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

EconBuff Podcast #56 with Fritz Laux

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.