Tariffs and Taxes: What Could US Trade Policy Look Like?

EconBuff Podcast #56 with Fritz Laux

https://youtu.be/mghpPpMFKtY?si=Q6KggpYsdXKOsE4J

Dr. Fritz Laux joins me to discuss U.S. tariff policy and the taxation of foreign investment as a possible alternative approach. We begin with an overview of the current administration’s use of tariffs and how those policies are being framed politically and economically. Dr. Laux explains what economists can contribute to the public conversation around tariffs and how economic theory helps us evaluate their effectiveness. We then turn to an alternative strategy that Dr. Laux has proposed—taxing the income that foreign investors earn in U.S. markets. He lays out how such a policy might work in practice, what its intended outcomes would be, and how it compares to tariffs in terms of economic impact. Dr. Laux also discusses why countries typically use tariffs, what their strengths and weaknesses are as a tax, and how they function in addressing trade imbalances. We explore why investment income taxes on foreigners are rarely used, despite their potential, and address the concern that such taxes might discourage foreign capital inflows. Dr. Laux provides his perspective on whether taxing foreign investment would harm U.S. growth or could instead serve as a more targeted and effective tool for managing trade and generating revenue. We discuss the potential revenue such a tax could produce compared to current tariff income, and Dr. Laux draws on international examples to illustrate how other countries have approached foreign investment taxation. Finally, we consider how this kind of tax might work alongside tariff policies, and Dr. Laux breaks down the political and legal hurdles, including conflicts with existing tax treaties, that would need to be addressed for such a policy to move forward.

Transcript:

LEE STITZEL: Hello and welcome to the EconBuff podcast. I'm your host Lee Stitzel. With me today is Dr. Fritz Laux. He is a professor of economics at Northeastern State University. He researches in health economics and has a background in microeconomic theory. Fritz, welcome.

FRITZ LAUX: Thank you for having me, Lee. I've been looking forward to this.

LEE STITZEL: Good. I'm excited. So, our topic today is tariffs. So, starting us out just by briefly summarizing the situation with the current administration's tariff policy. I know it's changing quickly, so we don't have to get too far down in the details.

FRITZ LAUX: Well, for people who have been living under a rock, yeah, there's been a lot of noise. And I guess one thing is Trump came out with a big bang with this long list of reciprocal tariffs and there are a lot of questions about where these numbers come from, and a lot of controversy and talk about what's happened in the stock market. And of course this is all in the context where we expected that the Trump administration was going to implement tariffs pretty early on because it was a big campaign promise. They were going to deal with manufacturing in the U.S. So I guess that's just a start. I don't know how deep I should go into this, but that's just the sort of the landscape.

LEE STITZEL: Yeah. I was speaking with a colleague earlier and he was saying I could have of course predicted that there would have been tariffs. Everybody could have, but the nature of them is a little surprising. Is that something that surprised you or is this par for the course of the administration?

FRITZ LAUX: I was surprised with the formula for calculating the reciprocal tariffs. Basically, it's like a calculation for an implicit tariff based on the trade deficit with that particular country. And then I was surprised by that and I was like, well, I guess, instead of jumping to judge people, my habit is, maybe neurotically, to ask: what was wrong with my perception? How come I didn't anticipate that? And what I was thinking is, wow, this is a lot more complicated than I had expected.

LEE STITZEL: Yeah, same. And I'm like, "Okay, well, what they're trying to do is they're trying to come up with some way to deal with non-tariff trade barriers and act like those are tariffs." And of course it's really a top-level media blitz. Basically, what Trump's doing is this. There's going to be situations where the U.S. has a surplus with one country and then that country has a deficit with another country with which the U.S. has a deficit. There's going to be roundabout trade. So you can't just do things on a bilateral basis. But I don't think the intention was to figure things out very precisely. If you have this kind of a formula, this trade gap formula as a basis for determining what the implicit tariff is, it's sort of a given that you're using a top-level approach. And so I was like, that was weird. But I guess if you want to make a big announcement, you need some sort of a top-level approach. It's kind of above my pay grade, sort of.

So I'm happy to have you on. I actually was asked to give a talk about tariffs last week. And basically the entirety of what I did was this is how economists think about it and this is how a politician might think about it and comparing those perspectives. So I want to get your opinion on that. What perspective or perspectives do you think economists could provide that would help the public in thinking about tariffs?

FRITZ LAUX: Well, yeah, I really like that. That's the same way I would talk about it. It's like if you're a politician, you're dealing with rational ignorance. The voters aren't experts. They're not really paying attention to these things. So it makes sense for a politician to be appealing to the base. They're facing a whole different set of problems than an economist would face. But, I mean, for tariffs we've got game theory, clearly. I think politicians, and sort of the public, almost get the idea. For example, Trump talks about reciprocal tariffs. So apparently everybody understands that strategic aspect. I'm not saying he was doing reciprocal tariffs, but using that language implies that everybody understands the idea of the strategic aspect of tariff policy. Tariffs are clearly a tax. So the logical framework, if you're not thinking in strategic terms, is to think about them as a tax-policy question: what would be the right tax policy?

Tariffs are very attractive as a form of sales tax because you can offload some of the burden of the tax onto the foreign entities. And then I mean, I guess the kind of stuff that I like to talk about is alternatives to tariffs. We got a lot to say about that.

LEE STITZEL: Yeah. When I gave a talk last week, I was driving home the point that tariffs are taxes. It's not obvious to me whether the public thinks like that. I don't know if people are like, "Yeah, tariff is a tax." Or if I say that to people if they're surprised by that. How do you think the public thinks about tariffs? Yeah, like you said, I think the game theory aspect, the retaliation trade war, they think about that kind of thing. But I don't think they think about it as taxes. Do you want to expand on that part?

FRITZ LAUX: Well, maybe they look at it as the tariff is paid by the seller. So, for example, when you go to Walmart, you think of yourself as paying the tax because it shows up on the receipt. But I guess with a tariff, your receipt doesn't include the tariff charge when you go to Walmart. So maybe it's like that. I really don't know. I guess the public would think about it as a tax if they got to the point of getting beyond the strategic aspect. Perhaps that's what's going on. The public is saying well you know the Chinese are taking intellectual property. There's all this political risk associated with U.S. investments in foreign countries. So the purpose of a tariff is to kind of level the playing field. And so those are all strategic considerations. So maybe that's why they don't think about it as a tax. The first thing that comes to mind is the strategic consideration.

LEE STITZEL: Yeah. I think there's a reflexive reaction from a certain component of American society, which I'll just be upfront. You know, those are my friends. I'm here in Texas. I have lots of friends on the red side of the aisle. And to them, that's completely what it is. So, they're not very interested necessarily in taxes and trade deficit nuances from an economist. Not that deters me from telling them about it. What do you think about Trump's strategy and what he's trying to achieve? And do you think there's a different way to go about that?

FRITZ LAUX: Well, I think Trump's been very busy, and my assumption was that he wanted his team to come up with something big as a political strategy to fulfill promises made to voters in the Midwest: we're going to bring back manufacturing. I think it's it makes a lot of sense. It's such a loud rollout of the tariff thing that there's no every voter in the Midwest knows that he did something. So, and I'm not sure his thinking on it goes that much deeper than that. Obviously, I don't know. I guess his thinking would go deeper in the sense that he's been talking about tariffs for 20 years, and I think he's been focused on the strategic aspect. One thing I kind of liked and this must have come from some economist lower down invented the terminology 'External Revenue Service'.

LEE STITZEL: That's clever.

FRITZ LAUX: Yeah, exactly. And that was that's something that's as in a political sense it's clever because it's easy for people to understand and it's very catchy and it conveys the idea of what is it that you don't like about the U.S. paying tariffs on our exports and us charging less perhaps on our imports? That kind of puts a label on that. And I'm not even sure the tariffs. I haven't. This is odd for me given that we're in a podcast talking about tariffs. I haven't really focused on the relative tariff rates across countries. I always I tend to think of the non-tariff trade barriers as the bigger issue.

LEE STITZEL: Yeah, that's absolutely that's a good point that sort of sets us up for a specific discussion of why countries might use tariffs and specifically then why might the U.S. use tariffs and I was kind of proud of myself thinking about how long the history of tariffs is. So I think in the early days of governments, you know, the royalty of the early Renaissance in Europe, the governments are raising revenue by issuing charters, selling charters, right? Basically selling monopoly rights and then we start raising revenues by tariffs and because tariffs are easy to implement administratively. You don't have any administrative apparatus. You just need to put people at the port. There's going to be some smuggling, but as long as the tariff isn't too high, presumably you can keep it under control. And so if you have you know an early industrial society, it's easy to implement tariffs.

And so I think it's something that people have understood for hundreds of years, whereas the more modern taxation schemes that we use are they're a little bit more mystical or something. How does all this administrative apparatus work?

FRITZ LAUX: Oh, absolutely.

LEE STITZEL: Many types of taxes people don't understand at all. Income taxes would be a classic example of this, right? Not understanding marginal tax rates, not understanding you know what your exemptions are etc. So I think there's the pro-Trump side of the issue feels like I'm going to use a tariff I'm going to make revenue And of course you actually talked about that some of which might be good, the External Revenue Service and I'm going to bring manufacturing back stateside and I think a minute ago you alluded to Yeah, that's probably actually possible and Midwest voters might like that. Can you expand on those a little bit?

FRITZ LAUX: Well, I think the Midwest voters are going to be happy just because of the announcement. Yes. Because they're not necessarily going to follow the details of maybe to some extent they'll follow the details of the resurgence of manufacturing if we have one. But to me the more effective way to lower trade deficits. The question of whether manufacturing is the right industry mix for the United States is something we don't yet know. But I think that the best way to bring back productivity to the American economy is to lower trade deficits. And tariffs can do that. But that wouldn't be the first tool I would use for lowering trade deficits. I mean, tariffs traditionally are used more to protect specific industries. They're used for special interest politics which kind of makes sense. Yeah. And they can be a good source of tax revenue. Assuming, well, that the strategic issues allow that.

But I guess protecting particular industries in the U.S. like maybe steel aluminum let's see high-tech military stuff. Yeah. Right. Yes.

LEE STITZEL: Okay. So let me step back. You said you believe it would be a good thing for productivity to address trade imbalances. Is that your opinion or do you believe that's a strategic well element of Trump's position?

FRITZ LAUX: Well, I think it's both my position and, within the Trump movement, their position. I'm not sure exactly how everybody sees it. There's a lot there. Yeah. But a way of expressing this would be: there's a sense in which maybe the U.S. has been suffering from Dutch disease because we get so much inflow of foreign capital that we don't have pressure to manufacture things, right.

LEE STITZEL: Yeah. So that's interesting. Do you view that your opinion and what you said there, your stance, do you view that as something that fits with sort of traditional economic theory as it relates to trade deficits and productivity or do you think you're a little heterodox in that area?

FRITZ LAUX: I guess Dutch disease is mainstream. Yeah, of course. But I would have worked on this a while back had I not been doing projects in health economics, right? So it's a little bit outside my field. I don't think I'm that heterodox. I think that there's the textbooks clearly advocate free trade but they also talk about things like oh promoting investment in plants and the things that relate to not having completely free trade. If we could steer investment toward capital, then that's good for the economy as opposed to just saying, well, just let the consumers decide. So, I'm not sure I'm that heterodox.

LEE STITZEL: So, step by step, as a mechanism, how would you view correcting the trade imbalance as improving the capital stock and leading to productivity?

FRITZ LAUX: Well, for example, if the dollar went down, U.S. manufacturing became more competitive in that sense. And the way I would try to encourage that is to discourage capital flows in and make the dollar go down and then it's profitable to manufacture things in the United States that it wasn't profitable before. So you're developing the capital stock and then of course that leads to productivity.

LEE STITZEL: Yeah. Let me be more precise. By increasing the capital stock, the marginal productivity of labor goes up. Is that in manufacturing?

FRITZ LAUX: It would. Yes. Uh-huh.

LEE STITZEL: Right. And so you have a different industry mix. Do you have an opinion on either using tariffs or I guess you said a minute ago you wouldn't want to use a tariff to correct trade imbalances. Do you have a preferred way to address trade imbalance?

FRITZ LAUX: Yeah, I think the right way, and this is a little bit unusual, though I don't see why it is, the right strategy is to tax dividends and investment income that goes to foreigners. So, the way I explain this, so if my sister-in-law is in Mexico, if she invests in the U.S. stock market, she's going to pay a 10% rate on dividends and interest, and she's going to pay a 0% capital gains rate. Now, if I invest in the stock market, I'm going to pay, well, my income's pretty low. I'm going to embarrass myself here, but if I were wealthy, let's say wealthy like my sister-in-law and I invest in the U.S. market, I'm going to pay a 15% capital gains rate. I'm going to pay well for dividends, I'll pay ordinary income. It'll be, you know, up in the 30s, and then I've got state tax on top of that. I'm going to pay a much, much higher rate than she would, right?

So what this does is encourage her to invest in the U.S. markets and in a sense it's not a free market because it's not a level playing field or it's as if we have a policy that's trying to pull in foreign capital and so in order to invest in U.S. markets she's going to have to run a trade surplus with me with the United States. So it in it incentivizes trade deficits in order for these foreign investors to raise the money to take advantage of these very low tax rates that they pay on investments in U.S. markets.

LEE STITZEL: So it's almost like you'd like to deal with the trade balance from the other side, right? Rather than dealing with U.S. imports, you know, you want to address it from the investment side. Do I read that right?

FRITZ LAUX: The capital account. Yes. Exactly. Yeah.

LEE STITZEL: Okay. This is good. So, just for the listeners at home, the capital account might be a phrase that's new to us. Can you give us like a brief textbook style walkthrough on that?

FRITZ LAUX: I mean, if you borrow money, let's say you spend on your credit card. If you spend more than you earn, you're borrowing money. And so the loan that's coming to you is an investment in you from a bank or from somebody. And so you run a trade deficit because you're purchasing more than you earn. You're spending beyond your means. And then somebody in order for you to run a trade deficit, somebody had to give you a loan. So they've got a financial asset. You've got a financial debt. So the capital account is dealing with the financial flows, and the current account is dealing with the trade flows.

LEE STITZEL: Good. I think that's intuitive. So this idea that you have is very interesting to me. How do you think a policymaker could pivot from the tariffs towards talking about using taxation on foreign investment as an alternative to tariffs?

FRITZ LAUX: Well, you're hitting on the key issue which is the public consciousness is that we want foreign capital to come in because it's like a gift. You know, they're going to build a plant. Taiwan Semiconductor Company is going to build a plant, and it's going to be a big boost to our economy, or we've got all this investment, all this plant and equipment, coming in and this is going to be high-paying jobs yada yada. So that's the public consciousness and so I think the way to twist that around or change that is focus on: is it fair that my tax rate is 20 or 30%. Whereas a foreigner gets 0 or 10%. And you know, I'm not saying this is virtuous. It's an appeal to envy, but I think if you're doing policy, you sort of go with the negative emotions a lot. So maybe something like that. So why is it, you know, you get some raging politician say why is it that they pay 10% and we pay 30%. I think that's how you sell it.

I mean the reality is it's sort of like correcting the market. You want the rate to be the same for everybody.

LEE STITZEL: Yeah. Because there's incentives now that make it more appealing to foreign investors than it does to domestic.

FRITZ LAUX: And to me the real issue is intergenerational transfer, right? And so that's another way of selling it is by encouraging foreign investors to save for their retirement in the U.S. market. We're setting up a situation where the U.S. public isn't saving for their retirement. And so we want to correct that. That would be a more virtuous way to sell the idea.

LEE STITZEL: Yeah. Sorry, go ahead.

FRITZ LAUX: Well, so you know and you know the economists we say well that's a normative issue. You know is intergenerational transfer good or bad? Well you know there's another issue which is the potential downside for having a the debt getting out of control and not being able to keep up with the payments. This sort of currency crisis, fiscal crisis, yeah, debt service paradigm. And I think we're not there yet, I don't think. But it's better to address those kinds of problems before you get there. So that's another that's an appeal that would that's a way of selling it to the intellectual crowd.

LEE STITZEL: So as a U.S. citizen, right, I would look at what are my potential options to do with money that I might invest and then the tax rates that I would face on that. And then as an international investor, then I would look at all my different options of where I might invest and then the U.S. tax rates. So in some ways, it's probably not even one-to-one. I pay 30%, and they pay, I forgot what number you said, 10%. Right? Because the U.S. investment might already be more appealing than what their alternative options are, right? The tax rate is a marginal impact on how they would evaluate investments. Do you factor any of that into this or you're just saying let's start from the baseline of getting these tax rates the same?

FRITZ LAUX: Yeah, I haven't done econometric analysis on how foreign investors would respond to different tax rates. There has been a little bit of work on that. I think realistically you would roll it out. You would test it. So it would be China because I mean they're the boogeyman. Yeah. So you'd say, "Okay, let's increase it. And I looked into this. The tax treatment of foreign investments is set by treaty. But it turns out that presidents have a track record of just canceling treaties, right? So they don't need Senate ratification to cancel a treaty. And so they could cancel these, for example, the tax treaty with China and then if you can negotiate with China and set up a new accord and implement that accord by executive agreement, so that wouldn't need Senate ratification. And then once it's implemented for a while, I think it'd be pretty hard to change or so effectively you could implement changes in the international tax rate. The WTO isn't a problem either. This would be a broad-based, across-the-board policy.

So realistically you deal with China now that's going to set up a lot of arbitrage opportunities. China would, you know, would instead of doing investment in the United States, they do investment somewhere else and the money is just going to flow through elsewhere. But you could still get some data that way. You could see how the market reacts, right? And then you could broaden the policy depending on how the market reacted.

LEE STITZEL: And so why don't countries tax the investment income of foreigners to raise money and control trade imbalances? Like why don't they use your strategy?

FRITZ LAUX: We have tax treaties.

LEE STITZEL: But now you just said those could go away with the snap of a finger.

FRITZ LAUX: No, exactly. I think if you're a country who's primarily investing abroad, if you're not a debtor country, you want that tax rate low because it's in your interest. Okay. So the Germans and the East Asians, they're creditor countries. So there wouldn't be a lot of innovation from those countries saying, you know, let's change these laws to our interest, right the U.S. is the big debtor. So maybe we just haven't been thinking that way. I think the long, centuries-old history is non-tariff trade barriers and so countries have always used non-tariff trade barriers, whether it's a crazy regulatory requirement like limits on foreign ownership of corporations so we have a long history of that I think it's just an accident of history it's relatively new that the international financial system has been so open, right? It just hasn't developed yet, maybe.

LEE STITZEL: Yeah. And as long as the U.S. is the big debtor nation, it might not develop. I wonder if the listeners would think of the U.S. as a debtor nation. I don't think it's obvious to people how that relates to the idea of having a trade deficit. Could you explain that a little bit?

FRITZ LAUX: Well, right now, as a nation, U.S. entities owe $26 trillion more than we are owed. Our liabilities are $26 trillion greater than our assets in an international context.

LEE STITZEL: And so break that down to the listener.

FRITZ LAUX: I'm sorry, I lost the question.

LEE STITZEL: I actually think you answered it. Just in a sense of I think people realize that the U.S. government's in debt, you know, that there's this big public debt and I think they have a sense of what running a trade deficit means. I don't think those two ideas connect for your average

FRITZ LAUX: Oh, yeah. Yeah, they're different. The government debt is maybe about half of that; a little bit over half of that is owed to U.S. individuals, U.S. entities. But then of course we got the same thing. U.S. government owes a lot of money to foreigners plus U.S. companies.

LEE STITZEL: Yes. Yes. Yes. So for clarity then when you're saying the U.S. is a big debtor country, you're talking about the individuals in the country. You're not talking about the U.S. government.

FRITZ LAUX: Correct. I'm talking about all of us. Yes.

LEE STITZEL: Yeah. Yeah. So, you know, it's us. It's not the administration. It's not Congress. Not that they're helping, but it's our preferences, right?

FRITZ LAUX: No. Totally. Yeah. Totally. And to some extent, if we didn't have this influx of money from my sister-in-law, this, you know, foreign money coming in buying all U.S. securities, we wouldn't be as in debt because we would have higher interest rates. We wouldn't want to borrow money at those high interest rates. We'd want to save money. So that would encourage a higher U.S. savings rate.

LEE STITZEL: Yeah. It'd be like they took my credit card away, right? Or charged me higher rates on my credit card.

FRITZ LAUX: Exactly. It would be like your wife took your credit card away. Yes. Exactly. Cut that up. No more debt for you.

LEE STITZEL: I think people think this taxing of foreign investment is a counterintuitive idea. So if you want inflows from foreign capital, you know, why would you want to tax it? Aren't you going to get less of it then?

FRITZ LAUX: Yeah. The idea is the inflows of foreign capital are effectively subsidizing consumption. They're subsidizing the fact that you're borrowing more money which you're going to impose on your children when this foreign capital comes in. I mean it's the U.S. has enough prosperity to pay for plant and equipment now and you and alternatively if you're a politician you can say well I don't want to bring in foreign capital to pay for home mortgages or to pay for a fancy car. I want to bring in foreign capital for plant and equipment and the yield on those investments is going to more than pay the interest. So that's better for future generations, for us to make a profit on foreign investments. That's fine, except if you bring in foreign capital to finance plant and equipment, then there's more money available to finance consumption. The money is fungible.

But I have no problem with a politician saying, "Yeah, let's bring in money for foreign direct investment, as long as they're willing to tax foreign investment income and limit the overall flow. So as long as they're being honest about it, I'm okay with them bringing in foreign capital. But my concern is that by bringing in all that foreign capital, they're feeding the risk of a debt crisis or a currency crisis and they're also increasing the extent to which we're imposing this intergenerational transfer.

LEE STITZEL: So would the listener do well to sort of view the current inflow of foreign investment as fueling consumption? And you're saying you'd rather see it happen in a way that the structure of the economy is that foreign investment is going towards capital stock. You called it plants and something, plant and equipment.

FRITZ LAUX: Yeah. Yeah. Plant and equipment from the old days when I did accounting.

LEE STITZEL: Yes. Yeah. That's foreign terminology to me as an economist. So yeah.

FRITZ LAUX: So, an illustration: I very seldom hear Trump speak, but I think I've heard a clip of him saying that this tariff went up and now they're investing in a new factory because they know they're not going to be able to import cars anymore. Maybe this was Honda. They're not going to be able to import cars anymore because of the tariff. So now they're going to build them in the U.S. So this would be an example of promoting foreign investment that's going to yield a return that could more than compensate for the dividend or the interest. So there could be a net profit for the U.S. associated with that transaction. But it would be better for our currency. It would be better for avoiding a currency crisis. It would be better for future generations if the Honda plant were financed with U.S. money.

LEE STITZEL: And how you're proposing that would be from taxes on foreign investment?

FRITZ LAUX: Well, realistically, the taxes on foreign investments, who knows? They're going to be spent before we even see that money, of course.

LEE STITZEL: So how does that change the incentives such that Honda would build an auto plant in the U.S.?

FRITZ LAUX: Well, I mean, if the dollar goes down because of a tax on foreign investments in the U.S. because we start taxing dividends to foreigners. So, the dollar going down is always a hard sell for politicians, right?

LEE STITZEL: Yeah. Well, and the real hard sell with anything if you're trying to close a trade deficit, you're talking about reducing the standard of living for Americans.

FRITZ LAUX: Yeah.

LEE STITZEL: If my wife cuts up my credit card, she's going to be fair on this.

FRITZ LAUX: Yeah.

LEE STITZEL: Then she's hurting my standard of living, right? But it might be good for me in the long run, right?

FRITZ LAUX: Yes. Yes.

LEE STITZEL: Like everything she does, right?

FRITZ LAUX: Yeah.

LEE STITZEL: So, wives are always looking out for us in the long run.

FRITZ LAUX: That's right. There. There you go. So cutting the trade deficit hurts. It's a cut in standard of living, disposable income for the time being. Well, I should say purchasing power for the time being. Yeah. Yeah.

LEE STITZEL: Okay. So I think we have kind of a picture of what the basic strategy is, how we might want that to change the structure of the economy etc. Let's talk about the scale a little bit. Do you view this as...

FRITZ LAUX: Let me interrupt a little bit here. I just a thought came to me saying cutting the trade deficit is, in the immediate term, a cut in your standard of living. The same thing for tariffs. So whether you know the tariffs are a sales tax, it's a cut, and people get the idea that it's a cut in your standard of living. So a tax on foreign investment, you know, dividends that go to foreigners for investments in the United States is also going to cause a decline in the value of the dollar. There'd be a cut in our standard of living. It's analogous to a tariff. And actually I think the tariff would be less efficient; the impact would be worse than the tax on the dividends because it's more blunt or because there's excess burden.

Because there's an efficiency loss associated with the tax that you wouldn't have with the tax on investments because the tax on investments you're leveling the tax treatment and so you should be reducing the inefficiency of the economy whereas with tariffs you'd be injecting an inefficiency. Right, yeah, you'd be creating an excess burden with the tariffs. You know, not to get too far down a rabbit trail if I'm teaching.

LEE STITZEL: So, exactly. Well, last week when I gave a talk about tariffs and then I'm talking about trade deficits, you know, to me kind of the mainstream take is, you know, don't worry about trade imbalances. You know, it's about total trade exports plus imports instead of what your actual trade deficit or surplus is. You're taking a different approach to that. I kind of appreciate it because it's definitely refreshing. Do you have the same kind of view in general about trade deficits or would you take more you know you would want to see the trade deficit go down because it's the net borrowing?

FRITZ LAUX: To me, if we didn't have $29 trillion in debt to foreigners, I wouldn't even be thinking about this. But I guess to me the issue is the debt to foreigners. It's the intergenerational transfer is the issue. Yeah. The trade deficit year to year, that doesn't concern me.

LEE STITZEL: You're saying, but look at the situation that we're in now. Yeah, that makes sense. So I'm kind of interested in the scale. One of the things that I reacted to with tariffs, this idea that we're going to levy a bunch of tariffs and then fund the government. I think that's difficult to defend because I don't think you can take in enough revenue to do that. I mean, obviously it's a one of many taxes in the portfolio that the federal government would use to fund itself. What kind of revenue do you think the U.S. could realistically generate from taxing foreign investment?

FRITZ LAUX: Well, the budget, I don't know what it's called, the budget resolution from the U.S. Senate. They put a number in there of $2 trillion in 10 years. That'd be $200 billion a year. And I don't know if that's an increase. I suspect it's the total tariff revenue.

LEE STITZEL: You're talking about tariffs, not your proposal.

FRITZ LAUX: This was customs duties. Yes. Customs-duty collections for the United States. Yes.

LEE STITZEL: So, tariffs, pre-2025, the number's like $80 billion a year. Do I have that right?

FRITZ LAUX: Correct.

LEE STITZEL: Okay. And so we're talking about between double and triple that.

FRITZ LAUX: Yeah. Maybe. Exactly. $120 billion extra a year.

LEE STITZEL: Which strikes me as not that much money. That would be my reaction, but it's just difficult to think that way with anything that starts with a B just in general. Yes. How would your taxing of foreign investment income compare?

FRITZ LAUX: Let's see. Assuming we just increase the tax 10%. That's between 300 and $600 billion a year.

LEE STITZEL: Okay. So substantially. Okay. Now, substantially more. It would be roughly three to five times as much as the tariffs. As an economist, I can't hold still when we do projections that don't account for people changing their patterns. Right? So if I levy tariffs, how am I going to collect $200 billion if that is then going to cause the trade volume to fall? Does the budget resolution account for that?

FRITZ LAUX: Probably not. Well, and to me, my number is unfair because I think realistically we would roll it out gradually because it's something we don't have a lot of experience with, right? You can't jump 20%.

LEE STITZEL: Well, I was saying 10%. Not 20%.

FRITZ LAUX: So, I'm sorry, yeah, from 10% to 20%. Yes, I understand. But we would, you know, maybe start with China, so the effect would be relatively small until we found out how it worked. And then, I think realistically, once it worked, countries around the world would probably follow suit and that's good for us because we owe so much money so it's fine if they follow suit.

LEE STITZEL: Yeah. That's a neat side effect, isn't it?

FRITZ LAUX: Yeah. But the revenue, I think, is more of a long-term effect. I think there's too many unknowns to really be confident about how much revenue could be raised. But the same goes for the tariffs. You know so many unknowns. I think the $120 billion extra is a hugely optimistic number.

LEE STITZEL: Optimistic, you said?

FRITZ LAUX: Yeah. For the tariff revenues. Because as we're seeing, you know, we're not going to implement these large tariffs that were probably considered in the Senate budget resolution. But so five years down the road it might be $300 billion, $400 billion, you know, maybe 10 years down the road. Another effect of this which I think is interesting is the developing countries are borrowing a lot of money from China and one reason that's happening is the United States is pulling capital out of the world with our trade deficits our capital-account effects because of our trade deficits. So it would seem better if we didn't borrow quite so much because we're not helping our future generations.

We're not promoting stability by having this large debt to foreigners.

LEE STITZEL: And by promoting stability, do you mean that from a budgetary perspective from our government or do you mean forcing other countries to go to China to borrow?

FRITZ LAUX: Oh, I'm sorry. No, I was thinking of just stability of the currency. Because people in the U.S. owe so much money to foreigners. So at some point you would expect to see a shock devaluation of the dollar. The government, you know, that's giving me a headache if I start thinking about that. But then stability in terms of the foreigners, you know, the developing countries. I guess I'm just arguing it's bad to push other countries towards borrowing money from China. That probably can't end well. Exactly. Yeah. And so if the United States isn't taking all the money off the table, then it would be easier for developing countries to borrow from other sources.

LEE STITZEL: Yeah. Yeah. That's interesting. Do you know of other countries that have tried this? You're proposing it for the U.S., but do we see examples around the world now or historically?

FRITZ LAUX: Well, the only examples I've seen, which really surprised me. It makes me think I'm crazy, you know, but sometimes people just don't think of things. I'm not seeing examples of people using tax policy. What I see is non-tariff trade barriers everywhere. The examples I have seen are of course in the United States we had the IRA, we had the 401(k)s, those are effectively getting at the same thing. They're trying to promote U.S. savings to reduce the trade deficit. That will have the effect of reducing the trade deficit. Of course if we reduce the government, you know, the federal government deficit that would help, right?

LEE STITZEL: Yes.

FRITZ LAUX: But there was a weird policy: for a while, the Germans tried subsidizing investments by Germans in foreign markets. So it was like you put your money in you if you get a 10% return, we're going to give you a bonus on your return from the foreign investments. Really weird thing similar to a 401k or IRA. You know, the United States would give people a tax break for saving, but they were giving a tax break explicitly for saving in foreign assets.

LEE STITZEL: Well, what motivates that?

FRITZ LAUX: Presumably they want to run a trade surplus.

LEE STITZEL: Yeah. Oh, interesting. So, do you think this policy you're describing, do you think it complements or do you think it's a substitute for tariff policy?

FRITZ LAUX: Well, there's a sense in which it complements because the conventional wisdom is that tariffs are going to cause an appreciation. If the U.S. imposes tariffs, the dollar will appreciate. But this assumes we're tending toward trade balance. But anyway, that's the standard. The conventional wisdom is that you impose tariffs, the dollar goes up. If you impose taxes on foreign investment income, the dollar goes down. So the two would tend to neutralize the effect on the dollar. The two work in opposite directions. So that's complementary.

LEE STITZEL: You' think?

FRITZ LAUX: Yeah, that would be a good thing.

LEE STITZEL: So you would use those together. I had gotten the impression maybe you were proposing this in place: leave the tariffs and try this strategy.

FRITZ LAUX: I think this approach is better than tariffs. So I wouldn't use them together, but I think realistically we're going to have tariffs. So yeah, the question of whether these are complementary to the tariffs we're going to have is relevant. I think the only tariffs that really make sense would be you know on specific technology issues where you don't want technology transfer those kinds of things.

LEE STITZEL: Yeah. Yeah. It's interesting. You had shared an Arnold Kling article with me before which hits on a lot of the themes that we've discussed now. I'm a big fan of Arnold Kling. I would recommend him to the listeners just almost without reservation. He's very good on a lot of topics, a broad commentator on econ. But the thing that you had shared with me you beat me to it. It was on my reading list and I didn't get to it before you shared it with me so I have to give you credit is you know talking about China sort of as a predatory lender of sorts. How do you view that and how do you think your proposed strategy would interact with that or combat that?

FRITZ LAUX: It's embarrassing, but I don't remember the article. But suppose China is a predatory lender.

LEE STITZEL: Yeah. You know, it's saying, oh, the trade imbalance between us is because you know China I think you had used the word predatory earlier. That the trade between us and China, that China is predatory in that regard. And that Arnold Kling actually then talks about us as borrowers in a similar frame to you. I didn't mean to put you on the spot. I apologize.

FRITZ LAUX: Well, no. So suppose a country is doing that. Then, you know, you could respond. Let's say you're worried that a country's investing in a lot of portfolio assets and then they're going to pull money out and manipulate your markets. Various things they could do. You can speculate what the CIA might do in different countries. So they're manipulating our financial markets that way. Well, if you impose a tax on their investments, you're making it expensive for them to do that.

LEE STITZEL: I don't think it really protects you very much, though. Here, I have the quote. Stephen Miran, President Trump's chairman of the Council of Economic Advisers says, quote, "In the years running up to the 2008 crash, China, along with many foreign financial institutions increased their holdings of U.S. mortgage debt, which helped fuel the housing bubble, forcing hundreds of billions of dollars of credit into the housing sector without regard as to whether the investments made any sense. China played a meaningful role creating the global financial crisis." End quote. And then Arnold Kling says, "The American left like to blame mortgage defaults on, quote, "predatory lending." Miran is accusing China of that same evil."

FRITZ LAUX: Oh, okay. Yeah. I think I just read the Miran quote, not the Kling piece. So, the idea, in my view, traces back to the savings glut. What Bernanke was talking about during that period of time was all this money coming in from abroad feeding this bubble in our real estate market, right? And I don't think it's true that they were trying to cause a crash. So the predatory part I don't get, but I do think the right approach to a savings glut is to tax the dividend income, especially for portfolio assets. So whether it's dividends or, you know, capital gains, that's a little bit harder, you know, it might be kind of hard to administer that with foreign ownership. But interest and dividend income, definitely, you should tax it. That's the way to fight back against this kind of a bubble, right?

LEE STITZEL: Okay. So, I mean, you think that dovetails very nicely with your potential tax strategy.

FRITZ LAUX: Yeah. To the extent that you would worry about it at all, I guess. And in terms of the predatory aspect, they can do that, and we can do that. We're net debtors.

LEE STITZEL: Yeah.

FRITZ LAUX: We can go short. We can go long. We can invest in other people's markets as long as you have an open financial system.

LEE STITZEL: Yeah.

FRITZ LAUX: People can play games with your markets.

LEE STITZEL: Yeah.

FRITZ LAUX: So, the fact that we owe money doesn't really matter.

LEE STITZEL: But what about the structure of your tax policy?

FRITZ LAUX: Well, to me, the structure of your tax policy is a lever by which you can keep interest rates from hitting zero. So the Fed can continue to have the option of lowering interest rates as long as interest rates don't get so low. I think that was Bernanke's main concern was that interest rates were so low because all this foreign money coming in, right?

LEE STITZEL: Yeah. There's a lot of discussion about that. It's difficult to move interest rates against the headwinds of the global market, right? Yeah. Yeah, that makes a lot of sense. So you're saying, "Okay, how much can tax policy do against that?" Yeah, I understand that argument. Well, we've been going an hour now, so I'll bring this in for a landing. Let me ask you one last question. In your view, what are the political and legal obstacles to implementing your tax here, especially as they regard those tax treaties that we discussed earlier?

FRITZ LAUX: The political side is just changing the public consciousness to be focused on intergenerational transfers and some sort of a concern about the debt to foreigners. And that ought to be doable. What I wish is that economists would focus a little bit more on the capital balance, the capital account, instead of the current account. And that's kind of jargon. I'm sorry. It'd be nice if they focused on debt instead of trade. And you could get at the same thing. You deal with the same issues from the debt side as you would deal with the trade side. So that's kind of my bottom line.

LEE STITZEL: My guest today has been Dr. Fritz Laux. Fritz, thanks for joining us on the EconBuff.

FRITZ LAUX: Thank you.

LEE STITZEL: Thank you for listening to this episode of the EconBuff where we find applications of economic thought in a variety of topics and fields. If you enjoyed today's discussion, be sure to check out our previous episodes on YouTube, Spotify, and Amazon Podcast under the title EconBuff Podcast. And be sure to like and subscribe. For updates and information, visit our website at econpodcast.wixsite.com. If you have any questions, comments, or suggestions, we'd love to hear from you. Drop us an email at econpodcast@yahoo.com.

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