Front Page Titles (by Subject) CHAPTER XX.: Cost of a High Tariff. - Taxation and Work: A Series of Treatises on the Tariff and the Currency
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CHAPTER XX.: Cost of a High Tariff. - Edward Atkinson, Taxation and Work: A Series of Treatises on the Tariff and the Currency 
Taxation and Work: A Series of Treatises on the Tariff and the Currency (New York: G.P. Putnam’s Sons, 1892).
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Cost of a High Tariff.
In the debate upon the tax on tin-plates and on other occasions it has been urged by distinguished Senators that even if the effect of a duty were to raise the price for a time, yet when distributed, this tax would come to so small an amount on each tin utensil as not to be appreciable. In other words, the excess of price that has been paid during the last few years on tin-plates used in all the arts, and especially in canning, amounting to over sixty million dollars ($60,000,000) is not, in the judgment of these gentlemen, an appreciable burden! Such an argument displays the profound ignorance of him who presents it in regard to modern commerce, manufactures, and agriculture.
The burden of a tax is to be measured, First, by the ratio which the tax bears to profits that might be made in any given occupation, were there no tax upon the materials. Unless there is profit the industry will not be undertaken.
Second, the burden of the tax must be measured or estimated by its ratio to the wages or labor-cost into which the tax material enters as a component material. The burden of the tax may apparently be very slight in ratio to the gross value of the product, and yet be very heavy in ratio to the labor-cost, yet heavier in ratio to profits.
Let it be assumed, for instance, that the cost of canned fish, soups, meat, milk, or other food products is divided into separate items in somewhat customary proportions, such as govern the cost of other articles. The cost of packing and the cost of the package or can used in preserving food is large in ratio to the prime cost of the material, much of which would be wasted if it could not be so preserved. We will, however, assume that the cost of the food material which is to be canned or packed comes to one-half or 50 per cent. of the value of the final product. Next, that the labor in the canning factory may be estimated at twenty per cent. We will assume that the untaxed tin for the can would cost twelve per cent., and that the tax upon tin would come to ten per cent. We will assume that a net profit of eight per cent. on the work would cause the business to be established and as rapidly extended as the demand would warrant. These estimated proportions may be defined by lines.
Whether this proportion would exactly fit the canning industry is immaterial. There are many examples of industry in which such would be the proportions. It will be remarked that while the tax is only ten per cent. upon the product, it is fifty per cent. upon the labor, and one hundred and twenty-five per cent. upon the profit.
Now let it be assumed that this apparently small tax were abated; then the capitalist or employer could advance wages one half without changing the price; or he could advance wages twenty-five per cent. and increase his own profits sixty-two and one half per cent.; or, by making an extra discount of ten per cent. on his wholesale price, he could get a very much wider market, employ more workmen, and gain a greater aggregate profit at the same rate on each sale.
Yet more, it depends very often on a margin of much less than ten per cent. of profit whether a foreign market shall be supplied with very many classes of goods from this country or from other countries. In the matter of condensed milk, for instance, Switzerland, with free sugar and free tin plates, has relatively an enormous foreign export trade where we have had a very small one, if any. The evil effect of a small tax of this kind may be much greater than appears on the face of it. Let it be assumed that the cost of the production of the farm products which are to be canned or preserved cannot be reduced without great injury to the farmer or the gardener; it must remain at fifty per cent. in ratio to the final or manufactured product in the cans. It may also be assumed that the cost of labor computed at twenty per cent. is as low as it can be put in comparison with other branches of industry. In other words, the cost of the materials and of the labor cannot be reduced below seventy per cent. of the valuation of the manufactured or canned product without great injury to both farmers and workmen.
On the other hand, the imposition of a tax of ten per cent. on the tin-plate or some other material of foreign origin creates such a disparity in the cost of the finished product as compared to other countries as to forbid export. Under these conditions let it be assumed that the home market becomes overstocked: there comes what is called over-production of canned provisions. No large export trade can be established because other countries supply canned goods which are put up in untaxed tin. Even let it be assumed that the foreign cost of the materials is the same as it is here, or fifty per cent., and that the labor cost is the same, or twenty per cent.; let it also be assumed that the cost of the tin untaxed is the same, or twelve per cent., and that the margin of profit is substantially the same, or eight per cent., in other countries.
Now, let it be assumed that the producer of the same article in this country does away with all profit and tries to export his product merely to get rid of his excess. The account stands as follows:
The tax covers his whole possible profit and even more. There is an excess of cost as compared to the foreign competitor even without any profit, which forbids export because the whole commerce of the world now turns upon a mere fraction.
The difference of a cent a bushel of wheat will send an order away from Dakota to South America or India. Under such conditions when the tax more than equals the margin of profit, the employer of labor in the canning or any other industry must either force the price of farm products down, or he must cut down the wages, or the business must be reduced and adjusted to meet what the home market only will take at a profit. If there is no profit the business stops. This brings into conspicuous notice the fact that the burden of taxation is measured by its ratio to the profit that might be made on untaxed materials but which is often cut off by such taxes so as to prevent the establishment of that art within the limits of this country. Such a tax limits our export of the surplus which is not needed by the people of this country but is wanted by others, even in respect to articles of food for which the world is going hungry but cannot buy because it cannot pay with goods. Russia has to-day no gold with which to pay for food, yet the people of Russia are starving for want of the food that we might supply if we could buy sheet iron free of tax or some of the other products of Russia that we want.
When these considerations are applied to the estimate that I have put upon the true cost to the people of this country of the taxes which are now imposed upon crude or partly manufactured materials that might be imported from other countries, estimating that cost at a sum of money equal to about three hundred million dollars, it will be observed that in this mere estimate in money I have only begun to state the bad effect of that burden of taxation.
For instance, while during the period of ten years that have lately elapsed, the price of crude iron or pig-iron has not been maintained in this country above the price in Great Britain and Germany to the full measure of the duty; nevertheless, by a comparison of the prices of pig-iron, year by year, for a period of ten years, it has been conclusively proved that the consumers of iron in this country have paid on an average, year by year, $70,000,000 more for their supply of crude iron ($700,000,000 more in ten years) than for the same quantity that has been supplied to other consumers who buy iron from the works of Great Britain, Germany, and Belgium. During this period the actual price of iron has been very much reduced, but in each year during the progress of this great reduction the cost of iron to consumers in the United States has been $70,000,000 in excess of the cost of the iron supplied to other nations. The disparity in the price of iron rails and iron in the bar or sheet is yet more, and the disparity in the price of steel in the form of ingots, rails, sheets, and bars is yet more. No exact computation can be made, but when it is alleged that the disparity or difference in the price or cost of iron and steel to this country has been one hundred million dollars ($100,000,000) per year for ten years, that affirmation cannot be disputed, and the more the figures of prices are studied the more certain it becomes that the difference or disadvantage on our side has been greater. No one has yet ventured to deny or to attempt to disprove this statement.
Now let this disparity—no matter whether it has been a profit of individuals, or merely an increase of cost without profit to the ironmasters—be considered in its ratio to profits. In a broad and general way one may estimate the cost of the material that enters into the heavier kinds of machinery at sixty per cent., and of the labor at twenty per cent.
Then it appears that the disadvantage or higher cost of iron to the makers of heavy machinery, in the construction of vessels and in many branches of work, is greater than the entire cost of labor in Great Britain, in the conversion of untaxed iron and steel into these same finished forms. In this view of the matter the reason becomes very plain why we cannot compete with British steamers upon the ocean. The imagination fails to conceive the effect of this disadvantage which is due to the disparity in the cost of iron and steel in depriving us of the opportunity to supply the non-machine-using nations with what they need in manufactured goods, and in depriving us of the opportunity to meet the increasing demands of Asia, Africa, South America, and Australia, for machinery in all forms, for rails, engines, and cars, and in depriving us of any share in ocean transportation. I have stated that the exports and imports of all nations come to seventeen billion dollars a year; our proportion of that international traffic is ten per cent. The magnitude of our domestic traffic has lately been demonstrated in an article in The Forum, by Edward P. North, in which he quotes from an address given at the Deep-Water Ways Convention, held last December in Detroit, by Mr. George H. Ely. This statement is that “about thirty-six million registered net tons of shipping passed the city of Detroit in the previous year during the two hundred and twenty-five days that the navigation of the great lakes was open.” . . . “The aggregate tonnage entering and clearing from the ports of London and Liverpool during the entire year does not equal that passing Detroit in seven months, and that is a growing commerce.” Why should not our foreign traffic be brought up to that of England?
Were the price of iron and steel the same in this country and Great Britain, as they would be were it not for the duty imposed by us, making due allowance for ocean transportation, it would be in fact immaterial whether the price of iron were $16, or $20, or $25 a ton in either country. We use nine million tons of iron. Our relative disadvantage on the average for many years, let it be assumed, has been $7 per ton. If there had been no duty, the price of iron in this country might have been higher by one half that difference, or $3.50; nevertheless, the price of iron to our consumers would have been the same as in Great Britain, and we should have shared the international commerce of the globe and the ocean transportation in a measure that no one can determine, bringing in an advantage in comparison with which the slightly higher price of iron would have been a mere trifle. There would have been none of the great fluctuations, and so-called overproduction such as now affects the iron industry. There would have been a uniformity and practical stability in prices, and as the cost of coal is rapidly rising in England and the supply of coal and iron ore is becoming relatively deficient, so the more urgent demand of this country upon the mines and works of England by advancing prices there would cause the opening of our mines and works so much the more rapidly. Our mines and works would be protected by putting up the prices of crude iron to British consumers, while developing our own resources even in more rapid measure than we now do. Then the true Protection to our own domestic iron industry will be attained, because no one can compete with us on equal terms; our wages will be higher and our cost less, because our ores and coal are more abundant, more easily worked, and with a less number of days’ labor to the ton of iron than anywhere else. Whatever nation dominates in coal and iron controls the commerce of the world. Even at the disadvantage to which we have been subjected by the relatively higher price of iron and steel, we yet excel so much in the application of labor, that we export locomotive engines, looms, and agricultural tools and implements. We have gained in foreign commerce in some directions, but we have lost heavily in others. The disparity or difference in price against us has become a greater disadvantage the lower the actual price is forced. A disparity caused by the tariff of $9 was a comparatively small matter when the price of iron ranged from $40 to $50 a ton, as it did a few years ago, as compared to the difference of a little under $7 now, when the price of iron is less than $20. We have paid this excess of cost of iron, $70,000,000 average year by year, on all the metal that has been consumed in this country, sometimes, it is admitted, not to the full extent of the duty. But to the extent to which that duty has kept the price in this country higher than it would otherwise have been, and higher than it has been in foreign countries, it has cost us ten-fold any possible benefit to the producers of iron.
Moreover, the obstruction to our demand upon the iron and coal deposits of Great Britain, Belgium, and Germany has doubtless tended to keep the price of iron still lower in Europe than it would have been had we been free to purchase our materials from the representatives of those works. We consume nearly forty per cent. of the world’s total product of iron. We have the greatest purchasing power of any nation, and to the extent to which our purchases of iron from England have been obstructed, the purchasing power of England in respect to our grain and food has been diminished. To that extent the iron-masters of England, in the absence of our demand, have supplied the machinists of Europe at lower cost of iron to them. That is to say, the machine-makers and the ship-builders of Europe have been protected by exemption from taxation on materials, while ours have been hindered in their industry, and our power to construct American ocean steam-ships has been destroyed.
It has sometimes been held that when in consequence of our tax upon imports the price has been reduced in other countries on the articles which we still import, we have simply put the tax on the people of such other countries. There could not be a more mischievous error. To the extent that we keep down prices in other countries by tariff obstructions, we diminish the power of purchase of that country in respect to our food, and when our tariff tax has reduced the prices of iron and steel, wool, tin-plates, or some other crude materials abroad we have given the advantage to the foreign consumer of these crude materials over our own consumers. In this way we have invited the increasing quantity of imports of finished products at lessening cost by the very acts by which we have attempted to exclude them. Any tax imposed in this country on crude materials protects the foreign manufacturer.
I will not attempt to measure the effect of the disparity on anything but iron and steel. The demand of the world for tools, machinery, and other implements made of iron and steel is constantly increasing. It is far in advance of the increase in population. If the price of these crude materials were the same in Europe and this country (aside from the freight charge to and from there, which is trifling), then our ship-builders, machinists, stove-makers, and the like would enter into the world of commerce on substantially the same conditions and on even terms with their competitors in other countries whatever the actual price of iron might be. They are forbidden to-day by the relation which the tariff taxes bear to the profit that would induce the manufacture of goods for export. It has been held that if the tax is ten per cent. on the finished product—that is to say, if the tariff tax threatens a disparity between this country and another of ten or even five per cent., then the profit that under free conditions would have induced the undertaking of the work is forbidden by the tax.
Taxes, on the other hand, upon the finished products, especially upon articles which depend upon luxury, fashion, or fancy for their sale, may simply cost the consumer who chooses to buy them just the amount of the tax. A revenue tax upon finished products may therefore be substantially consistent with the rule that all taxes that the people pay, the government shall receive, while a tax upon the crude or partly manufactured materials is not consistent with this rule. The cost of these imported materials which enter into the processes of domestic manufacture prevents diversity of manufactures, limits production, prevents exports, and burdens commerce at every point. The burden of such taxation may be tenfold what the government receives, and yet it may not yield even a private profit to any one; witness the increase in the cost of woollen goods accompanied by a reduction in the price of protected wool.
Having thus analyzed the disparity in the relative burden of tariff taxation, the general conclusions which may be derived from this series of treatises will be given in the final chapter. The subject treated in this chapter is the only branch of the tariff question that requires hard thinking and close analysis in order to make it plain. Every person who has the slightest knowledge of commerce is aware that by way of the application of modern machinery the maximum of production in any given line is very quickly attained, and this makes it almost sure that the representatives of some important product may or will overstock the home market in a very short time.
Again, any one who is familiar with business knows how difficult it is to bring the production down again to a suitable point after the market has been overstocked, and how depressingly and how relatively grave is the effect upon prices of a very slight excess, which cannot be consumed and which cannot be exported. Keeping these facts in mind, it will be observed that in respect to grain and cotton, we are subject to a very large excess of product above any possible consumption within the limits of this country. While it is true that Europe must take our food or starve, and while it is also true that foreign spindles must be supplied with American cotton at present; yet to what extent, at what price, and how rapidly European countries can take from us these products, depends not only upon their own urgent demand, but also on their control of the means of payment. So far as payment may be made in goods the trade may be prompt and reciprocal, but when we obstruct or refuse to take the goods with which we might be paid, the purchasers of our products must find a market for these good in other countries from which they may derive the money which is to be placed to our credit in London for payment.
The farmers and cotton growers of this country have recently been trying to find out what is the matter with their markets, and they have demanded more money. The depression in the price of farm products and the difficulty in the sales of the excess lie at the bottom of this demand for more money, and have exposed us to the dangerous agitation of the silver question. What the farmers require is a more open and a wider market and a readier sale of the excess of their products, which they can only secure by removing the obstruction to the import of the means of payment with which the world is waiting to meet them.
Again, our manufactures are subject to great fluctuations. Why? Because their possible home market is very largely among the farmers, or among those who supply the farmers with tools and implements, or who move the products of the farm from the field to the consumer. More than one half of the domestic demand for the manufactures of this country rests upon the ability of the farmer to buy the goods; the ability of the farmer to buy manufactured goods depends upon his ability to sell his excess or surplus of products for export to foreign countries. Indirectly the stability of the market for all products depends upon the free export of our surplus.
The revenue derived from the crude materials which are necessary in the processes of domestic industry has formed but a small part of the excess of our revenue, which has been applied to the purchase of our bonds long before their maturity. It could all be spared at the present time without the loss of revenue being felt in the slightest degree. I am of the profound conviction that the indirect injury to manufactures, agriculture, and commerce is fifty-fold as great by measure in mere money. That is to say, the revenue of about $14,000,000 which the government receives from taxes upon crude materials which are necessary in all processes of domestic industry may have cost us $700,000,000.
In other words, I think that no one can deal with this tax in its ratio to profits, in its obstruction to exports, or in its pernicious effect in every direction, without reaching the conclusion that the cost of the revenue secured by the government upon wool, pig-iron, coal, ore, and a few other crude articles has been fifty-fold the amount of the revenue that the government has secured. This cost consists in privation of commerce, through the effect of this apparently petty tax, and in the disparity in the cost of domestic manufactures heretofore demonstrated.
The total revenue derived from the articles classed as crude products necessary in our domestic manufactures in the last fiscal year was $14,000,000, chiefly from wool and other fibres, coal, and iron. The direct effect of this tax in maintaining the cost of the material of our manufactures above that of other countries I cannot put at less than the entire cost of the conduct of this government, including pensions, or over $300,000,000. The indirect effect of this and other taxes upon the import of the products of other countries, which are their only means of payment for our products of agriculture, cannot be computed. It deprives us of what might be the profits upon agriculture and commerce, which may come to three or four hundred million dollars more. Who can tell? The evil can never be measured until it is removed.
In a previous number the statement has been submitted of the depressing effect of similar taxes upon the domestic industry of Great Britain in 1842. Sir Robert Peel and those who supported him in the abatement of these petty taxes upon materials had little comprehension of the prosperity that would ensue as soon as they were removed. An income tax was twice levied for limited terms of three years each, to make up for the expected deficiency of revenue which it was assumed would ensue from the removal of duties upon crude materials. But the removal of this tax gave such an immense impetus to British agriculture, commerce, and manufactures alike, that in each instance the income tax became a surplus. The import of dutiable goods increased, and the revenue thereon increased more rapidly than the abatement had diminished it. The income tax itself also yielded a far greater sum than its promoters anticipated, because the incomes subject to tax were so rapidly developed by the increasing prosperity of the country.
We shall never know in this country how much hurt has come to us from these malignant taxes on crude materials until one or two years after they have been removed.