There's a certain joy in seeing those who collect our taxes telling us that these aren't the right taxes to be collecting. Not that the tax collectors quite realize that this is what they're saying -- they would stoutly deny that they were saying so in fact. But, within what they actually say, it is possible to divine this truth.
The background is the customs tax collectors talking about how much is collected in customs revenue. The money so raised is an important part of the overall taxation system -- some 30% of the total in fact. Yes, obviously, tax revenue can be spent upon things that are worthwhile so the spending might well make us richer. The taxation itself obviously makes us poorer. The justification of making us poorer by taxing is that the making us richer by spending leads to an overall gain.
There are at least some parts of government which meet this test.
However, within this discussion of who gains, who loses, from customs revenue we get these two points made. Firstly "some exemptions at the import level for the convenience of consumers." If not charging import duties -- and of course near all customs revenues is from tariffs upon imports -- benefits consumers then it must be consumers who pay, or do not benefit, from charging import duties. Secondly: "To protect the local industry to discourage imports amid the current dollar crisis." As we've noted before, you can only have a dollar crisis if you're trying to fix the price of the dollar. A simple and properly floating exchange rate cannot, by definition, have a shortage.
However, it's the other part of that second which requires closer examination. That protecting local industry also translates into making prices within Bangladesh higher than they would be with free trade. It's not just that tariffs put up the price of imports. It's that if the competition from imports now have higher prices then all prices in Bangladesh can be higher -- because that competition gets cut off at the knees by the tariffs.
So, who benefits from this? Well, no, those higher prices don't go into wages. For as we've just pointed out all prices that consumers pay for things are now higher because of the tariffs. Your real wage is not some number of $ or Tk, it's what you can buy with your pay packet. So it must be the other people who benefit -- the capitalists. And that is indeed what happens. Tariffs increase the profits of local businesses. That's the whole aim, that "supporting local industry." That the local capitalists make more money because the tariffs exist.
So, what we gain from this analysis of tariffs as a source of tax revenue is that the local -- within Bangladesh -- business owners and capitalists benefit, we consumers, we lose out. This is not a known aim of standard economic policy. Sure, we can understand why the capitalists might like it, but there's no reason that we should.
There's another, deeper, reason we should be against this idea too. A standard economic analysis is that average wages in an economy are determined by the average labour productivity in that economy. Further, it is competition which increases labour productivity. If we close off that competition from foreigners then our productivity rises more slowly. Thus wages, over time, rise more slowly than they would in the absence of tariffs.
No, really, this is true. For it's only, really, the top 10% of any industry that even tries to export. We can find mediocrity right around any corner in any city. But people who are actually world beaters are rare -- the Bangladeshi RMG factories being one example of people who are. If Britain stopped importing Bangladeshi clothes then British clothing factories (yes, there are still a few) would feel less pressure to increase productivity and would so increase productivity less.
This applies to everything. So, Bangladesh having import tariffs against those most productive firms in the global economy lowers the future increase in Bangladeshi productivity and therefore wages.
So, customs tariffs lower our standard of living right now -- they benefit capitalists, not consumers -- and also make us poorer into the future. We should probably find another way of getting that 30% of the total tax revenue, shouldn't we?
All of which just goes to show that it's fun and interesting what we can find out by really examining what people are telling us.
Tim Worstall is a senior fellow at the Adam Smith Institute in London.
