Tariffs Have Long Been a Corruption Magnet

Transparency is a hallmark of good tax policy; opacity is its enemy

Letter to The WSJ. 

"Paul Rahe’s justifications for tariffs fail under scrutiny (“There’s a Case for Tariffs,” op-ed, April 16).

Mr. Rahe assumes tariffs boost resiliency, but recent history shows the opposite. National security might justify narrow trade restrictions, but tariffs have not insulated Americans from economic disruptions and have frequently made things worse. The baby-formula crisis of 2022 and automakers’ recent struggles to obtain aluminum, each triggered by the sudden closure of a tariff-protected U.S. factory, show that localized supply chains are vulnerable to local shocks—and tariffs block alternatives. Research from the pandemic finds that globalized supply chains performed better and adjusted faster than nationalized ones.

Mr. Rahe also errs on tariffs’ ability to promote manufacturing. Decades of protection failed to create thriving U.S. steel, shipbuilding, textile and footwear industries. More recent duties on solar panels did the same. With around half of imports being manufacturing inputs, tariffs raise American producers’ costs and undermine competitiveness. Combined with uncertainty surrounding executive branch tariffs, this explains why surveys consistently reveal manufacturers opposed to new protectionism.

Mr. Rahe is correct about the intrusiveness of income taxes, but tariffs can’t replace them because import volumes are far too small. Their invisibility, meanwhile, isn’t the benefit Mr. Rahe thinks. Since the 19th century, tariffs have been a breeding ground for rent-seeking and corruption and have persisted after decades of failure, precisely because their costs are hidden and diffuse. Transparency is a hallmark of good tax policy; opacity is its enemy.

Alfredo Carrillo Obregon and Scott Lincicome

Washington

Mr. Carrillo Obregon is a trade policy analyst and Mr. Lincicome is vice president for economics and trade at the Cato Institute" 

Understanding Tariffs and Their Trade-Offs

Although the economy was severely damaged during the pandemic, the culprits were price controls and lockdowns

Letter to The WSJ. 

"Flaws mar Paul Rahe’s op-ed arguing that, in a world subject to war and other disruptions, tariffs can protect an economy’s resilience (“There’s a Case for Tariffs,” April 16). It’s untrue that the pandemic showed that, with free trade and global disruptions, “supply chains collapse.”

Although America’s economy was severely damaged during the pandemic, the culprits were price controls and lockdowns. Yet despite these obstructions, as Scott Lincicome explains, “a December 2020 U.S. International Trade Commission (ITC) report found that U.S. manufacturers and global supply chains responded quickly to boost supplies or make new drugs, medical devices, PPE, cleaning supplies, and other goods, and that the pharmaceutical, medical device, N95 mask, and cleaning products (including hand sanitizer) industries were particularly ‘resilient’ (in the ITC’s own words).”

Economically, tariffs can’t increase the domestic capacity to produce particular goods without decreasing the domestic capacity to produce other goods. Because private businesses themselves have strong incentives to assess accurately the risks of global disruptions and optimally diversify their sources of supply to minimize supply-chain troubles, tariffs likely create excess capacity in protected, politically powerful industries as they drain resources away from other, politically weaker industries. This political determination of which industries are essential and which aren’t weakens the economy’s ability to respond effectively to global shocks.

Prof. Donald J. Boudreaux

George Mason University" 

America Is in the Middle of a Stealth Manufacturing Boom

Factory jobs are down, but factory output has risen briskly. Credit goes not to tariffs, but to the most basic economic force of all: demand

By Greg Ip. Excerpts:

"Since January 2025, manufacturing jobs have indeed fallen by about 100,000 workers, or roughly 0.6%. In the same period, though, manufacturing production rose 2.3%, and manufacturing shipments, unadjusted for inflation, climbed 4.2%."

"several sectors that where domestic production was strong, so were imports. Where production was down, so were imports."

"domestic production of computer and electronic products last year was up 7.7%. (All its figures are from the fourth quarter compared with a year earlier.) But imports in this sector were up even more, by 40.5%."

"Behind this: an artificial intelligence revolution"

"Aerospace and transportation equipment (which excludes trucks and cars) also boomed last year, with domestic output up 28%."

"Now consider motor vehicles and parts, around which Trump erected steep tariff barriers. Imports duly fell 14%. But domestic output also dropped 3%. In furniture and related products, imports were down 22% while domestic output fell 3%. Relatively high interest rates last year were likely a factor."

"Production of primary metals, including steel and aluminum, did benefit from tariffs which are now as high as 50%. Production rose, and imports fell. With prices well above global levels, capacity utilization, profits and investment should all rise. But Trump’s first-term tariffs didn’t yield sustained prosperity. Even now, primary metals production is more or less back to 2023 levels"

"Food and beverages contribute the largest share of domestic manufacturing output at 18%."

"Foreign competition isn’t that consequential. And production last year was basically flat."

"production can rise simply because existing factories are ramping up capacity. But durable improvement requires investment in new capacity, which is visible in semiconductors, pharmaceuticals and aerospace. If tariffs have led to new investment, the effect on production might not show up for a while." 

$170 per tonne industrial carbon tax by 2030—currently Ottawa’s plan—will cost Canadian workers $1,160 in reduced income and result in 50,000 fewer jobs

By Ross McKitrick, Elmira Aliakbari, Joel Emes and Milagros Palacios of The Fraser Institute.

Estimated Impacts of a $170 Industrial Carbon Price in Alberta and Canada

• This study, using a computable general equilibrium model of the Canadian economy, examines the economic implications of increasing Alberta’s and Canada’s industrial carbon price to $170 per tonne by 2030, in line with the current federal mandate.
• This policy would impose substantial costs. In Alberta, real GDP could decline by 2.0%, relative to a scenario in which the industrial carbon price does not increase after 2025. This corresponds to about $1,730 per employed person and a decline of more than 10,000 jobs.
• At the national level, the economy would shrink by 1.3%, equivalent to about $1,160 per employed person, with a loss of over 50,000 jobs.
• The impacts are not evenly distributed across the economy. Energy and energy-intensive sectors in Alberta—including electricity, refined fuels, transportation, and utilities—are projected to experience relatively large declines in output.
• Capital earnings decline much more than labour earnings indicating that, despite the loss in real GDP per worker, households are actually shielded in the short run from the worst economic impacts. The large drop in returns to capital, however, can be expected to result in reduced or cancelled investment plans, which will translate into further long-run declines in Canadian living standards.
• Policy makers should understand the full range of potential economic impacts of further increases in carbon prices, especially in a context in which major trading partners like the United States and China are not engaging in similarly aggressive GHG control policies.

The New Muckrakers Find Who’s Gouging California’s Drivers

By Craig Eyermann of The Independent Institute.

"Over ninety years ago, muckraking author Upton Sinclair ran a failed campaign to become California’s governor in 1934. He later recounted the experience in his very forgettable book, except for one quote, “I, Candidate for Governor, and How I Got Licked.”

The one quote that stands out in Sinclair’s account of his campaign stumping is this one:

“It is difficult to get a man to understand something, when his salary depends upon his not understanding it!”

There is perhaps no better quote to understand California’s politicians. Today, there is perhaps no better example of this insight at work than California Governor Gavin Newsom’s ongoing efforts to find evidence of oil companies gouging California consumers. Writing in the Sacramento Bee in March 2025, Nicole Nixon recounts Newsom’s quixotic quest:

Two years after California’s Democratic leaders declared victory over big oil with a law aiming to crack down on industry profits, the state has been unable to prove companies engage in price gouging when the cost of gasoline spikes in California.

Since late 2022, Gov. Gavin Newsom has accused the oil industry of ripping off California drivers, pointing to an extreme price spike in the state compared to the rest of the country – while companies reported record profits.

“Open your books and prove that you’re not price gouging. Otherwise, you – big oil – will pay the price, not consumers,” then-Sen. Nancy Skinner said after Newsom signed the bill she authored that created an industry watchdog division and gave the California Energy Commission authority to cap oil company profits and return funds to taxpayers.

But the state hasn’t leveled any penalties on oil refining companies since the law passed and has even stopped posting the data it required.

California’s politicians and the bureaucrats at the state’s Energy Commission are a perfect example of people whose salaries depend on their not understanding things. They could never find evidence of “Big Oil” gouging California consumers because there never was any to find. It was all a scheme aimed at low-information California voters to keep them from getting angry enough to vote out the state’s ruling politicians.

This recent history is front and center today because the price of a gallon of gasoline in California has once again spiked above that in every other state.

Only now, a new generation of muckraking journalists dug into the story of why California’s fuel prices are so much higher than in every other state and found the real culprit. Here is a bullet point summary of what CBS News California discovered after just six months of investigating:

• Why California gas costs more: Higher taxes, labor and business costs, combined with environmental programs, regulations, and the state’s unique fuel blend, drive up baseline prices.
• The political narrative is shifting: After failing to prove price gouging — and grappling with the impact of two shuttered refineries — state leaders are now publicly acknowledging the need to incentivize oil companies to stay.
• Why refineries are leaving: Rising costs, increasing regulations, long-term policy uncertainty, and shrinking returns
• Why global conflict matters: California’s growing reliance on overseas refining is increasing volatility — and validating long-standing industry warnings that outsourcing refining increases the risk of price spikes.

It turns out that 55% of the price of a gallon of gasoline in California is due to factors specific to California, especially those imposed by the state government. Amazingly, the state reports that it collects more in taxes per gallon than oil companies make in profit.

California’s politicians are the ones gouging California’s consumers. But don’t expect them to do anything about it because their salaries depend on their not understanding it."

Extractive Taxation and the French Revolution

Between 1750 and 1789, areas in France with heavier tax burdens experienced significantly more riots

By Tommaso Giommoni, Gabriel Loumeau, and Marco Tabellini. 

"The French Revolution dismantled the ancien régime and redefined state power and institutions. It transformed society by abolishing feudalism and establishing modern bureaucratic and legal frameworks, and its influence extended beyond France, shaping institutions worldwide. While the Revolution’s causes were complex, historical accounts have long emphasized the role of fiscal institutions, particularly the extractive nature of taxation under the ancien régime. However, systematic evidence on the role taxation played in shaping the Revolution remains limited.

Our research examines how taxation shaped the emergence and escalation of unrest and its influence on political behavior during the Revolution’s early years. Using data on local per capita tax burdens around 1780, we found that bailliages (administrative districts) with heavier tax burdens experienced significantly more riots between 1750 and 1789. Specifically, a shift from a bailliage in the bottom quarter of the tax-burden distribution to one in the top quarter—a difference of roughly 8 percent of per capita income at the time—more than doubled the number of riots during that period. High-tax bailliages were also more likely to be swept into the Great Fear of 1789, when rumors of aristocratic conspiracies spread rapidly across rural France, triggering attacks on manor houses and the destruction of feudal records and ultimately leading the National Assembly to abolish feudalism.

This relationship holds even after accounting for several factors commonly associated with revolutionary unrest, including the spread of Enlightenment ideas, increases in wheat prices, the local presence of aristocrats and clergy, and the size of tax police brigades. It also holds when we narrow the analysis to municipalities on either side of a tax border. One interpretation of these findings is that taxation depressed local economic development, impoverishing communities and thus leading them to revolt for material reasons.

The relationship between taxation and unrest stemmed primarily from taxes on goods rather than on income or profits. This aligns with historical accounts emphasizing popular hostility toward these taxes, viewed as especially regressive, enforced through intrusive state controls, and emblematic of the ancien régime’s fiscal inequities. Our research focuses on the salt tax and the traites, a system of internal customs duties. Together, these taxes accounted for over 20 percent of royal revenue by 1780, were deeply resented, and were among the first abolished in 1790.

Our findings provide evidence of widespread opposition to taxation. To examine this idea further, we analyzed the lists of grievances compiled and submitted to Versailles ahead of the Estates General in the spring of 1789. Areas with heavier tax burdens submitted more complaints against taxation, even after accounting for the total number of complaints submitted. This relationship holds only for the Third Estate and not for the nobility, consistent with the fact that commoners bore the brunt of taxation while the nobility was largely exempt. Our research also finds that inequality exacerbated opposition to taxation for reasons beyond its direct economic burden. Many complaints cited the unequal imposition of taxes across social groups and territories, as well as coercive extraction without corresponding public benefits.

The Enlightenment emphasized equality before the law and challenged inherited privilege and arbitrary power. Our findings show that riots were more common in areas with greater exposure to Enlightenment ideas, as measured by local book sales and subscriptions to the Encyclopédie. Local literacy rates do not seem to have played a significant role, indicating that the diffusion of ideas mattered more than access to reading per se.

Tax-related riots peaked in the 1780s, but the reason for this timing is unclear. Taxes on goods had existed for centuries, and the overall burden rose sharply between 1690 and 1760 but changed little thereafter. Instead, historians point to droughts that devastated harvests and drove up wheat prices in the 1780s. Our research uses historical data on temperature and precipitation and finds that hotter-than-average summers led to a larger increase in riots in high-tax municipalities than in their low-tax neighbors. Together with our evidence on tax disparities and Enlightenment exposure, these findings suggest that taxation created the structural foundations for unrest, while material hardship and ideological forces catalyzed long-standing grievances about fiscal inequality into open revolt.

While fiscal grievances fueled the Revolution from below, the decisions of representatives also drove the movement from above. We analyzed more than 60,000 legislative speeches delivered between May 1789, when the Estates General convened, and January 1793, when Louis XVI was executed. Our findings reveal that legislators from high-tax constituencies were about 70 percent more likely to discuss taxation, 60 percent more likely to criticize the ancien régime, and roughly 73 percent more likely to defend the Revolution in tax-related speeches than legislators from low-tax constituencies. These legislators were also more inclined to frame taxation as oppressive and call for fiscal reform.

Beyond fiscal debates, legislators from high-tax constituencies were more likely to demand institutional change, call for the abolition of feudal privileges, and criticize the monarchy in their speeches following the Great Fear of 1789. During the Legislative Assembly (1791–1792), legislators from heavily taxed constituencies were more likely to support abolishing the monarchy and to vote for the king’s execution during the National Convention in January 1793.

Note
This research brief is based on Tommaso Giommoni et al., “Extractive Taxation and the French Revolution,” National Bureau of Economic Research Working Paper no. 34816, February 2026."

Note to Bessent and Congressional Republicans: Greedflation Is Still Bad Economics

By Ryan Bourne and Nathan Miller of Cato.

"Republicans spent the better part of four years mocking the political left’s greedflation narrative—and rightly so. But lately they’re using similar arguments to deflect blame for high gas prices pushing up measured inflation. 

The war in Iran has predictably spiked oil prices. The price of the US crude oil benchmark rose over 40 percent in March, and gasoline prices now average above $4 per gallon. As a result, the energy consumer price index was up 10.9 percent in the second-largest single-month increase in the series’ 60-year history. Buoyed by those rising energy prices, overall CPI was also up—0.9 percent in the same month. 

Overwhelmingly, that’s the result of markets pricing in the likelihood of protracted war in Iran and supply chain disruption in the Strait of Hormuz. Already, the war has caused $50 billion worth of oil lost—nearly a month of total US oil demand. 

For economists, the price change is an unremarkable consequence. This is what happens when the supply of a good falls, especially one for which the short-term demand is relatively inelastic given oil’s downstream importance. Indeed, with oil being a critical input to so many other industries, sharply rising oil prices are one of the few supply shocks with the power to make the overall price level spike—producing a so-called transitory inflation.

During Joe Biden’s presidency, the war in Ukraine disrupted global energy and food supply chains in a similar way. But this occurred at the same time the Federal Reserve had just allowed a huge monetary expansion, and Congress was borrowing like crazy. The result was soaring economy-wide spending, as people shed money balances and bought assets, goods, and services. This effect was ultimately hugely more consequential in driving the uplift in the price level we saw over time.

Democratic politicians, as members of the incumbent party, faced massive pressure to do something about the cost of living, and predictably they reached for an explanation that didn’t implicate their own support for “running the economy hot” through monetary and fiscal stimulus. Some, including Biden, blamed Putin’s war in Ukraine. But many, like Sen. Elizabeth Warren (D‑MA) and later the president again, also advocated the greedflation or “profit-led” theory of inflation. 

Senator Warren argued that price increases were primarily driven not by excess consumer spending (from the inflated supply of money) or supply disruptions, but by corporations tacitly squeezing excess profits from consumers given the shrouding effect of the supply-shock cost rises. The best evidence supporters of that theory could muster was unconvincing: Nonsense reports conflated the producer price index with input costs, politicians made slipshod comparisons between corporate profits and the inflation rate, and researchers listened in on earnings calls for evidence that firms were using inflation as pretext.

Warren herself seems sincere in believing that this short-term exploitation can arise from periods of cost shocks; she also condemned companies she said were price gouging following Trump’s summer 2025 tariff chaos and last month pressed the Federal Trade Commission to investigate companies raising prices after war in Iran broke out—especially in gasoline, fertilizer, and airlines. But her misguided arguments are now finding convenient use by Republicans too. 

In a House Appropriations Committee hearing last week, USDA Secretary Brooke Rollins blamed rising fertilizer prices on “a handful of companies that have basically taken over the market.” 

A day before that, Treasury Secretary Scott Bessent warned retail gas stations to lower prices soon. As crude oil prices fall, Bessent said he’d be looking “to keep the retail gas stations honest,” adding, “I’m sure the president will call out anyone who’s a bad actor.” That comes at the same time CNN reported Republicans were actively searching for a midterm strategy post–Iran war: “The White House has also sought new ideas for taking on rising prices, such as accusing gas station operators of seizing on the war to gouge consumers at the pump.” Of course, we saw similar browbeating against companies after the Liberation Day tariffs.

But corporate greed or price gouging has never been a plausible theory of price changes, let alone inflation. Corporations with substantive market power don’t need pretext. They can always extract high prices by artificially limiting supply. And firms without market power that try to pocket a windfall invite undercutting by rivals; that’s especially true of hypercompetitive retail gas stations. When prices rise simultaneously across an entire industry—nay, across the entire world—the far simpler explanation is either a demand shock or a common cost shock—precisely the sort a war-driven supply shock produces. Consumers have to be willing and able to pay the higher prices, after all.

A lot of politicians around the world seem to get upset if prices for retail gas spike on inventory that was acquired at lower cost. They regard that as unfair “gouging.” Few of them, I suspect, insist on selling their homes for the price they paid for them. But fundamentally, this misunderstands the role of market prices, which reflect the relevant scarcity of the products in each new context. The opportunity cost for firms of selling oil below what the market will bear today is the price that could be obtained elsewhere in the world. Firms also need to replace inventory at the new market price. So, yes, they might make a short-term accounting profit on some inventory, but this is quite transitory.

More important, prices must rise to allocate scarce goods toward those with the highest willingness to pay and to prevent shortages. The profit received is an incentive to ramp up production and end a shortage. Companies who don’t raise prices don’t miraculously have more gasoline to give—we’re still $50 billion worth of oil short. And because charging below market prices would be crystallized into a shortage, consumers aren’t left better off in aggregate. The times when a consumer benefits by finding gas at below-market prices are inevitably offset by the times they find no gas at all—either because earlier customers tapped the supply or because the time cost of waiting in line for gas isn’t worth it.

The increasing frequency with which politicians reach for the greedflation myth is troubling. It reveals that lawmakers aren’t interested in reckoning with the consequences of their policies. When voters swallow the greedflation myth, they give cover to the bad policies that actually caused price hikes and absolve the lawmakers who pushed for them. With Warren and the Democrats, it was strong support for overly stimulatory monetary and fiscal policy. With the Trump administration, it’s explaining away the impact of tariffs and a conflict they started. 

Voters and consumers shouldn’t let this happen. Supply shocks raise prices, and wars are supply shocks. Loose monetary policy devalues the dollar. At a minimum, governments that go to war or government institutions that enable excess monetary creation bear responsibility for the inflationary consequences, not the people and companies that have to respond to those consequences."