basis” principle that would tax imports but exempt exports in the spirit of a border-adjusted VAT.

There are many problems with our international tax system, which is sorely in need of reform. A reduction in the explicit statutory rate is almost certainly a good idea compared to the current system in which companies often plan aggressively to reduce their effective rates in any event.

But the idea that the proposals advanced by House Republicans would preserve U.S. jobs makes no sense. Their basic premise is that at least for goods sold into the United States, companies should be taxed the same whether they have domestic or foreign production.

The problem, of course, is that the underlying economics favor foreign production. If the tax system is neutral, companies will move the jobs overseas. Even worse, for products destined for foreign consumers the proposals under the Better Way blueprint will actually favor foreign production by exempting profits from U.S. tax altogether.

I come back to the basic tension. If you like markets and the cost savings they bring, the jobs have to go. If you want to keep the jobs, you have to give up some of the benefits of the market. House Republicans seem to believe that reform of the tax system will allow them to preserve the benefits of markets and to preserve jobs. They are wrong.

Clash over patent office fraud a sign of what's to come for federal workers

Patent documents for the Wright brothers’ “flying machine.” (Bill O’Leary/The Washington Post)

House Republicans on Wednesday dressed down a top U.S. Patent and Trademark Office official and a union leader for what they called a weak response to reports of time and attendance fraud by patent examiners.

The rebukes, in response to an inspector general investigation released last summer, may foreshadow things to come when both President-elect Donald J. Trump is in the White House and Republicans control Congress come January.

Trump and conservatives on Capitol Hill have vowed to target the federal bureaucracy, holding civil servants accountable when they perform poorly poor or break the rules — behavior they say has been tolerated by the Obama administration across the government with few repercussions.

[Trump has a plan for government workers. They’re not going to like it]

The patent office has struggled in recent years with reports that some of its employees are chronically gaming the system, a practice made easier by the large number who work from home with little oversight by managers.

The agency’s watchdog has found plenty of fodder. In 2014, the inspector general for the Commerce Department, the patent office’s parent, reported that paralegals at the small office that handles patent appeals were told by their supervisors to fudge their time cards because they had so little work to do.

Last year, investigators found that a single patent examiner racked up more than 18 weeks of pay for work he didn’t do while his teleworking manager never noticed.

[He billed the government for four months of work he never did, and his teleworking boss never noticed]

And a 15-month analysis released last August by Deputy Inspector General David Smith of thousands of patent examiners’ turnstile badge swipes, computer logins and remote computer connections to federal systems showed consistent discrepancies between the time employees reported working and the hours they actually put in.

This time and attendance abuse cost the government at least $18.3 million, as employees who review patent applications billed the agency for almost 300,000 hours they never worked, investigators found.

“What is most troubling is that the numbers … are a conservative estimate,” said Rep. Mark Meadows, (R-N.C.), chairman of the House Oversight and Government Reform Committee’s panel on government operations at a hearing Wednesday.

[Patent office filters out worst abuses in report to its watchdog]

Meadows called the August report “alarming” and told a top patent official that “internal controls are lacking” to monitor fraud. “I want an accountable workforce going forward,” he said.

Rep. Gerry Connolly (D-Va.), the panel’s top Democrat, said the inspector general had not made the case that fraud was widespread, since the hours accounted for 1.6 percent of the hours investigators tracked.

[Patent office workers bilked the government of millions by playing hooky, watchdog finds]

The hearing focused on 415 employees investigators identified who lied about the hours they worked at least one day every other week — and 56 who played hooky an average of three days a pay period.

Russell Slifer, the patent office’s deputy director, told lawmakers that “any abuse of time and attendance … is unacceptable.” He said the agency has taken steps to give managers more tools to monitor when their employees are working.

[Read the inspector general report here]

But Slifer defended his army of about 8,000 patent examiners, saying the vast majority are honest, hard workers, many of whom do not have enough time to review each application on their docket. He also said that many examiners do their research off-line, so if they are not logged into their computers for a day or even two, this does not mean they are playing hooky.

Meadows was furious. “You’ve got over 8,000 employees and 400 or so who are taking advantage of the system,” he told Slifer. “Are you suggesting it’s okay to not log into your computer for two days? Do you think you can actually do your work for 48 hours without logging in?”

“Yes,” Slifer answered.

“Is that the best practice?” Meadows asked. Slifer acknowledged that it was not.

Patent officials have not been able to single out the 415 employees who have gamed the system for discipline, since privacy laws prevent them from matching computer data gathered in the inspector general’s investigation with personnel records.

But Slifer said that 30 patent examiners the agency was investigating separately for time and attendance fraud have been disciplined or fired. He did not say over what period or how serious the fraud was.

After the hearing, patent office spokesman Patrick Ross said in an email that officials would not provide further information. Cause of Action Institute, a watchdog group, said it filed a Freedom of Information Act request with the patent office in November seeking detailed records on disciplinary action.

Republicans also criticized the union representing patent examiners, which has an unusually close relationship with management. Pamela Schwartz, president of the Patent Office Professional Association, was first grilled by Rep. Jody Hice (R-Ga.) on her full-time work for the union, a legal, widespread practice known as official time. Republicans have vowed to weaken or eliminate it.

Meadows then called Schwartz to account for her advice to the patent examiner known as “Examiner A,” who bilked the government of tens of thousands of dollars. The union had urged him to resign, which he did, before patent officials could fire him.

“So you advised the employee to resign” rather than face the consequences of his actions? Meadows asked the union leader.

“We advised the employee their record would have less on it if they resigned,” Schwartz said.

Meadows asked her for a commitment that she would negotiate new language in the union contract that would make it easier to fire employees who commit fraud.

“If they falsify records, are you willing to support their termination?” the congressman asked. Schwartz hedged, and would not commit.

“I would need clarification on that,” she said. “It’s possible you could falsify some records and the appropriate level of discipline would not be termination.”

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