Aluminum tariffs, hotel taxes, electric cars and the value of complexity

Targeted taxes and added regulations always have unintended consequences.

In Hawai`i, when we pile taxes onto hotel rooms, it encourages alternative accommodations that may be able to avoid the tax—thus damaging the hotel industry.

When we regulate the heck out of taxis, it opens the door for Uber and Lyft.

Transportation fuel taxes provide an inadvertent subsidy to electric vehicles. Discussions of fixing that with a mileage tax will punish lower-income people who are forced to live where housing prices are cheaper, but who have to commute longer distances.

When President Trump announced new steel and aluminum tariffs, at first blush it seems sound. If these metals from foreign producers pay a big tax to get into the U.S., then that improves the competitiveness of metals from American producers.

But the unintended consequences are many.

Nearly a year ago, the firm NERA Economic Consulting looked into aluminum tariffs and their impact. They used an economic model from another firm, Regional Economic Models Inc. (REMI).

Among the conclusions: the higher prices from across-the-board tariffs would cost more jobs to the larger economy than they would add to the aluminum industry; and the tariffs would harm the parts of the manufacturing economy that rely on aluminum.

The study suggested that tariffs could be tweaked to actually be productive to the local economy, by targeting semi-finished aluminum products.

But, of course, that’s not what President Trump has proposed.

Tariffs and taxes are complicated. They often don’t produce the results intended.

One of the most concerning impacts of the metals tariffs is that while they may be intended to target our economic competitors, they more directly target our friends.

China is a big aluminum producer, and it has severely cut into our aluminum exports. But our biggest source of aluminum is Canada. Sixty percent of the product comes from our northern neighbor.

So it seems that an aluminum tariff could very well not harm China, but further damage Canada, which is already reeling from China’s growing exports.

Unintended consequences.

Which is a statement about complexity. Complexity breeds suspicion and misunderstanding. But complexity is almost always unavoidable in tax and tariff policy. Difficult subjects need smart people and careful consideration.

Simple solutions can sometimes be worse than no solution at all.

© Jan TenBruggencate 2018