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1 J. D. Foster, Hiding Protectionism the Tax Code 1 (1999)

handle is hein.taxfoundation/hidprotecxz0001 and id is 1 raw text is: TAX 1Will~
FOUNDATION
February 1999
No. 11

Hiding Protectionism in the Tax Code

ByJ.D. Foster, Ph.D.       Free trade rules. Despite moments of
Executive Director and  weakness, Americans resist calls for protection
Chief Economist
Tax Foundation          against foreign competition. Even facing a
large and growing trade deficit, it would be
laughable to call for a general increase in
tariffs on imported goods. And yet we have
had a highly protectionist system in place for
decades and the U.S. Treasury in both Republi-
can and Democratic Administrations continue
to defend it.
Where is this protectionist scourge? In the
federal income tax. Specifically the taxation of
U.S. citizens' foreign income. Taxing this
income raises a modest amount of revenue,
Taxing US. citizens'foreign income
raises a modest amount of revenue,
but the real purpose is to use the tax
code as a sneaky system of tariffs to
discourage US. individuals and
companies from investing abroad.
but the real purpose is to use the tax code as a
sneaky system of tariffs to discourage U.S.
individuals and companies from investing
abroad.
Protectionism arises when a government
reacts defensively to the threat that lower-cost
or higher-quality foreign goods pose to
domestic employment. When goods are
imported, competitive pressures force domes-
tic suppliers to become more efficient or go
out of business. The country overall is better
off, because the remaining domestic suppliers
are more efficient and because consumers

have better choices at lower costs. Neverthe-
less, the shareholders and employees of the
companies that fail clearly suffer.
Because the benefits are diffuse and the
pain quite targeted, companies troubled by
foreign competition often appeal to the
government for protection. When the foreign
competition is selling goods below cost, such
as has been reported recently with Japanese
and Russian steel imports into the United
States, the government can and should take
action to halt the imports. When foreign
companies are just good competitors, the U.S.
government must, and usually does, resist calls
for protectionist tariffs and quotas.
There are many reasons a foreign supplier
might be a winning competitor in fair trade.
The classic explanations given in textbooks
are that the foreign competitor may have
access to lower labor, energy, or raw material
costs. For example, ever since World War II
the U.S. textile industry has faced stiff compe-
tition from companies able to take advantage
of low-cost foreign labor.
Japan in the 1970s and 1980s demon-
strated three other reasons why some U.S.
companies are hard pressed. First, the Japa-
nese developed some superior management
techniques, such as just-in-time inventories.
They also focused more steadily on superior
quality. And they often operated behind high
trade barriers that protected their home
markets so that their businesses could earn
extraordinary profits at home that subsidized
their foreign activities.
U.S. companies are also frequently at a
competitive disadvantage because of U.S.
government-imposed costs that exceed those
of our trading partners, such as high taxes and
stiff regulations. When a foreign government
imposes less tax than does the United States,
U.S. companies are disadvantaged at home, but

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