Ludwig von Mises Institute

Chapter 26
On the Tariff and the Principle of Taxation

There is an argument against a tariff on imports that appears to have escaped the notice of thinkers and writers on public economy. It is that, regardless of the tariff or taxes of any sort, general prices conform to the volume of currency: so much currency makes or measures so much aggregate price for all the property and service seeking to be exchanged. Hence if one commodity employs, by reason of a tariff, more of the currency than it would employ without the tariff, some other commodity of equivalent natural value must employ so much the less, and yield in price accordingly; the low price of the unprotected article underpaying, as much as the high price of the protected article overpays, its producer in relation to its natural value.

Thus suppose the normal value, as determined by cost and supply and demand, free of taxation, be the same for 1,000,000 bushels of corn and 1,000,000 yards of cloth, the price being $1 per bushel for corn and $1 per yard for the cloth, and the government then imposes an import duty of 25 per cent on cloth. The effect will be to raise the price of the whole 1,000,000 yards of cloth, embracing both the foreign and domestic article, to $1.25 per yard. Therefore, of the aggregate measure of $2,000,000 for both commodities, the cloth presents a demand for $1,250,000, and employs so much of the currency, leaving but $750,000 for the corn, so that the corn falls to 75 cents per bushel, and the farmer as compared with the manufacturer is one-fourth underpaid.

For the sake of simplicity I waive all consideration of the profit on the cloth duty to the jobber and retailer, which is so much additional tax paid by the consumer. By the "protection," whatever it amounts to, the farmer is wronged, and doubly wronged; once in the abstraction of currency that should go to the price of his product, and again in the abnormal price that, as a consumer, he must pay for the cloth.

This distribution of the currency is an unavoidable result of the law of value in relation to money; for whatever may be the character or amount of the currency, it can make only the same exchanges as a like sum of money, and it must, as the common instrument of exchange, follow the same channel of local circulation that would be occupied by a like volume of money—i.e., gold and silver.

The money of the world distributes itself among the nations according to the desirableness which constitutes the value of their respective productions as objects of exchange, with no regard whatever to local taxation. It is attracted by low prices and repelled by high prices; anything tending to high prices drives it away.

A nation or a community cannot therefore increase its money by increasing its taxes or its expenses; it can do this only by increasing its capital, of which money forms a part, and it cannot permanently maintain a volume of mixed currency greater than its capital naturally demands of pure money for its instrument of circulation. Since, therefore, provision cannot be made for an increase of a nation's taxes by an increase of its money, or currency, the only way in which the currency can be provided to pay the additional price of an article unequally taxed is to take it from the price of some other article, and thus rob Peter to pay Paul. Were money capable of increase by tariff, or other taxation, industry and enterprise would lose their significance, and the accumulation of national wealth would be a mere matter of legislation, an idea that carries its refutation along with it.

It may not be possible to know the precise equivalents that are disturbed in their relations by a tariff, or by any other unequal tax. Of course there are many more bushels of corn than yards of cloth circulated and consumed in this country, and any reasonable estimate of the relative value of the corn and cloth that change hands in commerce is perhaps impossible. If 10,000,000 bushels of corn are equivalent in exchange value to 1,000,000 yards of cloth, then corn would lose but 2½ cents per bushel of its normal price by a tariff of 25 cents per yard on cloth. All that I propose to show by the foregoing example is that equivalents in circulating capital are perturbed, and thrown out of their natural and mutually advantageous relations, precisely to the extent that the tax upon them is unequal, ad valorem. To that extent the abnormal is cherished and rewarded at the cost of the normal produce—to that extent a tax levied to favor the production of an article that would not be produced without it must be paid out of the proceeds of some other article not so favored, the production of which is natural to the soil and industry of the country.

The amount of duties on imports gives no sort of indication of the pressure of a protective tariff on the industry and earnings of the unprotected classes. The whole of the annual imports does not probably exceed one-twentieth part of the money value of the annual productions of the United States, leaving out of view the immaterial value or services that leave no enduring product capable of being exchanged, which are, equally with the material values, subjects of indirect taxation through duties on imports for the benefit of the privileged classes. Thus the pay of the clergyman, the teacher, the lawyer, the physician, the actor, &c, is so much the less by reason of the abstraction of currency to provide extra pay for the producer of that which could be imported for less than the cost of the home product. Hence the burden of taxation on imports is by no means confined to the consumers of the imports taxed, and of the special commodities protected. Were it possible for a consumer to avoid the use of every article the price of which is augmented by the tariff, he could not escape the insidious tax levied upon his industry by the abstraction of currency from his use to force a production against the natural law of value.

There are then two separate burdens imposed on consumers by a tariff on imports—first, the price added to both the taxed and the protected commodities, the latter being many times greater than the former, which sum is paid affirmatively by the consumers of the products immediately affected thereby; and second, the sum of currency abstracted from the normal remuneration of all other industries but those protected by the tariff, which sum is paid negatively but not less certainly by the unprotected classes.

There can be no objection to low and natural general prices, because, with a normal currency, they must be the consequence of activity of production, an increase of wealth, and abundance of capital in relation to currency—in other words, a high value of money, which increases the exports of merchandise: but there is an insurmountable objection to low and unnatural special prices, made so by abstracting currency from the use of one producer to give it to another through legislation, for this is but a form of robbery.

It is my opinion that the noticeable general disinclination to agricultural labor in this country is largely owing to the fact that it is the great unprotected branch of industry here. It is underpaid that other industries may be overpaid. Notwithstanding the cooperation of natural forces, working for nothing here with greater power than anywhere else on the globe, the farmer finds relatively small pay for hard work, and men are enticed away from this invigorating and naturally profitable employment, to seek ventures in crowded cities, and unwholesome work in manufacturing towns, to which the intermeddling of government gives an unnatural incentive and reward at the cost of agriculture. The result is the production of commodities that could be produced cheaper in money value, and with more public advantage in the spread of population, in the more extensive cultivation of the soil, the greater vigor, the better health, and the more general intelligence and happiness of the people, by a normal application of their industry, on the land and on the water, through the exchanges of an unshackled commerce.

It is no argument against this to say that the nation thrives. However it may check its thriving, the task would be difficult for government to prevent it. Such are the vast resources of the country in cheap and rich lands and inexhaustible mines—as the London Economist says, "the best things on the earth and under the earth"—accessible by many thousand miles of free navigation of rivers and lakes, a varied climate, favoring the production of almost everything that agriculture can furnish desirable to man, with ship timber, naval stores, forests of exportable lumber for house-building, numerous and secure harbors on an extended ocean coast; in short, all the most beneficent powers and capabilities of nature attracting immigration and co-operating with a high degree of intelligence, industry, and enterprise, among the laboring classes, what but madness on the part of the government can prevent the advance of the nation in material prosperity? Yet nature triumphs over an adverse legislation at a vast and needless cost to individuals of wealth and peace of mind. Nowhere else under the sun is bankruptcy in trade so general, success in life so various and uncertain, and anxiety in families, and unhappiness in society on the whole, so great. We prosper in spite of the government, which is tolerable only so far as it maintains order and justice; this is its only legitimate function. When it attempts didactic legislation—when it attempts to teach the people what branches of honest industry they shall or shall not pursue, it is positive and insupportable evil.

The foregoing considerations lead, of course, to the conclusion that all taxes should be direct and level, ad valorem. They should be levied on all property alike, and on all income alike, with the exception of a certain necessary standard of living, which government should be careful not to impair, since the ambition of the industrious classes depends largely upon it. Their enterprise and application to labor is affected by it to a degree that has a wide influence on the material and moral welfare of the nation. The higher that standard is fixed by custom and public opinion, the fewer persons will be satisfied with a low and grovelling existence, and the greater is, necessarily, the public prosperity.

As self-government is the ultimate aim of political science, any other is but a necessary evil to be endured only while and to the extent that the moral and intellectual forces of society are too weak to control the dangerous, and protect the suffering classes without the aid of public authority. Teaching is better than legislating for the public good. No good man needs an exciseman or a constable to tell him what to buy, or sell, or eat, or drink, or wear, or how to perform his part in life, and the hand of authority is badly employed when it tends to depress the ambition or check the honest industry of anyone.

The theory which looks to government as a teacher or a director is, to my apprenhension, altogether a mistake; government is formed, or ought to be, not to teach the people but to be taught by them; its authority is limited by their average intelligence and sense of justice, and when it attempts to extend its power beyond this limit, as, for instance, in the support of the institution of slavery in this country, it is sure to be resisted until the iniquity is destroyed. The tariff system of taxation, which stands at the mouths of our harbors to drive away our customers and cripple the commerce and industry of the country, is another of these iniquities that the intelligence and true democracy of the nation have marked for speedy destruction.

Levy and level the taxes ad valorem and they will not affect prices in the slightest degree; both the domestic and international exchanges will be made at prices the same precisely as if there were no taxes at all. This is obvious from the proposition with which we started, the correctness of which no thinker will dispute, that general prices conform to the volume of currency and its relation to circulating capital. Double the currency, or reduce the circulating capital one-half; either will depreciate the value of money or currency one-half in a rise of 100 per cent of general prices. Reduce the currency one-half, or double the circulating capital; either will appreciate the value of money or currency 100 per cent in a fall of 50 per cent of general prices.

People do not consider as they should—and legislators are culpably neglectful of the economical fact—that payment is made in value, not in price. Suppose a farmer to have 100 bushels of wheat on which he is taxed one per cent, then one bushel goes to pay the government, and ninety-nine to satisfy other demands. But suppose the tax to be five per cent, then five bushels go to satisfy the government, and ninety-five to other demands. It requires no more money or currency to make the one distribution than the other. There are but 100 bushels of the wheat to command currency or value in exchange; there is but so much capital as is contained in this quantity of wheat, only so much value to make payment so to be employed or consumed in peace or war, and it is pure folly to suppose that its efficacy or value can be increased by multiplying dollars and increasing its price. The same is obviously true of every item of capital and of the capital of the country altogether.

Had this simple economical fact been comprehended by government at the commencement of the rebellion, that capital and not currency—value and not price—makes payment, the folly of increasing the currency would have been avoided, and what a wonderful difference it would have made in the amount of taxation and of the national debt, as well as in the condition of the commerce of the country!

Value, it should be understood, is that power in exchange which commands the necessaries, conveniences, and luxuries of life, while price commands nothing but currency, which may be money, or bank or government debt, or overvalued tokens, the value of which is what it will fetch; and the laborer with three dollars of price will have no more or better payment for his day of service, when the currency is expanded threefold by debt, than with one dollar of money at its natural value, because the three dollars are by the expansion depreciated to the value of one dollar. In fact, under this supposition, two of these dollars are fiction; they never had any value, and can impart none; they make price without value. What the dollar buys is the laborer's payment or remuneration, not what the dollar is, or rather what it is not by reason of a trick of banking or of an issue or a legal tender act of government.

As to the apology of war for the present high tariff and other unequal taxation, however honestly presented or accepted, it is very absurd as a scientific fact. The argument just presented shows that inequality of taxation is as unnecessary for war as for peace. The capital of the nation supplies the consumption of the nation, and all that is necessary for the support of government, in war or peace, is an equal distribution of its cost among the people according to their means of payment. An astonishing delusion prevails upon this subject, especially with reference to the necessity of a public debt, and also as to the effect of war on the material prosperity of a country. Its moral and immediately personal effects we are not now considering. Its atrocities, and bereavements, and mutilations, and physical suffering, are shocking enough. No knowledge of science is needed to comprehend the moral evils of war and deprecate its horrors, but scientific knowledge is necessary to comprehend that a just war, equitably maintained, is not necessarily unprofitable, in a material sense, to the nation at large.

No capital but our own paid for the war of the rebellion; none was borrowed from abroad at the time, and none was needed; for we had ample capital to have maintained two such wars, without a public debt, and in continual prosperity as much as in peace, and we have no less capital now. Every dime of the cost of the war was paid for out of the national capital at once, as fast as the capital was delivered to the government for the purpose; and the energies of consumption it developed stimulated in like degree the vast energies of production in which, with special reference to the commodities most needed in war, no nation on the globe is more powerful than the United States.

So long as the capital of each producer is promptly replaced, that is to say, his present capital, which includes of course his invested capital and profits, the more consumption of his products, and the quicker the better, because the greater will be the employment of industry and the opportunities of saving, and the greater the national wealth. People argue on this subject as if capital were not consumed in peace. How long is it profitable to the producer of a finished article, or to the commerce of the country, to keep it unsold or unconsumed? Clearly until a buyer is ready to replace the capital it contains, and not a moment longer. It is only at the seat of war, where the means of reproduction are destroyed, that war, in the material or financial point of view, is necessarily unprofitable. Napoleon was careful to remove this from France—to fight on other soil than his own; so far he was a good political economist, and France never prospered more in wealth and population than during his wars against all the rest of Europe. Mankind people up to the means of maintenance, especially to the supply of food, and where these are steadily increasing population increases in like proportion, whether in war or peace.

No doubt the revolted States lost capital by the rebellion, since they used up and suffered the loss to a great extent of their means of reproduction; but the vast productive powers of the West and North were so stimulated at the same time that they have been enriched more than the South has been impoverished, and the national wealth, reckoning the Negroes, before and since, as they always were, labor and not capital, is to my apprehension no less to-day, in the aggregate, then it would have been without the war. I have not space in this article to discuss more fully the point of the relation of war to public wealth, and I offer these remarks upon it merely to give the reader assurance that a tariff or unequal taxation was not necessary for the conduct of the war that is just closed. I have acted with the Republican party in support of the fundamental democratic principle of human freedom, but with a continual protest against their financial policy; and I maintain that the present abnormal condition of the national finances is owing not necessarily to the war, but to an unequal and unjust distribution of its burdens, and to an unpardonable ignorance of the nature of money and of the fundamental principles of economical science.

Instead of taxing the rich and the bank stockholders for their share of the cost of the war, government has borrowed capital of the former, and granted to the latter the privilege of kiting, against public and private debt, a currency consisting of bank notes and book credits, miscalled "deposits," on which the people are obliged, from the necessity of the case, to lend their capital for nothing and pay interest on it besides, not for the benefit of the government or of themselves, but for the benefit of the currency-makers. These two classes, therefore, instead of being, like the rest of the people, payers of taxes, are made receivers of taxes, and the burden of supporting the war and a needless public debt has been thrown upon the poorer and the hard-working classes, who are the least able to bear it. Of course this cripples their means of consumption, and, as they are the great consumers, their forced abstinence reacts upon production, crippling that and necessarily the general trade of the country. As a nation we are in the absurd and paradoxical position of having paid for the war to the last dime out of our own capital and at the same time we are owing for a great portion of it to certain of our own citizens, because we have neglected to collect from them their share of its cost. Such is the preposterous nature of the funding system.