Posts Tagged ‘IMF’

I’m not a big fan of the International Monetary Fund for the simple reason that the international bureaucracy undermines global prosperity by pushing for higher taxes, while also exacerbating moral hazard by providing bailouts to rich investors who foolishly lend money to dodgy and corrupt governments.

Six years ago, I complained that the bureaucrats wanted a giant energy tax, which would have diverted more than $5,000 from an average family’s budget.

That didn’t go anywhere, but the IMF hasn’t given up. Indeed, they’re now floating a new proposal for an enormous global energy tax.

To give credit to the IMF, the bureaucrats don’t mince words or disguise their agenda. The openly stated goal is to impose a giant tax increase.

Domestic policies are thus needed to give people and businesses greater incentives (through pricing or other means) to reduce emissions…international cooperation is key to ensure that all countries do their part. …The shift from fossil fuels will not only transform economic production processes, it will also profoundly change the lives of many people and communities. …Carbon taxes—charges on the carbon content of fossil fuels—and similar arrangements to increase the price of carbon, are the single most powerful and efficient tool… Even so, the global average carbon price is $2 a ton… To illustrate the extra effort needed by each country…, three scenarios are considered, with tax rates of $25, $50, and $75 a ton of CO2 in 2030.

The IMF asserts that the tax should be $75 per ton. At least based on alarmist predictions about climate warming.

What would that mean?

Under carbon taxation on a scale needed…, the price of essential items in household budgets, such as electricity and gasoline, would rise considerably… With a $75 a ton carbon tax, coal prices would typically rise by more than 200 percent above baseline levels in 2030… The price of natural gas…would also rise significantly, by 70 percent on average…carbon taxes would undoubtedly add to the cost of living for all households… In most countries, one-third to one-half of the burden of increased energy prices on households comes indirectly through higher general prices for consumer products.

Here’s a table from the publication showing how various prices would increase.

The bureaucrats recognize that huge tax increases on energy will lead to opposition (remember the Yellow Vest protests in France?).

So the article proposes various ways of using the revenues from a carbon tax, in hopes of creating constituencies that will support the tax.

Here’s the table from the report that outlines the various options.

To be fair, the microeconomic analysis for the various options is reasonably sound.

And if the bureaucrats embraced a complete revenue swap, meaning no net increase in money for politicians, there might be a basis for compromise.

However, it seems clear that the IMF favors a big energy tax combined with universal handouts (i.e., something akin to a “basic income“).

A political consideration in favor of combining carbon taxation with equal dividends is that such an approach creates a large constituency in favor of enacting and keeping the plan (because about 40 percent of the population gains, and those gains rise if the carbon price increases over time).

And other supporters of carbon taxes also want to use the revenue to finance a bigger burden of government.

Last but not least, it’s worth noting that the IMF wants to get poor nations to participate in this scheme by offering more foreign aid. That may be good for the bank accounts of corrupt politicians, but it won’t be good news for those countries.

And rich nations would be threatened with protectionism.

Turning an international carbon price floor into reality would require agreement among participants…participation in the agreement among emerging market economies might be encouraged through side payments, technology transfers…nonparticipants could be coerced into joining the agreement through trade sanctions…or border carbon adjustments (levying charges on the unpriced carbon emissions embodied in imports from nonparticipant countries to match the domestic carbon tax).

I’m amused, by the way, that the IMF has a creative euphemism (“border carbon adjustments”) for protectionism. I’m surprised Trump doesn’t do something similar (perhaps “border wage adjustment”).

For what it’s worth, the bureaucracy criticized Trump for being a protectionist, but I guess trade taxes are okay when the IMF proposes them.

But let’s not digress. The bottom line is that a massive global energy tax is bad news, particularly since politicians will use the windfall to expand the burden of government.

P.S. Proponents sometimes claim that a carbon tax is a neutral and non-destructive form of tax. That’s inaccurate. Such levies may not do as much damage as income taxes, on a per-dollar-collected basis, but that doesn’t magically mean there’s no economic harm (the same is true for consumption taxes and payroll taxes).

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The International Monetary Fund is infamous for its advocacy of higher taxes.

Heck, it’s not merely advocacy. The international bureaucracy uses bailout money as a tool to coerce politicians into approving higher tax burdens.

This is so reprehensible that I’ve referred to the IMF as the “Dumpster Fire of the Global Economy” and called it the “Doctor Kevorkian of Global Economic Policy.”

The bureaucrats also are quite inventive when it comes to rationalizing tax increases.

For instance, a new report from the IMF suggests that a minimum tax level is critical for achieving rapid growth and development.

Is there a minimum tax to GDP ratio associated with a significant acceleration in the process of growth and development? We give an empirical answer to this question by investigating the existence of a tipping point in tax-to-GDP levels. We use two separate databases: a novel contemporary database covering 139 countries from 1965 to 2011 and a historical database for 30 advanced economies from1800 to 1980. We find that the answer to the question is yes. Estimated tipping points are similar at about 12¾ percent of GDP. For the contemporary dataset we find that a country just above the threshold will have GDP per capita 7.5 percent larger, after10 years. The effect is tightly estimated and economically large.

Here’s a depiction of the IMF’s perspective.

At some level, there is a correlation between prosperity and taxation. For instance, some poor nations in the developing world are so corrupt and incompetent that they are incapable of collecting much tax revenue.

But that doesn’t mean higher taxes would somehow make those nations richer. After all, correlation does not imply causation (i.e., crowing roosters don’t cause the sun to rise).

Professor Bryan Caplan of George Mason University points out the methodological shortcomings is the “state capacity” theory.

In recent years, many social scientists…have fallen in love with the concept of “state capacity.” …To my mind, this is scarcely better than saying, “Good government is good; bad government is bad.” Matters would be different, admittedly, if the state capacity literature showed that good government is the crucial ingredient required for success.  But researchers rarely even try to show this.  Instead, they look at various societies and say, “Look at how well-run the governments in successful countries are – and look at how poorly-run the governments in unsuccessful countries are.”  The casual causal insinuation is palpable. …why not just ditch your premature focus on “state capacity” in favor of an open-minded exploration of social capacity?  Good government might be the crucial ingredient for success.  But maybe good government is a byproduct of wealth, trust, intelligence, freedom, or some cocktail thereof. …While good social outcomes all tend to go together, the state capacity literature fails to show that government is the crucial factor that makes all the others possible.

Two other scholars from George Mason University, Professor Peter Boettke and Rosolino Candela, address the issue in an academic study.

This paper reconceptualizes and unbundles the relationship between public predation, state capacity and economic development. …we argue that to the extent that a causal relationship exists between state capacity and economic development, the relationship is proximate rather than fundamental. State capacity emerges from an institutional context in which the state is constrained from preying on its citizenry in violation of predefined rules limiting its discretion. When political constraints are not established to limit political discretion, then state capacity will degenerate from a means of delivering economic development to a means of predation.

They cite Mancur Olson’s work on “political bandits” to understand the limited conditions that would be necessary for there to be a causal relationship between taxes and growth.

Olson’s famous distinction between a “stationary bandit” and a “roving bandit” provides an illustration of our point regarding the emphasis placed on initial conditions. Olson provides a powerful argument for understanding how the self-interest of a revenue-maximizing ruler will align with the political conditions necessary for wealth maximization, not only for himself, but also for his subjects. In a world of roving banditry, a political ruler will have little incentive to invest in fiscal technologies required for regular taxation and judicial technologies that secure property rights and enforce contracts. Only when a bandit has settled down will he or she be incentivized to invest in the provision of public goods that encourage individuals to accumulate wealth, rather than concealing it from predators. However, by Olson’s own admission, his stationary bandit argument is a necessary, though not a sufficient condition for taming public predation.

Their conclusion is that constitutional constants on government are needed to ensure taxes aren’t a tool for additional predation.

In unbundling the relationship between state capacity and economic development, we have distinguished between the protective state, the productive state and the predatory state. To the extent that expansions in state capacity are consistent with economic development, this is because a credible commitment to a set of rules that constrain political discretion have been established. …Fundamentally, economic development requires a protective state from which state capacity emerges as a byproduct. If, however, political constraints are not established to limit political discretion, then state capacity will degenerate from a means of delivering economic development to a means of predation.

Professor Mark Koyama of George Mason University also has written wisely on this topic.

I’m not an academic, so I have a much simpler way of thinking about this issue.

When the IMF (and other bureaucracies) assert that higher taxes are good for growth, I explain that it’s all based on fairy dust or magic beans.

P.S. In a perverse way, I admire the IMF. The bureaucracy’s rationale for existence (dealing with fixed exchange rates) disappeared decades ago, yet the IMF managed to reinvent itself and is now bigger and more bloated than ever.

P.P.S. You won’t be surprised to learn that IMF bureaucrats receive tax-free salaries while pushing for higher taxes on everyone else.

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A few years ago, I put together a basic primer on corporate taxation. Everything I wrote is still relevant, but I didn’t include much discussion about international topics.

In part, that’s because those issues are even more wonky and more boring than domestic issues such as depreciation. But that doesn’t mean they’re not important – especially when they involve tax competition. Here are some comments I made in March of last year.

The reason I’m posting this video about 18 months after the presentation is that the issue is heating up.

The tax-loving bureaucrats at the International Monetary Fund have published a report whining about the fact that businesses utilize low-tax jurisdictions when making decisions on where to move money and invest money.

According to official statistics, Luxembourg, a country of 600,000 people, hosts as much foreign direct investment (FDI) as the United States and much more than China. Luxembourg’s $4 trillion in FDI comes out to $6.6 million a person. FDI of this size hardly reflects brick-and-mortar investments in the minuscule Luxembourg economy. …much of it is phantom in nature—investments that pass through empty corporate shells. These shells, also called special purpose entities, have no real business activities. Rather, they carry out holding activities, conduct intrafirm financing, or manage intangible assets—often to minimize multinationals’ global tax bill. …a few well-known tax havens host the vast majority of the world’s phantom FDI. Luxembourg and the Netherlands host nearly half. And when you add Hong Kong SAR, the British Virgin Islands, Bermuda, Singapore, the Cayman Islands, Switzerland, Ireland, and Mauritius to the list, these 10 economies host more than 85 percent of all phantom investments.

That’s a nice list of jurisdictions. My gut instinct, of course, is to say that high-tax nations should copy the pro-growth policies of places such as Bermuda, Singapore, the Cayman Islands, and Switzerland.

The IMF, however, thinks those are bad places and instead argues that harmonization would be a better approach.

…how does this handful of tax havens attract so much phantom FDI? In some cases, it is a deliberate policy strategy to lure as much foreign investment as possible by offering lucrative benefits—such as very low or zero effective corporate tax rates. …This…erodes the tax bases in other economies. The global average corporate tax rate was cut from 40 percent in 1990 to about 25 percent in 2017, indicating a race to the bottom and pointing to a need for international coordination. …the IMF put forward various alternatives for a revised international tax architecture, ranging from minimum taxes to allocation of taxing rights to destination economies. No matter which road policymakers choose, one fact remains clear: international cooperation is the key to dealing with taxation in today’s globalized economic environment.

Here’s a chart that accompanied the IMF report. The bureaucrats view this as proof of something bad

I view it as prudent and responsible corporate behavior.

At the risk of oversimplifying what’s happening in the world of international business taxation, here are four simple points.

  1. It’s better for prosperity if money stays in the private sector, so corporate tax avoidance should be applauded. Simply stated, politicians are likely to waste any funds they seize from businesses. Money in the private economy, by contrast, boosts growth.
  2. Multinational companies will naturally try to “push the envelope” and shift as much income as possible to low-tax jurisdictions. That’s sensible corporate behavior, reflecting obligation to shareholders, and should be applauded.
  3. Nations can address “profit shifting” by using rules on “transfer pricing,” so there’s no need for harmonized rules. If governments think companies are pushing too far, they can effectively disallow tax-motivated shifts of money.
  4. A terrible outcome would be a form of tax harmonization known as “global formula apportionment.” This wouldn’t be harmonizing rates, as the E.U. has always urged, but it would force companies to overstate income in high-tax nations.

Why does all this wonky stuff matter?

As I said in my presentation, we will suffer from “goldfish government” unless tax competition exiss to serve as a constraint on the tendency of politicians to over-tax and over-spend.

P.S. Sadly, America’s Treasury Secretary is sympathetic to global harmonization of business taxation.

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Back in 2016, I wrote “The Economic Case for Brexit.”

My argument was based on the fact the European Union was a slowly sinking ship, both because of grim demographics and bad public policy.

Getting in a lifeboat can be unnerving, but Brexit was – and still is – better than the alternative of continued E.U. membership.

But not everyone shared my perspective.

The BBC reported that year that Brexit would produce terrible consequences according to the International Monetary Fund.

Christine Lagarde said she had “not seen anything that’s positive” about Brexit and warned that it could “lead to a technical recession”. …The IMF said in a report on the UK economy that a leave vote could have a “negative and substantial effect”. It has previously said that such an outcome could lead to “severe regional and global damage”. The Fund said a Brexit vote would result in a “protracted period of heightened uncertainty” and could result in a sharp rise in interest rates, cause volatility on financial markets and damage London’s status as a global financial centre.

Yet none of these bad predictions were accurate.

Not right away and not in the three years since U.K. voters opted for independence.

Not that we should be surprised. The IMF has a very bad track record on economic forecasting. And the forecasts are probably especially inaccurate when the bureaucrats, given the organization’s statist bias, are trying to influence the outcome (the IMF was part of “Project Fear”).

But a history of bias and inaccuracy hasn’t stopped the IMF from continuing to interfere with British politics. Here are some excerpts from a story earlier this week.

Boris Johnson has been warned that a No Deal Brexit is one of the biggest risks facing the global economy. In a broadside against the new Prime Minister’s ‘do or die’ pledge to leave the European Union at the end of October with or without a deal, the International Monetary Fund said a chaotic departure could cause havoc across the world. …No Deal is one of the gravest threats to international economic performance, the IMF said. …Eurosceptics have long criticised the IMF for anti-Brexit rhetoric and it has been one of the loudest opponents of No Deal, saying in April that it could trigger a lengthy UK recession.

I was both disgusted and upset when I read this story.

I don’t like when the IMF subsidizes bad policy with bailouts, and I also don’t like when it promotes bad policy with analysis.

Fortunately, I don’t need to do any substantive number crunching because Professor Steve Hanke of Johns Hopkins University has a superb Forbes column on this exact issue.

No sooner than Boris Johnson put his foot over the threshold of 10 Downing Street, the International Monetary Fund (IMF) offered its unsolicited advice… In a preemptive strike, the Philosopher Kings threw cold water on the idea of a no deal, asserting that it would be a disaster. …such meddling is nothing new for the IMF. Indeed, a bipartisan Congressional commission (The International Financial Advisory Commission, known as the Meltzer Commission) concluded in 2000 that the IMF interferes too much in the domestic politics of member countries.

Professor Hanke is perplexed that anyone would listen to IMF bureaucrats given their awful track record.

…the IMF’s ability to…thrive…is quite remarkable in light of the IMF’s performance. As Harvard University’s Robert Barro put it, the IMF reminds him of Ray Bradbury’s Fahrenheit 451 “in which the fire department’s mission is to start fires.” Barro’s basis for that conclusion is his own extensive research.  His damning evidence finds that: A higher IMF loan participation rate reduces economic growth. IMF lending lowers investment. A greater involvement in IMF programs lowers the level of the rule of law and democracy. And if that’s not bad enough, countries that participate in IMF programs tend to be recidivists. In short, IMF programs don’t provide cures, but create addicts.

This is why I’ve referred to the IMF as the “dumpster fire” of the world economy and also called the bureaucracy the “Dr. Kevorkian” of international economic policy.

By the way, here’s Professor Hanke’s table of the IMF’s main addicts.

I wrote just two weeks ago about the IMF’s multiple bailouts of Pakistan, the net effect of what have been to subsidize bigger government.

Let’s close with more of Professor Hanke’s analysis.

The original reason for its creation has completely vanished.

The IMF, which was born in 1944, was designed to provide short-term assistance on the cheap to countries whose currencies were pegged to the U.S. dollar via the Bretton Woods Agreement. …But, in 1971, when President Richard Nixon closed the gold window, the Bretton Woods exchange-rate system collapsed. And, with that, the IMF’s original purpose was swept into the dustbin. However, since then, the IMF has used every rationale under the sun to reinvent itself and expand its scope and scale. …And, in the process of acquiring more power, it has become more political.

Sadly, he is not optimistic about shutting down this destructive – and cossetted – bureaucracy.

The IMF should have been mothballed and put in a museum long ago. After all, its original function was buried in 1971, and its performance in its new endeavors has been less than stellar. But, a museum for the IMF is not in the cards. …About all we can do is realize that the IMF is a political hydra with an agenda to serve the wishes of the political elites who allow it to grow new heads.

P.S. Here’s my explanation of how the U.K. can prosper in a post-Brexit world.

P.P.S. Here’s some academic research explaining how E.U. membership has undermined prosperity for member nations.

P.P.P.S. If you want Brexit-related humor, click here and here.

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I’ve labeled the International Monetary Fund as the “dumpster fire” of the world economy.

I’ve also called the bureaucracy the “Dr. Kevorkian” of international economic policy, though that reference many not mean anything to younger readers.

My main complaint is that the IMF is always urging – or even extorting – nations to impose higher tax burdens.

Let’s look at a fresh example of this odious practice.

According to a Reuters report, IMF-supported tax increases are provoking economic strife in Pakistan.

Markets and wholesale merchants across Pakistan closed on Saturday in a strike by businesses against measures demanded by the International Monetary Fund… Markets and wholesale merchants across Pakistan closed on Saturday in a strike by businesses against measures demanded by the International Monetary Fund. …Prime Minister Imran Khan’s government..is having to impose tough austerity measures having been forced to turn to the IMF for Pakistan’s 13th bailout since the late 1980s. …Under the IMF bailout, signed this month, Pakistan is under heavy pressure to boost its tax revenues.

I’m not surprised the private sector is protesting against IMF-instigated tax hikes.

We see similar stories from all over the world.

But what really grabbed my attention was the reference to 13 bailouts. Good grief, you would think the IMF bureaucrats would learn after five or six attempts that they shouldn’t throw good money after bad.

That being said, I wondered if the IMF was pushing for big tax hikes because they had demanded – and received – big spending cuts in exchange for the previous 12 bailouts.

So I went to the IMF’s World Economic Outlook Database to peruse the numbers…and I discovered that the IMF’s repeated bailouts actually led to big increases in the burden of spending.

The IMF’s numbers, which go back to 1993, show that outlays have tripled. And that’s after adjusting for inflation!

Looking closely at the chart, I suppose one could argue that Pakistan was semi-responsible up until the turn of the century. Yes, the spending burden increased, but at a relatively mild rate.

But the brakes definitely came off this century. Enabled by endless bailouts from the IMF, Pakistan’s politicians definitely aren’t complying with my Golden Rule.

I’ll close with one final point.

The IMF types, as well as others on the left, actually want people to believe that Pakistan should have a bigger burden of government spending.

According to this novel theory, the public sector in the country, which currently consumes more than 20 percent of GDP, is too small to finance the “investments” that are needed to enable more prosperity.

Yet if this theory is accurate, why is Pakistan’s economy stagnant when there are prosperous jurisdictions with smaller spending burdens, such as Hong Kong, Singapore, and Taiwan?

And if the theory is accurate, why did the United States and Western Europe become rich in the 1800s, back when governments only consumed about 10 percent of economic output?

This video tells you everything you need to know.

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The International Monetary Fund is one of my least favorite international bureaucracies because the political types who run the organization routinely support bad policies such as bailouts and tax increases.

But there are professional economists at the IMF who do good work.

While writing about the mess in Argentina yesterday, for instance, I cited some very sensible research from one of the IMF’s economists.

Today, I’m going to cite two other IMF scholars. Serhan Cevik and Fedor Miryugin have produced some new research looking at the relationship between firm survival and business taxation. Here’s the basic methodology of their study.

While creative destruction—through firm entry and exit—is essential for economic progress, establishing a conducive ecosystem for firm survival is also necessary for sustainable private sector development… While corporate income taxes are expected to lower firms’ capital investment and productivity by raising the user cost of capital, distorting factor prices and reducing after-tax return on investment, taxation also provides resources for public infrastructure investments and the proper functioning of government institutions, which are key to a firm’s success. …the overall impact of taxation on firm performance depends on the relative weight of these two opposing effects, which can vary with the composition and efficiency of taxation and government spending. … In this paper, we focus on how taxation affects the survival prospects of nonfinancial firms, using hazard models and a comprehensive dataset covering over 4 million nonfinancial firms from 21 countries with a total of 21.5 million firm-year observations over the period 1995–2015. …we control for a plethora of firm characteristics, such as age, size, profitability, capital intensity, leverage and total factor productivity (TFP), as well as systematic differences across sectors and countries.

By the way, I agree that there are some core public goods that help an economy flourish. That being said, things like courts and national defense can easily be financed without any income tax.

And even with a very broad definition of public goods (i.e., to include infrastructure, education, etc), it’s possible to finance government with very low tax burdens.

But I’m digressing.

Let’s focus on the study. As you can see, the authors grabbed a lot of data from various European nations.

And they specifically measured the impact of the effective marginal tax rate on firm survival.

Unsurprisingly, higher tax burdens have a negative effect.

We find that the tax burden—measured by the firm-specific EMTR—exerts an adverse effect on companies’ survival prospects. In other words, a lower level of EMTR increases the survival probability among firms in our sample. This finding is not only statistically but also economically important and remains robust when we partition the sample into country subgroups. …digging deeper into the tax sensitivity of firm survival, we uncover a nonlinear relationship between the firm-specific EMTR and the probability of corporate failure, which implies that taxation becomes a detriment to firm survival at higher levels. With regards to the impact of other firm characteristics, we obtain results that are in line with previous research and see that survival probability differs depending on firm age and size, with older and larger firms experiencing a lower risk of failure.

For those that like statistics, here are the specific results.

Here are the real-world implications.

Reforms in tax policy and revenue administration should therefore be designed to cut the costs of compliance, facilitate entrepreneurship and innovation, and encourage alternative sources of financing by particularly addressing the corporate debt bias. In this context, the EMTR holds a special key by influencing firms’ investment decisions and the probability of survival over time, especially in capital intensive sectors of the economy. Importantly, the challenge for policymakers is not simply reducing the statutory CIT rate, but to level the playing field for all firms by rationalizing differentiated tax treatments across sectors, capital asset types and sources of financing.

There are some obvious takeaways from this research.

For what it’s worth, this IMF study basically embraces the sensible principles of business taxation that you find in a flat tax.

Too bad we can’t convince the political types who run the IMF to push the policies supported by IMF economists!

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In a video I shared two months ago included a wide range of academic studies showing that government-imposed trade barriers undermine economic prosperity.

Not that those results were a surprise. Theory teaches us that government intervention is a recipe for economic harm. And we certainly have painful history showing the adverse consequences of protectionism.

When I debate the issue, I like to cite real-world examples, such as the fact that the nations with the lowest trade barriers tend to be very prosperous while protectionist nations are economic laggards.

No wonder there’s such a strong consensus among economists.

Today, we’re going to add to pro-trade consensus.

A new study from the International Monetary Fund investigates the macroeconomic impact of trade taxes. Here’s the basic outline of the methodology.

Some economies have recently begun to use commercial policy, seemingly for macroeconomic objectives. So it seems an appropriate time to study what, if any, the macroeconomic consequences of tariffs have actually been in practice. Most of the predisposition of the economics profession against protectionism is based on evidence that is either a) theoretical, b) micro, or c) aggregate and dated. Accordingly, in this paper, we study empirically the macroeconomic effects of tariffs using recent aggregate data. …Our panel of annual data is long if unbalanced, covering 1963 through 2014; more recent data is of greater relevance, but older data contains more protectionism. Since little protectionism remains in rich countries, we use a broad span of 151 countries, including 34 advanced and 117 developing countries.

And here are the results.

Our results suggest that tariff increases have adverse domestic macroeconomic and distributional consequences. We find empirically that tariff increases lead to declines of output and productivity in the medium term, as well as increases in unemployment and inequality. … a one standard deviation (or 3.6 percentage point) tariff increase leads to a decrease in output of about .4% five years later. We consider this effect to be plausibly sized and economically significant… Why does output fall after a tariff increase? …a key channel is the statistically and economically significant decrease in labor productivity, which cumulates to about .9% after five years. …Protectionism also leads to a small (statistically marginal) increase in unemployment…we find that tariff increases lead to more inequality, as measured by the Gini index; the effect becomes statistically significant two years after the tariff change. To summarize: the aversion of the economics profession to the deadweight losses caused by protectionism seems warranted; higher tariffs seem to have lower output and productivity, while raising unemployment and inequality. … there are asymmetric effects of protectionism; tariff increases hurt the economy more than liberalizations help.

These graphs show the main results.

The simple way to think about this data is that protectionism forces an economy to operate with sand in the gears. Another analogy is that protectionism is like having to deal with permanent and needless road detours. You can still get where you want to go, but at greater cost.

The bottom line is that things simply don’t function smoothly once government intervenes.

Lower growth, reduced productivity, and higher unemployment are obvious and inevitable consequences, as shown in the IMF study.

And while I don’t worry about inequality when some people get richer faster than other people get richer in a genuine free market, it’s morally disgusting for politicians to support protectionist policies that are especially harmful to the poor.

P.S. Everything in the IMF study about the damage of trade taxes also applies to the economic analysis of other forms of taxation. Indeed, deadweight losses presumably are even higher when considering income taxes. So the IMF deserves to be castigated for putting politics above economics when it pimps for higher taxes.

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